Late 60s retiring mom...50/50 okay? Pay off mortgage?

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ThreeScreens88
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Late 60s retiring mom...50/50 okay? Pay off mortgage?

Post by ThreeScreens88 »

My mom is in her late 60s. She's retiring at the end of this year (or very, very early next year). She has 400k in Vanguard Target Retirement 2020 ~50/50 AA)

She has a pension and will be receiving SS (she has, in fact, already started receiving it).

When she retires, the only debt she will have is 100k/15 years remaining on her mortgage ($300k house value).

Her pension + SS + 3% SWW is sufficient to cover all her retirement expenses.

With all the talk about stocks being overvalued, I'm wondering if there's anything she needs to do differently. She'll earn another $120k or so (gross) for the next year until retirement but most of that money will be used for a combination of retirement savings (she's saving 10+%), debt reduction, and buying a car prior to retiring.

Is the Target Retirement 2020 okay? Should she be reducing her exposure to equities? Should she pay off mortgage using retirement savings (all in 403b)?

Thanks!
Last edited by ThreeScreens88 on Thu May 06, 2021 11:38 pm, edited 1 time in total.
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David Jay
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Re: Late 60s retiring mom...50/50 okay?

Post by David Jay »

If she leaves it in VG Target Retirement 2020 the equity percentage will continue to drop for the next 5 years and at the end of that time it will be converted to Vanguard Target Retirement Income (permanent 30/70 AA) in about 2025 or 2026.
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raiderjkwong
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Re: Late 60s retiring mom...50/50 okay?

Post by raiderjkwong »

We are 54 and will be retiring in a couple years. We are 30/70 in our AA. We have a 2.7 M in our portfolio. We also will have two pensions. We are very conservative in our approach to money....50/50 is very reasonable but if she will need the money during the next several years, 40/60 or 35/65 will be much safer. No one knows the future and people in their 60s+ have no room for error or unnecessary risk. We don't need to be greedy; we just want to retire with no financial stress. Just my two cents.

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ThreeScreens88
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Re: Late 60s retiring mom...50/50 okay?

Post by ThreeScreens88 »

David Jay wrote: Sun Jan 17, 2021 6:30 pm If she leaves it in VG Target Retirement 2020 the equity percentage will continue to drop for the next 5 years and at the end of that time it will be converted to Vanguard Target Retirement Income (permanent 30/70 AA) in about 2025 or 2026.
Yep! Just wondering if the 50/50 allocation is wise for now (5-year glide path aside).
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JoeRetire
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Re: Late 60s retiring mom...50/50 okay?

Post by JoeRetire »

ThreeScreens88 wrote: Sun Jan 17, 2021 6:51 pm
David Jay wrote: Sun Jan 17, 2021 6:30 pm If she leaves it in VG Target Retirement 2020 the equity percentage will continue to drop for the next 5 years and at the end of that time it will be converted to Vanguard Target Retirement Income (permanent 30/70 AA) in about 2025 or 2026.
Yep! Just wondering if the 50/50 allocation is wise for now (5-year glide path aside).
50/50 is fine.
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Re: Late 60s retiring mom...50/50 okay?

Post by Wiggums »

ThreeScreens88 wrote: Sun Jan 17, 2021 6:51 pm
David Jay wrote: Sun Jan 17, 2021 6:30 pm If she leaves it in VG Target Retirement 2020 the equity percentage will continue to drop for the next 5 years and at the end of that time it will be converted to Vanguard Target Retirement Income (permanent 30/70 AA) in about 2025 or 2026.
Yep! Just wondering if the 50/50 allocation is wise for now (5-year glide path aside).
50/50 is fine
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lakpr
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Re: Late 60s retiring mom...50/50 okay?

Post by lakpr »

Is she willing to extend employment into the new year just a couple more months, enough to earn about $32k income?

She can defer that 2022 income entirely into a Roth 401k (or Roth 403b) for $26k. The remainder $6k is for taxes and withholdings.

With at least $26k in earned income showing up on W-2 form, she will be able to contribute another $7k to a Roth IRA.

Having $33k contributed to Roth accounts on which she would never have to pay taxes again, will be a good deal.
sandan
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Re: Late 60s retiring mom...50/50 okay?

Post by sandan »

If the funds are in a taxable account, it seems like paying off the mortgage would reduce uncertainty and eliminate having to worry about a SWR and finding a perfect asset allocation.
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Re: Late 60s retiring mom...50/50 okay?

Post by mhalley »

There are many aa that are fine for different stages of life. I chose to go 50/50 after retirement and plan to stay there till I die. Some like to lower the initial aa to prevent sequence of returns risk, some like the glidepath down to 30. It all depends on your risk tolerance and what the portfolio needs to earn to maintain your withdrawal rate. At a 3% swr, she should be fine with any of these.
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ThreeScreens88
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Re: Late 60s retiring mom...50/50 okay?

Post by ThreeScreens88 »

sandan wrote: Mon Jan 18, 2021 12:47 pm If the funds are in a taxable account, it seems like paying off the mortgage would reduce uncertainty and eliminate having to worry about a SWR and finding a perfect asset allocation.
The funds are NOT in a taxable account — all in 403b. I’m wondering now though if she should really consider paying off the mortgage.

Mortgage payment = $800 P&I (+ $400 Escrow)
~17 years remaining.
4% SWR on 403b = $1330/mo.

If she withdraws $100k to pay off mortgage (taxes notwithstanding), it would retire $800/mo P&I while reducing 4% SWR to $1000/mo. I’ve always been opposed to this move but it suddenly sounds like a win.

Would also need to consider tax strategy —
403b loan? do it over a few years?

She’s also been paying an extra $500/month to principal of late. If she refi’d now and kept paying the same amount as she does now, she’d have it paid off in 8 years. On the flip side, she could also refi pay the lower amount and know that for the rest of her life she’ll have $900/mo in mortgage + escrow (she usually lump sumps escrow shortfalls at the start of each year so it won’t change).

Looking for solid advice on this.

*Edited to properly reflect the current mortgage numbers (which she would likely refi).
Last edited by ThreeScreens88 on Fri May 07, 2021 3:01 pm, edited 2 times in total.
Fat Tails
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Re: Late 60s retiring mom...50/50 okay? Pay off mortgage?

Post by Fat Tails »

I don’t think she should take money from tax deferred to pay off the mortgage. It would take too much from her investments to pay off the mortgage and the associated income taxes on the withdrawal while pushing her into a higher tax bracket for that year.

If the mortgage interest rate is higher than current mortgage rates she could refinance and perhaps have a smaller payment perhaps even going out 30 years. If she wishes to refinance, she should do it will she is still working. She should stop making the extra principal payments.

Good luck.
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ThreeScreens88
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Re: Late 60s retiring mom...50/50 okay? Pay off mortgage?

Post by ThreeScreens88 »

Fat Tails wrote: Fri May 07, 2021 1:53 am I don’t think she should take money from tax deferred to pay off the mortgage. It would take too much from her investments to pay off the mortgage and the associated income taxes on the withdrawal while pushing her into a higher tax bracket for that year.

If the mortgage interest rate is higher than current mortgage rates she could refinance and perhaps have a smaller payment perhaps even going out 30 years. If she wishes to refinance, she should do it will she is still working. She should stop making the extra principal payments.

Good luck.
Thanks! Looking forward to hearing other perspectives, particularly on paying off the house vs refi and making mortgage payments forever vs refi and pay off in 8ish years (she’s now 69).
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Re: Late 60s retiring mom...50/50 okay? Pay off mortgage?

Post by lakpr »

With a $550 payment in principal and interest, 15 years remaining, it appears that the mortgage balance is around $80k (I assumed a 3% interest rate). That balance is too little to be able to successfully refinance (the closing costs will be expensive relative to the balance, and no-cost refi's are not available at this low a balance, at least not in my neck of the woods).

I would differ from @Fat Tails, and do suggest that she draw the money to pay off the mortgage. But NOT now, not when she is still working. When she is retired, and she no longer has that $120k income coming in, she would drop into a very low tax bracket. She could withdraw from the 457 up to $50k per year and be in the 12% bracket, use her taxable account for living expenses, and the mortgage would be gone within 2 years.

Another factor is that, if she leaves the money in the 457 plan, the RMDs required (which would hit in about 3 years, at age 72; you said she is 69 years old now) will be calculated on the balance existing then in the 457 plan. Emptying it out to pay off the mortgage would also reduce the RMD.
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Re: Late 60s retiring mom...50/50 okay? Pay off mortgage?

Post by SuzBanyan »

With no funds in either a taxable account or Roth, I would not pay off the mortgage, either now or early in retirement. I agree with other posters that she should stop making extra mortgage payments; instead, put those funds in a Roth or taxable account.

It looks like when she retires, most of her income will come from her pension and social security. With $400k in the 403b account, her early withdrawals are only going to be less than $16k per year. Roth conversions (that is drawing funds before RMDs kick in, paying taxes, then moving the funds to a Roth account) probably make no sense given her other income in retirement.
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ThreeScreens88
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Re: Late 60s retiring mom...50/50 okay? Pay off mortgage?

Post by ThreeScreens88 »

SuzBanyan wrote: Fri May 07, 2021 8:34 am With no funds in either a taxable account or Roth, I would not pay off the mortgage, either now or early in retirement. I agree with other posters that she should stop making extra mortgage payments; instead, put those funds in a Roth or taxable account.

It looks like when she retires, most of her income will come from her pension and social security. With $400k in the 403b account, her early withdrawals are only going to be less than $16k per year. Roth conversions (that is drawing funds before RMDs kick in, paying taxes, then moving the funds to a Roth account) probably make no sense given her other income in retirement.
Correct, most of her income would come from pension + SS. In fact I’d guess that her monthly expenses in retirement will be less than half of that amount (pretax).

My thinking is the $1200/mo or so from 403b withdrawals would cover mortgage plus other home expenses. But if the mortgage is paid off with retirement funds, the majority of those home expenses (P&I) would be eliminated and her monthly 403b would (only) be reduced to $900.

But I’ve always thought that it makes no sense to tap retirement funds to pay down a mortgage. But in this case, the math seems very sensible (unless I’m looking at it improperly).
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Re: Late 60s retiring mom...50/50 okay? Pay off mortgage?

Post by Watty »

ThreeScreens88 wrote: Fri May 07, 2021 9:09 am But I’ve always thought that it makes no sense to tap retirement funds to pay down a mortgage. But in this case, the math seems very sensible (unless I’m looking at it improperly).
The only way to figure this out is to do dummy tax returns including her state taxes to see what the actual taxes will be.

One thing to keep in mind is that the tax rates are scheduled to revert to the old higher tax rates in 2026 if there are no tax law changes. Depending on her details it may make sense to withdraw the money to pay off the mortgage before then to avoid the higher tax brackets in 2026 and beyond.

The way her Social Security is taxed is very complicated so she will need to take that into account too since this can put her into a higher than expected effective tax bracket.

https://www.bogleheads.org/wiki/Taxatio ... y_benefits

She could also end up in a situation where once the maximum amount of her Social Security is being taxed that the income above that would then be taxed at a lower effective tax rate.

She will also need to watch out for IRMAA taxes if her income gets too high if she makes a large withdrawal to pay off the mortgage.

Just for brainstorming if taxes will be a problem one other option to look at would be for her to refinance the mortgage into a new 30 year loan before she retires to greatly lower her mortgage payment. That might make sense if that would prevent her from getting into a higher tax bracket. I am normally a big fan of having a paid off house in retirement but since she has a pension she could be in a situation where this makes sense.
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Re: Late 60s retiring mom...50/50 okay?

Post by delamer »

raiderjkwong wrote: Sun Jan 17, 2021 6:39 pm We are 54 and will be retiring in a couple years. We are 30/70 in our AA. We have a 2.7 M in our portfolio. We also will have two pensions. We are very conservative in our approach to money....50/50 is very reasonable but if she will need the money during the next several years, 40/60 or 35/65 will be much safer. No one knows the future and people in their 60s+ have no room for error or unnecessary risk. We don't need to be greedy; we just want to retire with no financial stress. Just my two cents.

Invest in stocks to get rich; Invest in bonds to stay rich.
It simply isn’t true that 40/60 or 35/65 are “much safer” than 50/50. Take a look at this Vanguard chart: https://investor.vanguard.com/investing ... allocation

Lots of people in their 60’s will live another 30 years. While unnecessary risk of all thoes should be avoided, loss of principal is just one type of risk.
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Re: Late 60s retiring mom...50/50 okay? Pay off mortgage?

Post by RickBoglehead »

I don't see anywhere the interest rate on the mortgage...
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ThreeScreens88
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Re: Late 60s retiring mom...50/50 okay? Pay off mortgage?

Post by ThreeScreens88 »

RickBoglehead wrote: Fri May 07, 2021 9:48 am I don't see anywhere the interest rate on the mortgage...
5.125% -- way too high, she should have refi'd a long time ago. So she's doing that now down to 3%.
delamer
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Re: Late 60s retiring mom...50/50 okay? Pay off mortgage?

Post by delamer »

ThreeScreens88 wrote: Fri May 07, 2021 9:09 am
SuzBanyan wrote: Fri May 07, 2021 8:34 am With no funds in either a taxable account or Roth, I would not pay off the mortgage, either now or early in retirement. I agree with other posters that she should stop making extra mortgage payments; instead, put those funds in a Roth or taxable account.

It looks like when she retires, most of her income will come from her pension and social security. With $400k in the 403b account, her early withdrawals are only going to be less than $16k per year. Roth conversions (that is drawing funds before RMDs kick in, paying taxes, then moving the funds to a Roth account) probably make no sense given her other income in retirement.
Correct, most of her income would come from pension + SS. In fact I’d guess that her monthly expenses in retirement will be less than half of that amount (pretax).

My thinking is the $1200/mo or so from 403b withdrawals would cover mortgage plus other home expenses. But if the mortgage is paid off with retirement funds, the majority of those home expenses (P&I) would be eliminated and her monthly 403b would (only) be reduced to $900.

But I’ve always thought that it makes no sense to tap retirement funds to pay down a mortgage. But in this case, the math seems very sensible (unless I’m looking at it improperly).
I’m not clear why she’d just save $300/month if her mortgage expenses are going down by $550.

In addition to the tax hit from withdrawing a lump sum, if she is on Medicare then she may become subject to higher premiums under IRMAA.

I wouldn’t reduce my nest egg by 25% to pay off debt, especially with your mother’s level of assets.

Whether stocks are over-valued, under-valued, or properly priced isn’t relevant to her decision. Hopefully, she’ll live for another 25 or 30 years, and stocks will do what they do. Find an allocation that she can live with and move on.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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ThreeScreens88
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Re: Late 60s retiring mom...50/50 okay? Pay off mortgage?

Post by ThreeScreens88 »

delamer wrote: Fri May 07, 2021 9:55 am
ThreeScreens88 wrote: Fri May 07, 2021 9:09 am
SuzBanyan wrote: Fri May 07, 2021 8:34 am With no funds in either a taxable account or Roth, I would not pay off the mortgage, either now or early in retirement. I agree with other posters that she should stop making extra mortgage payments; instead, put those funds in a Roth or taxable account.

It looks like when she retires, most of her income will come from her pension and social security. With $400k in the 403b account, her early withdrawals are only going to be less than $16k per year. Roth conversions (that is drawing funds before RMDs kick in, paying taxes, then moving the funds to a Roth account) probably make no sense given her other income in retirement.
Correct, most of her income would come from pension + SS. In fact I’d guess that her monthly expenses in retirement will be less than half of that amount (pretax).

My thinking is the $1200/mo or so from 403b withdrawals would cover mortgage plus other home expenses. But if the mortgage is paid off with retirement funds, the majority of those home expenses (P&I) would be eliminated and her monthly 403b would (only) be reduced to $900.

But I’ve always thought that it makes no sense to tap retirement funds to pay down a mortgage. But in this case, the math seems very sensible (unless I’m looking at it improperly).
I’m not clear why she’d just save $300/month if her mortgage expenses are going down by $550.

In addition to the tax hit from withdrawing a lump sum, if she is on Medicare then she may become subject to higher premiums under IRMAA.

I wouldn’t reduce my nest egg by 25% to pay off debt, especially with your mother’s level of assets.

Whether stocks are over-valued, under-valued, or properly priced isn’t relevant to her decision. Hopefully, she’ll live for another 25 or 30 years, and stocks will do what they do. Find an allocation that she can live with and move on.
Good advice (especially the Medicare piece which I hadn't considered). Quick question: would you make extra payments to pay down the mortgage (refinanced at 3%) over 8 years or take the opposite approach and keep a 30-year mortgage (essentially for the rest of your life)?

FYI - the $300 difference I mentioned would have just been the SWR monthly withdrawal difference between having a $300,000 portfolio at retirement as opposed to $400,0000.
delamer
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Re: Late 60s retiring mom...50/50 okay? Pay off mortgage?

Post by delamer »

ThreeScreens88 wrote: Fri May 07, 2021 10:46 am
delamer wrote: Fri May 07, 2021 9:55 am
ThreeScreens88 wrote: Fri May 07, 2021 9:09 am
SuzBanyan wrote: Fri May 07, 2021 8:34 am With no funds in either a taxable account or Roth, I would not pay off the mortgage, either now or early in retirement. I agree with other posters that she should stop making extra mortgage payments; instead, put those funds in a Roth or taxable account.

It looks like when she retires, most of her income will come from her pension and social security. With $400k in the 403b account, her early withdrawals are only going to be less than $16k per year. Roth conversions (that is drawing funds before RMDs kick in, paying taxes, then moving the funds to a Roth account) probably make no sense given her other income in retirement.
Correct, most of her income would come from pension + SS. In fact I’d guess that her monthly expenses in retirement will be less than half of that amount (pretax).

My thinking is the $1200/mo or so from 403b withdrawals would cover mortgage plus other home expenses. But if the mortgage is paid off with retirement funds, the majority of those home expenses (P&I) would be eliminated and her monthly 403b would (only) be reduced to $900.

But I’ve always thought that it makes no sense to tap retirement funds to pay down a mortgage. But in this case, the math seems very sensible (unless I’m looking at it improperly).
I’m not clear why she’d just save $300/month if her mortgage expenses are going down by $550.

In addition to the tax hit from withdrawing a lump sum, if she is on Medicare then she may become subject to higher premiums under IRMAA.

I wouldn’t reduce my nest egg by 25% to pay off debt, especially with your mother’s level of assets.

Whether stocks are over-valued, under-valued, or properly priced isn’t relevant to her decision. Hopefully, she’ll live for another 25 or 30 years, and stocks will do what they do. Find an allocation that she can live with and move on.
Good advice (especially the Medicare piece which I hadn't considered). Quick question: would you make extra payments to pay down the mortgage (refinanced at 3%) over 8 years or take the opposite approach and keep a 30-year mortgage (essentially for the rest of your life)?

FYI - the $300 difference I mentioned would have just been the SWR monthly withdrawal difference between having a $300,000 portfolio at retirement as opposed to $400,0000.
There’s another option that I saw on the forum (courtesy of KlangFool) — put the extra payments aside into a high-interest savings account (or CDs) and let them accumulate until she has enough to pay off the loan all at once.

That way, she still has access to the money for emergencies, but the loan will get paid off well before 15 years.

Here’s a calculator that will help: https://www.bankrate.com/calculators/mo ... lator.aspx
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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