My wife and I are planning to retire next year. We have $175,000 in our savings account, $280,000 in our 401(k), and a $500,000 retirement villa on a Caribbean island, which we own free and clear. All we pay for that home is the monthly maintenance fees of around $1,000.
I have two other properties, which I still owe money on. I have a primary residence, with a mortgage balance of around $327,000, and a rental property with a mortgage balance of $334,000.
Should I use the money from my savings and 401(k) to pay off the mortgage on the rental property?
My rental brings $4,100 a month, before taxes, insurance, and landscaping fees, which are about $1,200 a month. And I still have 21 years of monthly payments left on this property. My mortgage payment is $2,890 a month.
I want to pay it off, but I know if I withdraw from my savings, I could incur heavy taxes. I also have a monthly payment of $2,300 on my primary residence, with 16 years left.
To be honest, I don’t want to sell my properties. I want to leave them for my son and daughter. But I also want to pay off my debts. I started collecting Social Security last year.
I want to have $6,000 a month in cash to live comfortably and travel upon retirement.
What are my options?
Island Guy
It’s hard to give you a roadmap that definitively puts $6,000 in your pocket every month without understanding how much in Social Security you’re expected to receive, other debt obligations you have, and so on. But here’s my back-of-the-envelope math.
If your savings, 401(k), and Social Security combined can give you that much per month and cover the mortgage, then maybe there’s no need to sell anything.
But I’m inclined to think that is not the case; otherwise, you wouldn’t be writing this letter.
If you don’t have enough cash on hand, it looks like you might need to consider selling one of the properties, or rent out your primary residence, said Kendall Meade, a senior financial planner at San Francisco-based SoFi. Meade is also a certified financial planner, and SoFi offers free financial planning services for its members.
Meade, however, warned against emptying all your savings and investments to pay off your mortgages, as this will leave you with nothing on hand in case of an emergency or an unexpected expense.
So how do you get to $6,000 a month?
Figure out how much you can take out of your investments each year. The 4% rule is a retirement strategy to gauge how much money you can take out of your retirement for the following 30 years, taking inflation into account. (The rule assumes that you live for 30 years after retiring.)
The rule stemmed from a study that “analyzed rolling 30-year historical periods to understand the maximum sustainable withdrawal rate for someone living for 30 years in retirement,” Meade said. “It is also based on a 50/50 portfolio, where half of the retirement assets are invested in equities, while the other half is invested in fixed income.”
So first, figure out how much you get if you withdraw 4% of your investments per year.
Then, factor in other funds. The 4% rule doesn’t factor in Social Security income, anything from pensions or other forms of income, Meade said. You said you began collecting last year, so factor that amount into your $6,000 goal.
The average Social Security benefit is about $1,862 per month, according to U.S. News, with the maximum benefit for someone who retires at full retirement age, hovers at $3,822. While you can claim Social Security payments at 62, the full retirement age when you can get full retirement benefits is 67 in 2024, according to the Social Security Administration.
So see how much your investments — under the 4% rule — and your other income streams give you every month.
But what if you’re still coming up short and you need another $3,000? To get an extra $3,000 a month from your investment accounts, you’d need roughly $900,000 invested in a portfolio that is 50% equities and 50% fixed income, Meade said.
And therein lies the challenge: To get to that position, you’d need to sell some of your properties.
At this point, you need to talk to a financial planner, and even a real-estate agent, to figure out their value, and which one would help you achieve your $6,000-a-month goal. An agent can also advise how much the property can be rented out for at market value.
One option is to live in your retirement property while renting out your primary residence. That way, you can still leave the property to your son and daughter.
Your wife may have her own retirement plan, so plan together as you will (I assume) wish to live out your remaining years together. And she might have some suggestions to get you to that magic number for your monthly income, too.
