Help Me Retire

We’re in our 60s, have almost $3 million and want to buy a new home. Do we tap into our savings or take out a mortgage?

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Dear MarketWatch,?

I am 67, drawing about $3,500 a month in Social Security, on Medicare and semi-retired as an attorney. I have no idea how much I am going to earn in a given year: It could be $50 or $150,000.

My wife retired from her company at age 60 last year and is on their retirement healthcare plan until age 65.?

We have approximately $2.9 million combined in pretax retirement accounts and have begun drawing $5,000 a month from them. Our house is valued at about $400,000 and is paid off.??

We enjoy the freedom to do what we want and spend what we want on our income of about $11,000 a month. While we could stay in our house for several more years, we are getting tired of the upkeep. We have a pool that is rarely used and a large yard. We would like to live in a newer home. To get into something ideal in our area, we are looking at houses in the $700,000 range.

Should we consider taking out a mortgage, which is likely going to cost about $2,000 per month for a 30-year fixed, and upping our monthly withdrawal from our retirement funds, or do we consider tapping our retirement account for the difference, knowing that we will take a one-time hit on taxes?

See: My wife and I are 62 and have about $3 million. I think she can retire. ‘How do you know when you have enough money?’

Dear reader,?

Let’s start with the obvious — you and your wife are in very good financial shape, with your almost $3 million nest egg and covered healthcare. Still, you highlight a common dilemma many retirees have. Even when people are looking to downsize, it can still cost money.?

The tax consequences should be a main priority in your decision making. Depending on how much you withdraw from a pretax account, you could face expensive repercussions, said Crystal Cox, a certified financial planner at Wealthspire. “Making a substantial withdrawal from a pretax account could push you into a higher marginal tax bracket for ordinary income, capital gains, Social Security, Medicare premiums, etc.,” she said. “There may certainly be an ‘extra’ cost from a tax perspective that may or may not be less beneficial than a high-interest-rate mortgage.”

There are a few other questions to think about, though. For example, what would your interest rate on the mortgage be, and how does that compare with the anticipated return rate you’d see from keeping all or most of your money in your portfolio over the long-term? As you are probably aware, mortgage rates are quite high these days.?

Also, what do you and your wife envision for yourselves over the long term? Do you expect to live in the new house the rest of your days, or will you eventually downsize or move again? Will you choose to move to an assisted-living facility or a retirement community? The answers to these questions will help in your cost-benefit analysis.??

While you’re doing the math, keep in mind what mortgage payments on a new home will do to your monthly budget. You mention living comfortably on $11,000 a month, and that a mortgage would be about $2,000 a month: How does that figure fit into your monthly spending? Only you and your wife — and maybe a qualified financial planner — can really answer that.

Having a mortgage in retirement isn’t a bad thing — it’s not like credit-card debt, which is considered “bad debt” in the financial-planning world — but it can be a problem if you can’t afford it, if it leaves you feeling strapped for cash or if you’re drawing down your retirement savings too quickly.?

And as you do the calculations, consider the other potential expenses, such as what you’ll be paying in real-estate taxes or homeowners-association fees in this new neighborhood, whether you’ll have other types of upkeep you don’t currently have, and so on.?

A qualified financial planner can help you map out various financial scenarios, including what a higher withdrawal rate every year would mean for your retirement savings in the long term, versus the bigger tax hit you’ll take if you withdraw a large amount of money to purchase a home. If you’re not working with a financial planner regularly, or you’re not interested in a relationship like that, you might consider working with one for a limited, specific purpose like this potential home purchase.?

Also see: We’re retired, have about $350,000 in our accounts and live comfortably with Social Security and pensions. Should we pay off our $132,000 mortgage?

If you decide to buy a home, it may help if you to do so before you’re fully retired. Retirees can get mortgages, but it may be easier to work with a lender if you’re still earning income outside of your retirement assets.?

“Mortgage lenders will allow you to cash-flow the new mortgage using regular recurring distributions from your retirement assets, which means you could significantly lessen the tax bite and keep more of your savings growing tax-deferred for much longer,” said Malcolm Ethridge, a certified financial planner and executive vice president of CIC Wealth.

I can’t tell you what to do, but I’ll end with this: You’re not wrong at all to consider moving, and you’re definitely well-positioned for a new home, but you both should run the numbers over and over again and have all the data in front of you before jumping into anything. If you’re not ready to make your decision, don’t rush into such a big purchase. It sounds like you’ve already done a great job preparing yourselves for retirement. Good luck!?

Readers: Do you have suggestions for this reader? Add them in the comments below.

Have a question about your own retirement savings? Email us at [email protected]