A reader wants to know which option is the best — or least bad.
Question:I am 63 years old. Retired. 401 $300,000 + plus pension & SS. Wife 62 retired drawing SS small 401 $45,000. We are retired and need to have more disposable income. We only owe $17,000 on our house with an interest rate of 5 3/4. If I took out money from 401 to pay off house we would have an additional 1,000 a month. Is this a good use of our money?
Steve Rhode answers…
There are two logical choices here out of a pool of more options. The most questionable choice would be a reverse mortgage which would allow you to convert equity to income each month.
Reverse mortgages can be a dangerous tool to use without education and awareness. So I would not consider that option without first talking to a Home Equity Conversion Mortgage (HECM) counselor. You can talk to them for free. See this list.
The most logical options would be to consider selling the house, downsizing, and saving some of the the proceeds from the sale and living off the rest. But obviously I have no idea how much your current home is worth, so only you can determine if that is a good idea or not based on home value.
If you can take out $17,000 without a tax consequence or as part of your minimum required distribution, then using $17,000 to save $1,000 a month can be a smart thing to do mathematically — in some ways. But what we don’t know is how much longer you’d be making that $1,000 mortgage payment. If you would only be making it for the next 18 months or so then the most important calculation would be the cost of the lost 401(k) month over a longer period of time.
These days a stock index mutual fund is returning about 10 percent so if we assume you may live to 77, then if you leave the $17,000 in your retirement fund, it would be worth about $69,000 at age 77. You can calculate the future value of money by using this calculator.
So you are not really taking out $17,000, you are really losing the value of that money which is forecast to return $69,000.
Ultimately, only you can determine what is best for you. But here are some big issues to watch out for if you consider the reverse mortgage route to suck cash out of the home.
Steve Rhode is the Get Out of Debt Guy. He’s been helping people with personal finance troubles through advice and education since 1994. If you would like to ask a question, visit Get Out of Debt and let Steve help you for free.