Retirement Answers

Jacob: 00:00

Hey there, and welcome to the very first Friday Q and A, where I'm going to take some time to answer your real life questions about retirement and hopefully give you some context and some answers to different things that might be beneficial for you as you evaluate your retirement situation. So today I'm going to go ahead and jump in. Let's go ahead and read the question and then we'll process it, see what thoughts I might have solutions for them and maybe help you get some ideas around your situation. So the question comes in and it says, do we pay off our house or not? It says, hello, my husband is nine years older than I, he turned 60 this month and he wants to retire as soon as possible.

Jacob: 00:33

A lot of hard work over the year and that's killed his body. I will continue working until I'm 66 or so, so that's about fifteen more years. My husband's job has an ESOP which could pay off our house. He has a smallest four zero one ks and he could make things work if the house was paid off. We just bought that house back in November 2023, and my husband has already said that he's willing to work part time, doing a job that doesn't make him drive a semi for fifty hours a week because that's what's killing his back.

Jacob: 01:01

Is that smart to pay off the house? We still have to check with this company to see if he would be penalized for taking the ESOP early. Any help would be appreciated, thanks. Okay, so a lot going on here and this question of do we pay off our house is a big one and it's something that comes up a lot in conversations I have with people just like you as you're approaching retirement and thinking about it. So the question is, do we pay off the house?

Jacob: 01:23

The hard part about paying off a house typically for most people is that most of us don't have enough cash just sitting around to go pay off the house in one lump sum. We have to pull that money from somewhere. In this situation, it seems like they're gonna have to pull that from an ESOP if they were to pay it off. So the question is, do we pay it off or not? Now, the big thing about an ESOP is, is most of the time those are gonna be tax deferred.

Jacob: 01:44

So that means if they pull money out of that ESOP, they've got to factor in taxes, right? So if they're both working and they're both making a decent income and they have to pull enough money out of an ESOP to go pay off the house. Well, that's gonna be taxed at a fairly high tax rate relative to whatever they're used to paying. So that's something to consider here as we think about that. Also too, I think that, you know, having a paid off house is great.

Jacob: 02:06

My husband's nine years older than I am, he turns 60 this month. So she's got a while to go. She's got a long way to go in terms of fifteen more years of work. So she's gonna have an income and something else that sticks out to me here is that he's willing to work part time, he just needs to find something else. He can't do driving fifty hours a week because his back is hurting.

Jacob: 02:24

So a change of career or slightly less work doing something else is still on the table. It's not like he's gonna stop and retire and just be done, which might be a problem if he's willing to work and actually take on a little bit of income and make that for the household and they don't need any income on top of that to meet their normal living expenses, they might not have to pay off the house yet. So something to consider here, obviously I don't have all the numbers. I don't have, you know, how much money they make. I don't how much they spend.

Jacob: 02:50

That's really important to know and have here or even how much, you know, the mortgage is every month. But there is something to think about here and it's related to when they bought their house. It says they bought it back in November 2023. So that's not very long ago, which means their amortization schedule is not working in their favor yet. They're paying more of their monthly payment towards interest rather than principal.

Jacob: 03:10

Also to November 2023, interest rates were back up a little bit higher at that point. So they probably don't have the lowest of interest rates that many people have sub 3% or around 3%. They probably have four or 6%. And so that's something else to factor in here. I don't necessarily think they should wait to pay this thing off over their entire life or over the thirty year term, assuming they have a thirty year mortgage.

Jacob: 03:32

I would say they wanna pay it off. The question is, is do we need to pay it off right now? Personally, I would say this, if we can make the cash flow work every single month from her income and then a part time income on his part, and we don't have to sell anything, you know, of our personal possessions or, we're not gonna be pulling a ton of money out of our four zero one ks every month to meet our income needs. I would say not to pay off the house yet. And the reason for that is, is I'm a fan of having all the debt paid off and having a house paid off.

Jacob: 04:02

I'm also a fan of liquidity, meaning flexibility. I want to have cash in my name. I want to have some income coming in that can meet my expense needs rather than having to take a big chunk out of my total retirement savings, my ESOP in this situation to pay off a house, take that all the way down to zero. And now I don't have any retirement savings outside of our 401ks to meet our retirement goals one day. So what you've done is you've taken a lot of money out of working for you over the next fifteen years while she's still working and you're saying I'm paying off the house.

Jacob: 04:30

So the question is, is how much is that interest rate? Should I pay it off or not? How much could I get if I keep that money invested? But I would say because they're just doing a transition, they're moving, he's moving from his full time job he's been doing to a part time job with a lower income. I would say don't pay it off right now before that.

Jacob: 04:46

I would say pay it off after that at some point. So kind of get your feet under you in this new lifestyle that you're gonna be having. His work's changing, your income's gonna be changing. Just get your feet under you, go through that transition, see what that's like. And then at some point, once you kind of get settled and figure things out, then you can move forward with perhaps a plan to pay it off.

Jacob: 05:04

The hard part again is going to be taking it from that ESOP because it is tax deferred, and I don't like paying big taxes in a big chunk. Maybe you could spread that out over two different tax years perhaps. So do like, for example, at the end of twenty twenty four right now, you could do one portion here in 2024, one portion at the beginning of 2025, pay it all off, spread out that tax over a couple of different years, if it would be beneficial to do that. So I'm maybe leaning towards maybe not paying off this house just yet. I'd rather them get their feet under themselves and get adjusted to a new lifestyle with new jobs before making that big of a decision.

Jacob: 05:37

Obviously big fan of paying off debt, big fan of paying off your mortgage, just a matter of doing it in a wise way, doing a thoughtful way at the right time. So hopefully this helps you as you kind of evaluate your situation. If you've got a question like this of whether or not you should pay off your house, maybe this doesn't fit your exact situation, but maybe it gives you some context around how you can evaluate your situation to see what the right decision might be for you and your family. So thanks so much. We'll see you next time.