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So,
we are looking at our future and have decided we will retire in Arizona or Nevada. We currently live in upstate NY, so we will need to purchase a home for retirement. We have a figure of $200,000 -$250,000 that we plan on spending on a home. We are looking for opinions...... do we draw $100,000/$150,000 plus($100,000 cash from sale of our current house) out of our Roth 401k to purchase or do we take out a 15 year mortgage (putting down 50%). It would be great not to have a mortgage, but would love to not have to take a large sum out of our 401k.
To begin with, we will have income of $4,800 per month plus our 401k. We will then have a small IRA four years later.(59 1/2) At age 60, we will add an additional $1,000 per month. (this would be five years into the mortgage). Two years later we will add an additional $2,800. per month (SS).....so, do we keep our 401k and get a mortgage or tap the 401k and pay cash?
That's a lot of facts and very little information!
What are your monthly expenses going to be in AZ or Nevada?
Will you have enough money to cover the mortgage? Will you have enough money left over to put aside for emergencies?
If you decide to pay cash, what percentage of your total assets does that cash represent? Will you have enough cash/assets left over for emergencies? Will the portfolio that you have left cover you for the effects of inflation after your last income stream has started?
Take the mortgage. You can always pay it off early!
If something happens, you just might want a stash of cash handy. What happens if you pay cash, and don't like it out there? Now you are financially exposed a larger amount, and may take a huge hit on resale.
Meanwhile, leave your 401k alone as long as possible, so it just continues to grow.
This topic has come up many, many times. The common argument is that it "feels" better not to have a mortgage. I took out a mortgage in retirement partly because the rates are so low. I expect to earn more on my investments than the mortgage money costs me. So far for the first 3 years that has been true. If I had started with 2015 investment performance I might not feel quite as positive. It is certainly possible for returns to fall behind at least for the short term.
There are a couple of other considerations. As already mentioned, if you have your money tied up in a house, pulling out equity can be difficult and can take time. That would be especially true if the housing market or overall economy has tanked. Secondly, you should look at your tax situation. Having a mortgage can significantly reduce taxes. The most important consideration may be your ability to handle money and investments. If the money is in your house, you cannot spend it or invest it unwisely. If you take out a mortgage, you need to be able to invest and wisely handle the money that you did not spend on the house. Many people just are not able to do that and they "feel" better with their money tied up in the house.
Have you considered that in order to net $100K to $150K toward a house out of your 401K, you will need to withdraw $130K to $200K before taxes, plus probably another $25K to $50K to cover after tax moving expenses and closing costs on both ends?
That's a $150K to $250K 'hit' to your 401K and the future earning potential on those funds. Of course, home appreciation can help offset that, but, only if/when you sell.
You may find yourself competing with a lot of cash offers, especially if you plan on buying in an age restricted location. Everything else being equal, sellers are more likely to accept a cash offer over a loan offer, because it's so much cleaner and faster, such as no need for an appraisal. And offering over the asking price can result in the appraisal coming in below your offer. I would touch base with an experienced realtor in the areas you are looking at for a better perspective.
We were faced with very similar situation 5 years ago and we did the mortgage. I am really glad we did. We got a 5 year ARM at 3%, interest only. It was intended to be a bridge loan until we sold our old house but I decided to put it in the market rather than pay off the loan when we sold it. So we let it ride the market for 4 years and just paid the loan off a month ago. We have our retirement house, we are debt free, and we made some money in the market off the whole thing.
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