This post covers two reader questions related to retirement – one specific scenario about how to best use an $8,000 inheritance leading up to retirement and another more general question about how to research and choose a retirement account provider.
We’ll tackle the question of using the inheritance first and then talk more generally about retirement investing.
What's In This Post
Question 1
Q: I have an $8,000 inheritance in an account that has been earning 0.5% interest. I can withdraw part or all of the money whenever I want. I am 57 and still have 23 years left on my $153,080 mortgage at 4.25%. I would like to retire before I die, so I would like to pay off my mortgage as soon as possible. I make $60,000/year as a teacher and have about 3 months of emergency savings. Should I apply the $8,000 towards the mortgage, invest it in some way, leave it where is?
In this scenario, it sounds like the amount of income this reader expects in retirement isn’t enough to comfortably cover the mortgage. Thus, the aim to pay the mortgage off ASAP to allow her to retire.
The problem here is that we’re pitting 5-8 years from retirement vs 23 years left on a mortgage with over 150K of principal remaining. It will take a very aggressive payoff plan to shave those extra 15+ years off of the mortgage in the next 5-8 years. Just estimating from the mortgage details provided, it would probably require adding somewhere in the ballpark of $1,200+ extra, over and above the current payment each month, for the next 7 years to pay it off in full.
That’s roughly $15,000 extra per year for 7 years to pay off the house that fast.
A rock and a hard place: cash vs mortgage payoff
With a solid plan that comes up with the math for an extra $15K per year, paying the mortgage in full could be done. The risk, however, is that if that doesn’t happen, her retirement hangs in the balance. Because going part way isn’t an option.
Until the entire mortgage is paid in full, the monthly payment is still the same (unless you refinance) no matter how much principal you’re able to pay down.
Thus, you will still have a cashflow problem at retirement. And, even worse, all your liquid money is sunk into that mortgage that you still need to keep paying.
So, because sinking all free money into the mortgage isn’t a guarantee of a free and clear retirement just yet, I’d suggest a more conservative approach.
Create flexibility: hold the money for now
Whether you pay the house off or carry the house payment into retirement, it boils down to this. More income is needed, right?
So the strategy here is definitely to work on racking up enough additional income to pay off the house – because that seems to be the key motivator here. But…
Especially with a relatively low interest mortgage, it likely makes more sense to plan on carrying the house payment into retirement.
Therefore, instead of working hard to bring in more income and then immediately paying it against the mortgage quite yet, find a middle ground that offers flexibility with the inheritance money and the new income brought in.
I’d suggest putting that 8K inheritance and all additional money built up into savings and investing. Open an IRA if you don’t already have one and max it out, including catch up contributions, every year. This should be about $7,000 a year that could be put into low risk investments with big tax advantages. When the tax-advantaged retirement account is maxed out, shovel everything else into a traditional investment account.
A double win: more income creates more choices
The real strategy now is in how you build the additional income. Using methods that could continue into retirement, will capitalize on the hard work you’ll put in these next several years to increase your income during retirement for the longer term.
And that completely changes the equation for being able to comfortably carry the mortgage into retirement. Perhaps it’s an online business, starting a tutoring service or company, substitute teaching, renting out a room in your house, or any variety and combination of options that feel manageable and fun (and also lucrative!) into retirement years. Every little bit adds up.
This way, when you’re ready to retire, you can see where you stand and re-strategize.
What kind of lump sum have you built up? How much has it grown?
After 5 or so years, you can decide whether you’ve built enough money to:
- Pay off the mortgage in full (Woo hoo! But I’m still glad you didn’t bet your retirement on it at first.)
- Help pay living expenses for a few years, with the expectation of depleting these funds, in order to push back the date you begin drawing Social Security benefits (and therefore guaranteeing a higher payout forever, increasing your retirement income for the long haul, by about 8% for each year you delay Social Security past age 62.)
- Help pay living expenses throughout the whole of retirement, by drawing a small enough distribution each year that the investment sustains itself (usually about 4% distribution each year- so if you built up to $100K, you could likely count on withdrawing about $4,000 per year, basically forever).
To help run scenarios of how investments may build & how mortgages may shrink, these are a couple of my favorite online calculators:
Nerdwallet compound interest calculator
Mortgage Professor prepayment calculator
Summing it up
In other words, instead of betting your retirement on paying off the house, I’d shovel money that is theoretically for paying off the house (including that inheritance) into low risk investments (including a tax advantaged retirement account) and decide exactly how to use that money later – when you really have a substantial sum in front of you.
If the work done in the next 5-7 years generates some additional revenue streams that continue into retirement, even better.
And here’s the great part that makes maxing out an IRA a no-brainer. The age requirement to be able to draw off your IRA is 59 1/2 so while people considering how much to invest in their IRA at age 35 have to consider the unavailability of that cash, you can load everything possible into this tax-advantaged pot knowing it’s fully available to you if you needed it in only 2 years.
This strategy gives you max flexibility to save up for any purpose (payoff the mortgage in full, provide monthly money to support the mortgage at an accelerated or normal paydown during retirement, or any other scenario).
And even better, you will do so with significant tax advantages and interest accrual… which in combination will likely be more beneficial than the elimination of a 4.25% interest loan this close to your desired retirement anyway.
To know just how to set up and invest into an IRA according to your goals and risk tolerance, I highly recommend using the 10X Investing Course from Seedtime.com. Bob Lotich created this course and it’s exactly what you need to get knowledgeable about how to invest, down to him showing you exactly what account to set up and the buttons to push to do it all on your own, quick and easy. You can be getting this stuff sorted out by next weekend!
He even includes in the course how he would invest if he were 5, 10, or 15 years from retirement. I really can’t recommend this course highly enough if you want to begin investing as part of your strategy for your inheritance and final retirement prep.
And here’s where our other retirement-related question comes in…
Question 2
Q: How do I research and choose a retirement account provider?
The short, honest answer is I have no great answer.
My area of expertise is day to day money management and general short and long term money strategy. I know enough about retirement account providers to know it’s not a huge deal- in terms of you spending hours researching and then the company you choose could get bought out by another and everything changes anyway… Meaning, you don’t want to get stuck in indecision and put off getting started with retirement investing because of this unknown. You can always switch down the road.
But I also know that fees vary with the type of investing strategy you take (managed funds, roboadvisor, etc.) and the company or platform you’re with. And I’ve also had the experience where I realized the ability to buy partial shares was really useful and wasn’t available to me in my old E*TRADE account, just an example of one feature I’d look for in an online investing platform.
Personally, instead of spending a lot of time gathering information and overanalyzing, I just followed Bob Lotich’s advice in 10X investing on this for myself. Bob’s poured over this stuff for 16+ years and I completely trust his advice in this area, so I’d rather follow his recommendations than start from scratch researching on my own.
So here I’m going to punt and, yet again, highly recommend the 10X course.
Now it’s your turn… how would you use an 8K inheritance approaching retirement? What kind of retirement planning have you used and how did you choose an account provider? Leave your thoughts in the comments below. 👇
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Please note I am not a financial professional. The information contained in this post is my best advice based on my personal knowledge and experience, and is the same advice I’d give to a family member or friend. But you are responsible for getting informed and making your own decisions with your money.