Dear Moneyist,
I am a widow who is 63 years old. I receive $2,115 per month in Social Security and $533 per month for a pension. I have $600,000 saved. I have not been able to find work in the past five years so I am looking at the money I have as the best case scenario. I rent, but it is getting quite expensive.
Where I live it will cost $240,000 to get a modest town home. I am thinking of buying the house in cash so I will only have property taxes and homeowner association fees, and home insurance to pay monthly which will be $1,150 less a month then what I pay now. I will have $320,000 left to invest.
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What do you think would be the best course of action to invest the money left over? I will need it to throw off $12,000 a year to supplement my Social Security and pension and, if possible, grow the principle investment. I am hoping to take the money in such a way as not to pay much in taxes.
Widow in Chicago, Wondering about Moving
Dear Wondering,
First off, congratulations. Somehow, you managed to save a sizable nest egg and, given that you are renting your home and have no job, you likely made many small sacrifices along the way. You’re in pretty good shape compared to many Americans and you have the luxury of many options.
Only about half of baby boomers are on track to meet their most basic retirement expenses. You appear to be among them, assuming you play your cards right. Take heart in that. Don’t make any big decisions without consulting an adviser. Nor should you stick with the first adviser you meet.
He or she may have more insight into your situation regarding investing versus home ownership, but it’s your money and you should never forget that. Trust your gut. So much will depend on your appetite for risk at the age of 63 (or any age, for that matter).
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Think carefully before locking up so much of your savings in a home. Neil Krishnaswamy, a certified financial planner in the Frisco, Texas office of Exencial Wealth Advisors, says $12,000 a year to supplement your Social Security would leave you with a 3.8% portfolio withdrawal rate on $320,000.
“You won’t be left with much flexibility for larger, more variable expenses,” he says. “These can include large home repairs, cars, travel or any out-of- pocket health or long-term care costs.” He has a suggestion: A reverse mortgage, which is available to people 62 and over.
You may only have to pay for 50% upfront. “This would allow you to retain around $440,000 to invest. This drops your portfolio withdrawal rate to around 2.7%,” he says. HUD oversees this program, which has been abused in the past by predatory lenders and advisers.
Also see: My sister has devoted 15 years to helping our parents — how can I ever repay her?
Tread very carefully with reverse mortgages. My preference: Move to a less-expensive area and live well for a lot less, and remain debt-free and without the fees and interest rate associated with a reverse mortgage. That’s in ideal world, and you’re pretty close to living there.
Home prices have been on a tear these last 10 years, however. The median price of a home in Detroit is $147,957, $126,566 in Oklahoma City and it’s $212,017 in St. Paul, Minn. Home prices accelerated again in March, surprising many analysts. They shot up 7% in March on the year.
The Moneyist Facebook Group has plenty of suggestions on starting life anew. They’ve mentioned everywhere from Chattanooga, Tenn. to Florida and Texas. MarketWatch has also a series, “Retire here, not there.” No one has all the answers. But it will help you with ideas.
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As for your investments, the Facebook Group suggest everything from a high-yield corporate fund or lower risk bonds or a low-cost index fund (50% stocks, 35% bonds and 15% money markets). Be prepared for a market downturn. At 63, you’d have less time to recover your losses than most.
The Dow Jones Industrial Average took six years to recover after the Great Recession, but it took longer after previous recessions. The AARP has advice on taking charge of your money in your 60s. By your 60s, Fidelity recommends that you have saved six times your annual income.
Ultimately, this process should make you feel empowered rather than fearful. You’ve done well to get this far with what you have, and some prudent and well-thought out decisions with the help of an adviser and friends should ensure a comfortable retirement where you also have peace of mind.
That, after all, is something we all aspire to.
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