I'll be as brief as possible. Due to poor decisions by my former employer, the writing on the wall was clear that the business was on the verge of closing, so I looked for a new job. The good news is that I found one with an even higher salary; the bad news is that a relocation was necessary, which meant we had to short-sell our home. We emerged from the mortgage crisis approximately 35,000.00 underwater. We moved a year and a half ago, and have been renting since then.
Here's my issue -- we want to buy a home, but the short sale, the move, etc. left our savings (which weren't a lot -- around 5,000.00) completely depleted. Saving money since the move has been difficult; we moved from a small town to a big city where everything from housing to car insurance to utilities are more expensive. Also, in order to make myself more marketable (knowing I needed to find a new job), I completed a Master's Degree, so I now have a student loan payment to contend with. Basically, we are emerging from our own financial crisis, slowly but surely.
The problem is that I am 46 and my husband is 56. We are getting very close to "that age" and it worries us that we have no housing secured for our later years. My husband has no retirement savings, as he has been largely self-employed throughout his life and has spent periods of time as a stay-at-home dad to our son.
I have 86,000.00 in a 401k from my former employer (and 6,000 in my current employer's 403b). Believe me, I know the common wisdom is never to touch it and to leave it alone until retirement. However, I see us throwing away 1000.00 in rent every month -- money I am certainly not gaining in my 401k right now. I know there are penalties and taxes to be paid, and that scares me, too. However, I have been wondering if I would be better off taking part of that money (and losing some too...) and investing in a home with a 15 year mortgage that we can pay off by retirement. Or, should I let it ride and cross my fingers that we can put together a 10-20k down payment at some point in the future (I don't see how, but...)?
I am really struggling with this decision. My husband wants me to withdraw the money, but ultimately it is mine and he respects that.
Any advice is welcome!
Thanks for reading.
Wed Jan 13, 2016 10:42 pm
oldguy Senior Member
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quote: I have 86,000.00 in a 401k from my former employer -------- and investing in a home with a 15 year mortgage that we can pay off by retirement
You will be losing about $24,000 for Fed Income Tax and $8600 to early withdrawal penalty, leaving you with $53,000. I would avoid that at all costs, considering that you have almost no other retirement savings. Keep the $86,000 in your Qualified Account, put it in 11%/yr n0-load funds, that would be $625,000 when you are age 65.. And keep growing your $6000 403b - those two accounts should give you an adequate retirement.
Keep renting for awhile until the credit hit from the short-sale 'times out', then get a house. Make the smallest down payment possible (to retain as much of your own cash as you can). And get a 30 year fixed rate loan, not a 15 yr loan - you need to keep the payments manageable. Plus, you can get 30 year money for under 4% these days,that is very cheap use of capital.
But the key to your far-future is to make sure that the $86,000 doesn't get fiddled away, you need to stay on plan to build the $625,000.
Thu Jan 14, 2016 12:14 am
christcorp Preferred Member
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Something you can look into is is taking a loan out on your 401K; and use that money to pay off the student loans and any other loans. This way, while you're paying off the 401k loan, you're actually paying yourself back the interest. It will save you a bit.
Thu Jan 14, 2016 2:29 pm
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I know you say $1,000 is throwing away money, but sometimes mathematically owning a house will end in the same result. The thing you have to remember is that a house can be expensive. For example, if you bought a 300k home and put 50k down, you'd have PMI which would run about $2,000. Also, the total interest paid on a 30 year note for a 250k mortgage @ 4% comes out to an average of $491.57 a month. If your property tax is $4,000, then you'd be paying $333 a month. If you add your property tax + Interest payments = $824.57 a month for 30 years. That amount ususally rises if your in a good county with good schools due to higher taxes.
These costs don't include lawn maintenace, snow removal, a new roof, water heater, furnace, AC unite, etc....
When you rent you're not responsible for anything except rent and utilities. So when people say buying is cheaper then renting, their not looking at all of the costs. I'm not saying there aren't advantages to buying a home, like tax deductions (which if your in the 25% bracket then you'll get back 25% of the interest you paid, so the other 75% is out the window), appreciation of your home and the pride of home ownership. But owning a home isn't for everyone.
My main concern for you seems to be income and retirement savings. As old Guy stated, I wouldn't touch the 86k, because that is a nest egg that can grow to approximately 700k by the time you retire. If it were me, I'd find a way to make additional income for the purpose of investing solely to help catch up your retirement savings.
Risk comes from not knowing what you're doing. (Warren Buffet)
Thu Jan 14, 2016 4:02 pm
3JRTs New Poster
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Thank you and one more question
Thank to both of you for your input -- I feel more heartened about my retirement outlook now.
That said, I feel kind of dumb, because I don't know what 11% no-load funds are (as Old Guy mentioned). Is there somewhere I can look and learn so that I can adjust where my 401k is currently invested?
I use the SP500 Index - it has a longterm average return of about 11%/yr, pick out some 30-year-blocks and check out the history. We have SP500 Index accounts at both Vanguard and at Fideliy. And most 401k Plans have as SP500 choice.