Early retirement plan

[di32911308]

Trying to find out if anyone thinks this retirement plan will work.

My wife and I have a modest income of just under $50k a year. I am 59 and still working. She is 58 and on Disability.

I plan on retiring early at 62. Our house is paid off and we have no major debt but owe some back taxes plus some consumer debt totaling around $25k.

Our combined monthly income in retirement will be about $2,500 a month.

I have a small 401k that nearly matches our total debt mentioned above and I plan on using it to pay that debt off at age 59 1/2.

When my wife turns 62 we plan on doing a reverse mortgage on our $200k+ home.

What do you think?

[di32911308 · Accepted solution]

Not sure why this is getting so much attention 6 years later lol

Just to let everyone know, I executed my plan and everything worked out beautifully. Loving retirement! 😁

[MuktaS390247]

Honestly, you’re in a decent spot with no mortgage and a plan to pay off debt first. One thing to watch is how a reverse mortgage might affect your cash flow down the line—you can see the numbers and options clearly here (hud.gov/program_offices/housing/sfh/hecm/hecmhome) and (reverse.mortgage/saver-is-the-retirement-savior). Even running a few scenarios now could make retirement feel a lot less stressful.

[GailL1]

Why would one use a reverse mortgage rather than a HELOC or even a HEL especially if the home already has NO mortgage?  

Never understood the appeal of a reverse mortgage - it is stopped if you have to move out of the home (like if you have to go to assisted living or nursing home).  You (or the family) has to pay it all back if you or your family wants the house back completely.  

Plus it is very important that one understands the details of the reverse mortgage - especially if there is only one of a couple on the deed - not both and that party moves out or dies.  

If one can just use their equity as they need it and then pay it off - it does not complicate the matters of the home once other plans have to be made due to the owner moving into another type living environment or they die.  

[MuktaS390247]

Yes, that is a very valid point. Reverse mortgages can be beneficial to some people who want stable, reliable, and predictable income without the requirement of monthly payments, but they also can be tricky - especially if there is a potential move or health issues in the future. A HELOC or home equity loan keeps ownership cleaner and flexibility is much better. At the end of the day, the important thing is understanding the terms of the mortgage before entering into a commitment. It is not simply a one-size-fits-all issue.

[JohniesJ420422]

Your retirement plan appears achievable, but there are a couple of key considerations. For one, plugging for a combined income of $2,500 per month in retirement could make ends very tight indeed — particularly if you encounter any unexpected health expenses or home repairs. Tapping your 401(k) to pay off the $25,000 debt can work, but remember that you would be incurring taxes and penalties for early withdrawal. As always, check with a financial adviser to confirm whether this is the best strategy for your situation.

Reverse mortgage If you are looking for a way to tap into your home’s equity, but don’t want an additional monthly payment, then a reverse mortgage can be helpful. It works well for some people, but there are some disadvantages to it. The interest and fees will compound in value over time, which could leave your heirs with less money when they sell the home down the road. It’s critical to completely understand the mechanics of a reverse mortgage and its long-term impact.

And if you’re able to save an emergency fund and pay your debt off more quickly, it could help keep off financial pressure during retirement. Consider a comprehensive review of that long-term financial plan, and do include the reverse mortgage, so you can be ready for anything in your future.

For a more in depth look at reverse mortgages and if they could be right for you, go here: Reverse Mortgage – Saver Is The Retirement Savior. It offers a deep dive into how reverse mortgages may affect your retirement and whether they might be the right choice for you. 

[FillowMiko]

Your plan seems pretty well thought out, especially since your home is paid off and your debts are relatively manageable. A reverse mortgage could definitely be an option, but it’s worth carefully weighing the long-term impact — especially if you plan to stay in the home long-term or leave it to heirs.

Using your 401(k) to pay off debt might make sense, but have you factored in any taxes on the withdrawal?

Also, with $2,500/month in income, have you considered how you'll handle unexpected expenses or rising healthcare costs?

[GailL1]

As retiredtraveler said, the importance of whatever type of retirement income is relative to your retirement expenses,

It would be much better to pay off the debt with NON-retirement money.  If you liquidate your 401K to pay off debt, the amount which you draw down will still be reduced by the income taxes owed on it.  If you do the removal in a year's time frame, it could also push you into another higher tax bracket if done in one year.  

OR if your wife is on SS Disability, it could also mean paying some taxes on her SS amount.

Debt is important to have paid off going into retirement, including any home mortgage or car loan.  Once you are free and clear of all debt, you can go into retirement paying all consumer credit on a monthly bases so no credit cards run a balance that cannot be paid on a monthly basis or more than a few months, at least to save on interest cost.

Got an emergency fund = to at least 6-9 months of recurring expenses or more.

From here you can cover things that unexpected - replace it if you have to use the funds.

If you are going to continue to live in your home, make sure that major repairs and maintenance are done and paid for before retiring.  Just because a person has retired does not mean that these repairs/maintenance items stop happening.

What about health insurance before reaching Medicare age?  Even Medicare is not without monthly cost, copays, deductibles or Medigap insurance premiums if that is the Medicare route which you pick.

How does the cost of living look like where you will live after retirement?

Property taxes ?  Utility cost?  Insurance cost - car and home?

What about if a situation arises where you or your wife, especially if she is now on disability, need some daily living care which the other cannot handle alone?

Got long term care insurance or money to pay out of pocket?

Reverse mortgages are expensive in cost.  Why not get a HELOC before you retire and use this equity if you need it.  It will require a monthly payment if you use it.  

If you do decide to go the reverse mortgage route, use a HUD approved program and lender.  Make sure that you and your wife understand it COMPLETELY.  Don't just let the lender explain it - READ the doc's and ask questions BEFORE you sign on the dotted line.  Also let any of your heirs know what you are doing with your home.

Personally, I'd say, you need lots more money saved before going into retirement especially early retirement.  Remember you are planning for almost 30 +/- years of limited income but your expenses will be only limited by the both of you.  $2500 a month will not get you too far especially if cost rise in that period of time.

[lghbob]

A long read, but perhaps helpful.

http://www.early-retirement.org/forums/f27/sharing-23-years-of-frugal-retirement-62251.html 

[retiredtraveler]

  There is no way to determine if plan is good without knowing your expenses. I've written a number of times that wife and I tracked our expenses, literally to the penny, for three years before retiring using a spreadsheet. This can be done using pencil and paper also.

  We then tried to project expenses over time and would break them down and add them to the expenses. This is something that so many retirement planners have written about, that people fail to do.

  Example: You have a house. Have you planned for the inevitable re-roof of the house? $10,000? Do you have a car?  If so, you need to project repairs or possibly replacement of the car.  What about general maintenance to your house and yard? Paint, repairs, tools, etc. Do you want to travel or have some kind of entertainment expenses?  Have you tried to project medical expenses? Do you know how much your insurances are --- car, auto, life, etc.? Do you have projections for your taxes?

  You get the idea. A very large number of people, according to many surveys, totally fail to take into account their future expenses.