Will Rising Rates Doom This Couple's Retirement?
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- Опубликовано: 27 сен 2024
- Rising rates are making dream homes much more expensive. This couple has a plan to downsize, but rising rates are putting pressure on their retirement budget. Can they still afford to stop working and live the dream retirement they've saved up for?
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Perhaps they can use a reverse 4 purchase.
This will only make them draw approx 30k from the portfolio.
The 30k from the portfolio combined with the 288k from the sale of the home will provide the 70% down payment on new home. The reverse mortgage will pay the remaining 30% thus getting this couple into their dream home with no p@i payment, minimal taxes and leaving more money in the portfolio for the long term growth.
The Monte Carlo results show that these sorts of simulations have large error bars - depending on how life plays out you might die broke or a multi-millionaire! And this was done with only one set of Monte Carlo parameters. That is to say one assumed underlying statistical model. No one knows what the correct model to use is. Change to another different but equally plausible model you can get very different results. MC sims are very sensitive to assumptions. So "jumping" by 1% is just noise. What this really shows is within the margin of error, all three of the last scenarios are essentially as good as one another. You can take out a mortgage and leave more in liquid accounts for emergencies or to grow if the market sky rockets, but at the expense of higher required cash flow. Or you can pay for the house outright, reduce the amount of income you need, but at the expense of drawing down your nest egg, and if markets tank better to have put that money into your house. Given they have $2M to start and the amount needed to just pay for the house in cash is less than 10% of that, that still leaves a solid nest egg. So, my take away is it just does not matter which of the last three approaches they take. They all work just fine, and no way to know which will be best - sort of a six of one, half dozen of the other situation.
That said, I am a huge fan of running the numbers. It is very valuable, even if all you find is you have three pretty well equally good ways to go. That should give them confidence and help them sleep well at night. And sometimes you find one option really is significantly better than the others.
FWIW this sort of scenario analysis is way better for things like when to take a pension or SS than the common "break even" calculation that is so often used. So I'm not knocking the approach - I like the approach.
Great info Patrick!
A few years ago we thought about downsizing and moving into a ranch style house. They were almost as expensive as our house, needed some work and we couldn't justify the money outlay so we stayed put; we did a refi and lowered our PI by $250 a month with a 2 7/8% rate. It's a modest mortgage and total monthly payment is way lower than rents in our area. I'm not a financial planner but I always tell people to take a 30 year mortgage to have lower payments but if you want/can pay the extra money equivalent to a 15 year mortgage to lower the payoff time line. Every time I've looked for us it's around $200 difference per month and I believe to have a lower payment if the money falls short. That strategy has worked well for us during some tight times, we have never been high dollar earners which could make a difference in mortgage strategy.
Makes sense if a person/couple have enough money where taking some won't hurt their lifestyle to do it. Sounds like it won't in this case. Nice alternatives vs being disappointed.
Great point, Vinny! It always makes sense to do the math. And if you can put extra toward the principal, that works even better!!! 🙌
Ugh. These scam WhatsApp people again... 😠
Another video suggestion I would like to see you do- what if this couple had taken the 30 year mortgage at 7% (which they can safely handle the payment on) but are also taking a bet that in 3 years rates have fallen back to 3.5% on a 15 year and they choose to refinance into a lower payment, which of course impacts their long-term odds. I feel like this is a realistic scenario to consider. While I can't imagine any wealth manager suggesting clients intentionally take this path since we don't know how long interest rates will stay like they are, I also believe 7% mortgage rates aren't going to last and there will be people who end up benefitting down the road when rates drop and refinancing becomes a thing again. At any rate, I would be curious to see how much a refinance impacts the MC simulations.
@sandfalcon1 -- this is an interesting scenario. However, that's a huge bet that rates will come down. I'm not convinced the "Fed put" is going to come back. Remember, these rates below 4% were historically low. It's not something I'd bet on.
1) don’t understand why people wait until retirement to build their dream house, what’s wrong with the house they live in now?
2) why leave your kid so much money once you are dead? You won’t see them enjoy it.
Also,your kids are waiting for you to die, and they are anticipating a large inheritance, so why be ambitious?
1) I suppose the definition of "dream house" can change through the course of one's life. Perhaps when you're in your working life and raising kids having a larger house is ideal, but I think a lot of people want to get into something smaller and easier to care, maybe no second floor for old knees to have to deal with, etc, and so a dream house in retirement looks different. For myself I am in my dream house right now because the location is great for my job, but once I retire I don't see myself staying here- I would like to get further away from the city and maybe on a small bit of land.
S CT -- downsizing is a reasonable strategy for retirement (assuming the numbers worked out). In this case, I called it their "dream house", but I suppose it's their "dream retirement house" that's smaller and in a retirement community.