Q. I am planning on retiring soon. My question is should I take funds out of my 403b plan to pay off a rental house my husband and I own? The rental income would be $1,600 per month and all major repairs are complete. My husband is still working and his net pay is around $3,500/month. Without a mortgage on the rental property we’d have this income which would be a nice supplement until I begin collecting Social Security in a couple of years at age 62. My social security benefit will be $1,500 and we plan for my husband to get half of that until he switches to his own benefit at age 65 or 70. We have about $40,000 in a money market so we’d need to take about half of my 403b which would be around $80,000 to pay off the $120,000 mortgage. In addition to the increased income stream, we think this would make sense because the mortgage interest rate is 4.75 percent and my 403b is only earning between 1.5 percent and 2.0 percent. We are uncomfortable with the stock market and feel like our money would be safer in the rental property. Is this a good plan for conservative investors?
A. It would be OK if it weren’t for those nasty income taxes owed on withdrawals from your 403b. If you want to net $80,000 you’d need to withdraw around $120,000 from your 403(b). This large of a withdrawal in addition to your husband’s income would place you the 25 percent to 28 percent federal income tax bracket and if your state has income tax you need to add another 5 percent. This makes the 4.75 percent mortgage interest rate look like a steal. You’d be much better off making small withdrawals from your 403b to help meet expenses until you begin your social security benefits.
You should also consider delaying your benefits until full retirement age or even to age 70. If you think you will live past age 82, you should be better off financially to wait until at least your full retirement age. Benefits increase 8 percent a year for each year they are delayed from age 62 until age 70 (they only increase if there are cost of living adjustments after age 70). Full retirement age is 66 for those born in 1943 - 1954 and gradually increases to age 67 for those born in 1960 or later. If your husband is still working, his benefit would be reduced by $1 for each $2 he earns over $15,720 (this dollar amount is adjusted for inflation each year) until the year he reaches his full retirement age. In the year he reaches full retirement age, benefits will be reduced by $1 for each $3 he earns over a different limit ($41,880 in 2015) until he reaches full retirement age. Once a person reaches full retirement age benefits are not reduced regardless of how much that person earns. If your husband is eligible for benefits based on his own earnings he cannot file for only spousal benefits and suspend his own until he reaches full retirement age.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624