Retirement Planning - Lessons Learned

[Jstpssng]

Don’t you take a tax hit if you pull a large amount of money from your retirement fund?

 

[RickB]

Don’t you take a tax hit if you pull a large amount of money from your retirement fund?

Depends on your age and what type of an account it is in. For all accounts other than a Roth, you will pay tax on some or all of the proceeds at a minimum. If you are younger than 59.5 years penalties may apply.

 

[kenmac]

also depends on how much money taken out, and how much it adds to your total end of the yr income. If it puts you in another tax bracket, you could pay xtra taxes. I have been there

 

[California]

Depends on your age and what type of an account it is in. For all accounts other than a Roth, you will pay tax on some or all of the proceeds at a minimum. If you are younger than 59.5 years penalties may apply.

I started drawing Deferred Comp before 59.5. No penalty but rules then in effect required declaring a lifelong monthly minimum payment in order to do this. More recently the rules changed and you can change the monthly payout.

This is literally deferred wages, so taxable as ordinary income.

 

[Frankenkubota]

This is true. In border cities along the Washington side of the WA/OR line they ask if you if you are an Oregon resident. If you are you do not pay sales tax. The businesses on the WA side lobbied for it to attract sales.

just before i left portland Oregon some gal across the river in vancouver wash got popped for selling and delivering mattresses to oregon customers from her stores in wash to avoid the sales tax

I think i got that backasswards but you get the idea.

 

[goeduck]

just before i left portland Oregon some gal across the river in vancouver wash got popped for selling and delivering mattresses to oregon customers from her stores in wash to avoid the sales tax

I think i got that backasswards but you get the idea.

She probably got in trouble because she delivered to OR.

 

[Torvy]

At the time, preceding the 2008 crash, banks were making crazy irresponsible loans just for the transaction fees with no concern for the credit worthiness of the borrower. As soon as they wrote the loan, they sold them into pools that were bought by investors (we know how that turned out).

I was working for one of the most responsible US banks at that time. We got out of the mortgage business before the bubble and got back in after. What is missing from your narrative here is that Congress bullied banks into making loans to people who could not afford them. The banks have a fiduciary responsibility to their stockholders (most of whom are regular folks with 401k holdings). They package don't those loans with a balance of good loans to be responsible. Unless they did what we did, they did not get to choose 'pass' on bad loans....fyi, banks don't like to make loans that don't get paid. The banks would have made considerably more money making better loans, except Congress. Money for lending is a finite resource. Most people assume, incorrectly, that banks just look at a FICO score and loan to anyone. The sweet spot in lending is someone who has ok credit, but has been improving over time. They don't get the lowest rates, but are very likely to repay. FYI, after the bust, Congress required us to take their money even though we were one of the banks that past the 'stress' test.

 

[Torvy]

She probably got in trouble because she delivered to OR.

Pretty sure it was the other way around. Delivering to Washington customers from Oregon stores. Oregon customers don't pay sales tax either way. One sister of mine lives in Salem (husband worked for the state for many years as an Economist). The other lives just north of Seattle. I don't think it matters where in Washington they buy. Oregon sister often shopped in Seattle with no tax. WA sister always hosted Thanksgiving so they could shop sales together.

 

[LFP79]

If you have the means...get the mortgage paid off. It takes a huge load off your mind. Even if your IRA tanks, you have your home.

If you have any credit card debt, you should not retire. You have established a lifestyle that is above your means. If you cannot control it you are going to be in trouble quickly.

Have all or most of your "toys" paid for.

If you have a spouse or partner that wants to retire "in style" and you cannot afford it...get rid of her/him if you can. If married to her/him prepare for "issues".

Cost of divorce should be evaluated. Many seniors realize they will not enjoy retirement with the person they have only had to endure 24 hours a day for two days a week. Spending 7 days a week them, with no work to escape can trigger it. If you have friends and your partner does not...that is a another "red flag".

You will need/want about 65% of your pre-retirement income until you learn to live on less.

If you do not have a company pension or government job pension, do not depend on SS. Which means you need about $500k to $1 million in investments.

About 15% of people over 65 live in poverty and only 58% live at double (or more) than the poverty level. The good news about living in poverty is that life expectancy goes down so you may not suffer for long.

Lots of folks do not have "Golden Years".

Issues with the spouse, very good point, dealing with that now. The one thing I don't have when I was younger is time, much more difficult to recover from.

 

[ericm979]

Don’t you take a tax hit if you pull a large amount of money from your retirement fund?

Yes, if you pull it out before the age limit (if there is one on that kind of retirement account, not all have them).

We keep looking at paying off the mortgage early but with only a few years left it doesn't make sense. Most mortgages are structured so you pay mostly interest first and mostly principal later on. In the last years you're paying almost entirely principal. So in effect you have an extremely low interest loan. Like nearly 0%. If you invest that money instead you'll end up ahead in the end, assuming your investment does better than nearly 0%.

 

[cdaigle430]

Im thinking about using my 401k to pay off my house early next year. I will pay 10% penalty fee and they will deduct state and federal taxes which comes out to this as an example. If I remove 100,000 out of my 401k, that means they will hand me a check for 65,000 dollars. I would have to withdraw 155,000 assuming 10% penalty fee, 20% fed taxes and Maines 5.5% tax rate(total 35.5%) in order to get the 100,000 to pay of the mortgage.

1-I would own the hose after that so if stock crashed-I got something out of it.

2-I should get some taxes back after filing taxes?

3-If I font pay of the loan early i will pay on interest which is 5% now foe me for 15 more years. Thats about 75,000 in interest I would save vs 65,000 in taxes and fees withdrawing from my 401k.

4-I would lose compound interest earnings but then again the stock market isnt going to continue to go up like this...no way no how.

5-I would have 750 a month less to pay for bills meeting meeting and exceeding my budget.

Anyone think of any more pros or cons? My medical is mostly paid for for life and I already have a soc security and two small pensions and one medium sized pension for life. I am also mostly debt free.

 

[dirttoys]

Im thinking about using my 401k to pay off my house early next year. I will pay 10% penalty fee and they will deduct state and federal taxes which comes out to this as an example. If I remove 100,000 out of my 401k, that means they will hand me a check for 65,000 dollars. I would have to withdraw 155,000 assuming 10% penalty fee, 20% fed taxes and Maines 5.5% tax rate(total 35.5%) in order to get the 100,000 to pay of the mortgage.

1-I would own the hose after that so if stock crashed-I got something out of it.

2-I should get some taxes back after filing taxes?

3-If I font pay of the loan early i will pay on interest which is 5% now foe me for 15 more years. Thats about 75,000 in interest I would save vs 65,000 in taxes and fees withdrawing from my 401k.

4-I would lose compound interest earnings but then again the stock market isnt going to continue to go up like this...no way no how.

5-I would have 750 a month less to pay for bills meeting meeting and exceeding my budget.

Anyone think of any more pros or cons? My medical is mostly paid for for life and I already have a soc security and two small pensions and one medium sized pension for life. I am also mostly debt free.

There is nearly no logical reason to take the 10% hit.

If you fear a market correction that you don't have time to recover from, move to money market fund.

If you feel interest is too high on the house refi.

If you need a heart transplant take the money out and pay the 10%, not for anything else.

Best,

ed

 

[kenmac]

Go take on a part time job and pay all you earn on your house mortgage.
No logical sense to take a 40-50% hit on taxes just because you want to pay off early ! JMO !

 

[kenmac]

We keep looking at paying off the mortgage early but with only a few years left it doesn't make sense. Most mortgages are structured so you pay mostly interest first and mostly principal later on. In the last years you're paying almost entirely principal. So in effect you have an extremely low interest loan. Like nearly 0%. If you invest that money instead you'll end up ahead in the end, assuming your investment does better than nearly 0%.

I owe 20 years on this farm. If I never pay it off that's fine. When I'm gone, the money I leave behind (if any) should be enough to take care of the responsibilities. If not, the mortgage company can have it.

I'm not pulling money out of my investments to pay it off

 

[beowulf]

I would never take the penalty or tax hit just to pay off a mortgage. If the interest rate was too high, I would refi. If the rate is competitive, just try to pay more each month. The last mortgage we had - several years ago - was for 15 years. We put down every extra dollar each month on the mortgage and it was paid off in 3 years and 3 months. I know not every one will have extra money to do this totally, but every little bit helps. I really hate paying interest unless it is less than I can somehow earn on our money.

Now for an interesting mortgage story - about a different mortgage - Washington Mutual. Many years ago when our mortgage was down to about $16,000 we decided to just pay it off. I went into the bank and asked about the balance and then wrote a check for that balance. They directed me to a loan officer. I gave him the check and told him I wanted to pay off the balance. He hesitated and then told me the bank could not accept the "last payment" by check - that it had to be in cash. So I told him that, okay, I would write another check for the balance less one dollar and then would give him the check to "pay down" the mortgage, and then I would give him a dollar so the last payment would be in cash as they required. He just stared at me - for a very long time - really, a very long time, and finally he said they could not do that either. We finally agreed that I would give him the check for the full amount but that they did not have to mark the mortgage paid until the check cleared.

 

[CH4Ohio]

Im thinking about using my 401k to pay off my house early next year. I will pay 10% penalty fee and they will deduct state and federal taxes which comes out to this as an example. If I remove 100,000 out of my 401k, that means they will hand me a check for 65,000 dollars. I would have to withdraw 155,000 assuming 10% penalty fee, 20% fed taxes and Maines 5.5% tax rate(total 35.5%) in order to get the 100,000 to pay of the mortgage.

1-I would own the hose after that so if stock crashed-I got something out of it.

2-I should get some taxes back after filing taxes?

3-If I font pay of the loan early i will pay on interest which is 5% now foe me for 15 more years. Thats about 75,000 in interest I would save vs 65,000 in taxes and fees withdrawing from my 401k.

4-I would lose compound interest earnings but then again the stock market isnt going to continue to go up like this...no way no how.

5-I would have 750 a month less to pay for bills meeting meeting and exceeding my budget.

Anyone think of any more pros or cons? My medical is mostly paid for for life and I already have a soc security and two small pensions and one medium sized pension for life. I am also mostly debt free.

You should really talk to a financial advisor. Some companies even offer that through their EAP programs.

People are refinancing their mortgages in the 2 -3% range. There's no reason to have an expensive mortgage unless your credit score won't allow for a refi. It would be crazy to pull invested money out to save on a 2.5% mortgage if you have to take a penalty.

On your point number 2, you won't get any of those "penalty" taxes back. Those are calculated and fixed. Don't kid yourself.

Pay extra on your mortgage every month and pay it off early. That saves you interest and doesn't cost a thing.

Just my opinion . . . And, I should add, you really shouldn't be relying on financial planning advice from an Internet tractor forum!

Good luck.

 

[Jstpssng]

I calculated how much extra to pay to ditch my mortgage 3 years early, then started paying an extra 70$/month. It backfired though, they applied it toward the escrow even though it already had enough to pay my insurance and taxes. When I called them they said “that’s just the way we do it.” I’m back to making my scheduled payment, and will start putting the extra into a Roth acvount

 

[Torvy]

Another loud vote that you do NOT take 401k money to pay mortgage. Even low-No risk investments will outperform your penalty. More likely than not, they will outperform your mortgage interest. In other words, you would be overpaying your mortgage for a false sense of security.

If your mortgage loan APR is high (over 4-5%), you would be better served to refinance. We will pay off our home loan when we retire because we are selling the house and downsizing. (Moving to our rural slice of heaven). It has only a few years left and is worth about twice what we paid 15 years ago...so the proceeds of the sale pay off the house.

Feel free to pay a financial advisor. 100% will tell you to only touch your 401k for real emergencies. If you are risk averse, that is OK, just select lower risk investments... Fixed income securities, government bonds, guaranteed rate funds. You will not grow much money that way, but you also will not lose money. Your plan automatically loses you a big chunk of money with no return on investment.

Fyi, fixed rate mortgages are a hedge Against inflation. Your payments will not get higher, but income will grow (COLA on SS, for example).

 

[Torvy]

I calculated how much extra to pay to ditch my mortgage 3 years early, then started paying an extra 70$/month. It backfired though, they applied it toward the escrow even though it already had enough to pay my insurance and taxes. When I called them they said “that’s just the way we do it.” I’m back to making my scheduled payment, and will start putting the extra into a Roth acvount

You could press them on that. More likely, they screwed up and bluffed you. Good choice! It seems counterintuitive, but heading into inflation it may make more sense for some people to get a low interest rate 2nd mortgage and invest (carefully). As inflation grows the home value grows but payments stay low.

 

[beowulf]

I calculated how much extra to pay to ditch my mortgage 3 years early, then started paying an extra 70$/month. It backfired though, they applied it toward the escrow even though it already had enough to pay my insurance and taxes. When I called them they said “that’s just the way we do it.” I’m back to making my scheduled payment, and will start putting the extra into a Roth acvount

Unless there are provisions about pre-paying, you should be able to pay down the principal any way you want to pay it. What they did makes no sense. I know that in my situation I had to clearly indicate that the extra payments were to apply exclusively to principal.