Reduce dependency on high income
Adjust to having less going into retirement
Hi Pete,
I’m a 66-year-old gainfully employed registered nurse. I hope to work three more years. I make $125,000 a year and collect my deceased spouse’s Social Security of $2286 a month, while mine continues to grow. My first mortgage balance is $154,000 and I have a home equity loan for $36,000. My interest rate on my first mortgage is 3.625% and 5% (variable) on the HELOC. I need your advice; should I refinance my mortgage and roll both mortgages together or try to find a fixed rate home equity loan? I am so afraid I will make a wrong decision.
— Beth
I love a good plan, and it appears you are well on your way to a successful retirement. Because I don’t have all the financial details about your life, I will need to make some assumptions. After that, I’ll offer you two distinct paths.
You have a tremendous amount of household income right now, and if used efficiently over the next three years, your retirement can benefit from your actions. Reducing your obligations is as important as accumulating money when you’re preparing for retirement. I have a hunch you have some retirement assets based on your income and your confidence in your ability to retire in three years, so I’m not going to focus a tremendous amount on accumulating more assets.
The answer to your question might be more obvious than you think. If you
You need a bigger than normal emergency fund heading into retirement.
happened to have a very large cash holding (worth more than 18 months expenses), including certificates of deposit, you may consider simply paying off your HELOC (home equity line of credit) immediately. Why? Because you’re likely earning significantly less interest on your savings deposits than you are paying in interest on your HELOC. Why pay 5% when you’re only earning 1% on money you don’t need right now?
If you go this route, you need to be laser focused on rebuilding that savings over the next few years. By the way, if you’re wondering why I chose 18 months expenses as the threshold, it’s because you need a bigger than normal emergency fund heading into retirement. Because once retirement starts, it’s hard to replenish an emergency fund.
In the event you don’t have the cash to wipe out your HELOC, you still need to focus on paying it off aggressively, as opposed to carrying the debt indefinitely.
Don’t refinance your mortgage and start the interest clock all over again, just focus on paying-off your HELOC sooner rather than later. You can easily pay off that debt within the next three years by simply using the Social Security payments you’re receiving. This will accomplish two very important tasks. First, it will get rid of your debt. And second, it will break your dependency on your current high level of income.
You have access to $152,000 of income right now, and unless you have a giant pension or millions in retirement assets, you need to get used to having less income. But I have no idea what you have in regards to retirement assets, so no matter what you have, you need to begin the process of getting your expenses to match the income you’ll have available three years from now. In fact, I believe this is where most pre-retirees miss the opportunity to cross i’s and dot t’s.
Saving and investing vs. reducing obligations
For instance, if you have $79,000 ($6,583/month) of annual income available at retirement, then you need to ween yourself off the $152,000 ($12,667/ month) you’re currently receiving. There’s two ways to do this. The first is to save/invest anything over $6,583 of current income. The second way is to rid yourself of pesky obligation which will make retirement unnecessarily difficult, like your HELOC.
Honestly, you have a reasonable shot at paying off your primary mortgage with this “excess” income over the next three years. You should consider making that a priority if you have already secured a level of retirement income you’re comfortable with.
No matter how cheap borrowed money is right now, don’t let it distract you from making your retirement as easy as possible. While having a lot of money is great, not needing a lot of money is better.
Peter Dunn is an author, speaker and radio host, and he has a free podcast: “Million Dollar Plan.” Have a question for Pete the Planner? Email him at Ask Pete@petetheplanner.com. The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.
Pete the Planner