Q. I’d like some advice for a young retiree. I’m retiring from federal law enforcement at age 50, with 30 years of government service. I have $325,000 in the Thrift Savings Plan. I also have $45,000 in savings and no credit card debt. Car loans have been paid off. My house is appraised for $280,000 with a mortgage balance of $32,000. There are 3 years left on the 15-year mortgage. I would like to avoid touching my TSP money during retirement.
Would it be prudent to withdraw $32,000 from my TSP and pay off the mortgage? I am paying 5 percent interest. My thinking is that even with the 10 percent penalty and the earned income hit at the end of the year, I will be better off with an extra $500 a month. How about taking some money out of savings to pay it down?
Once retired, where should I invest the money in my TSP account? Should I leave it in relatively high-risk funds for a few more years? Should I go conservative and put it in one of the lifecycle funds? I still have 9 1/2 years to let it ride. —J.P., by email
A. Most of what you are paying on the mortgage these days is principal, not interest. So your mortgage payment is basically an enforced savings plan. If you made payments for 12 years so far, you can probably hang in and make another 3 years of payments.
Withdrawing from your TSP plan would subject you to two hazards. You’d pay the penalty for withdrawal before age 59 ½. You would also face the possibility of paying income taxes at a higher rate because the withdrawal would be added to your pension income. That's a good formula for taking close aim at your foot and pulling the trigger.
Yes, I know that paying the mortgage off would feel really good. But think about it this way: You have the resources to pay it off "at will." You should feel good about that. If the itch really gets to you, take the money from your savings.
For your TSP, let it ride. Remember, you’ll have a substantial pension at retirement, so you can afford more risk than most people. Your pension income will be a multiple of the income you can get from your savings plan.
Q. I turned 63 earlier this month. I was laid off thru a reduction in force effective October first of 2010 and received a severance package through year end. Due to previous lay-offs and extended job searches we have virtually depleted our retirement savings. I am in good health and I have no interest in early retirement. Our cars are paid for. We have no credit card debt. Our COBRA benefits cost $1,400 a month. The cost of home owner insurance, car insurance and property taxes is $900 a month. Our monthly mortgage and second mortgage payments are another $1,200. We owe a total of $49,000 on the house.
We have about $110,000 in a 401k and about $85,000 in other investments plus $10,000 of cash on hand. Starting in 2011, we will start living off the cash on hand and then our investments (until I find a new job). During this time I will also be making the mortgage payments from our investments. With the uncertainty of the job market, wouldn’t it be a good idea to pay my home off NOW? —M.I.V., by email
A. I know you are looking for some kind of certainty, but paying off the mortgage is exactly the wrong thing to do. Your security depends on what you have in financial assets to support your ongoing expenses. The $49,000 it would take to pay off your two mortgages is enough to provide you with mortgage payments for nearly 41 months. It would leave you with $156,000 to cover your remaining living expenses. Of that amount $110,000 is in your 401(k) plan so each dollar taken would be a “taxable event” and would likely involve a tax cost.
My suggestion: Keep as much of your powder dry as possible. Do everything you can to avoid the forced sale of assets, including your house. If finding a new job is really difficult, consider putting the house on the market. Do it well before you run out of cash to meet your expenses.