I am 70 and retired in December.  I had a $250k life insurance policy through my employee benefits, but the COBRA to continue it is too high.  I need to make sure my wife can keep the house if I pass on.  Would it be a good or bad idea to use my 401k to pay off the mortgage and just live on SS?  Pros and Cons?

Thanks

UPDATE:  I received my last contribution from my former employer today.  It was my Q4 Commission /Bonus and 25% ($3k) went into the 401k.  As I mentioned below, 50% of my cash is in MIP, which sucks, and SPAXX is not an option.  I have stared a small business and the Fidelity rep recommended a rollover to a SEP IRA, which I can continue contributing to with my business.  This also allows me to make SPAXX the core account.  If I go to a 60/40 mix with SPAXX as the 40, I can still purchase FXAIX so I was thinking doing 30% on that and 30% of something else.  Unfortunately, FID Growth Pool A, while down 0.67% today, is up 14.6% YTD, is not available as an IRA selection.  Any ideas on a replacement for that one?

Thanks

More information is needed.

In general - life insurance is used to replace income.  You should not need life insurance once retired, as your income should be based on your investments and pension income - not earnings.


How is your 401k invested?
What is your typical annualized rate of return?
What is the balance of your 401k?
How much is owed on the home?
What is the current interest rate on the home?


Generally speaking, it is bad idea to take an investment earning returns, and use it to pay off debt.  A pile of money is more powerful in a crisis than a pile of equity.

It might make sense if your expected returns are lower than your debt interest rate.

Don't forget, withdrawals from your 401k are taxable, so if you take out $250k in a given year to pay off debt, you put yourself in a MUCH bigger tax bracket, and you will pay 22% to 24% in tax on the majority of this withdrawal, further making it not a good decision.

Also remember, even if you wipe out the mortgage P&I, you still have insurance and property taxes to pay, so make that part of your calculations.

If you are dead, how do this impact your financial situation?  If you are no longer earning income, your passing wont change things much.  The biggest impact is that your wife will now file to get SS based on your earnings, as opposed to her own of half of yours.  This could mean a reduction of income, depending on how much she got from SS and if she is impacted by WEP/GPO due to a state provided pension.  In those cases, she will depend more in income from the 401k, not less.

I help two widows with their finances right now.  Once gets $200 per month from her investment income, and comes up short about $500 per month based on her expenses.  A seriously major expense would wipe her out.

The other gets about $700 per month from investment income, and doesn't need any of it because her expenses are low.  A major expense would just be taken from her nest egg with little impact.  

So I applaud you looking to lower expenses as part of the equation, but don't use up the majority of cash you have as the only means to get there.

Presumably your wife is the beneficiary of your 401k?  
If so, why wouldn't she be able to pay off the mortgage with your 401k if you die first?  

If you have a low interest mortgage it is almost guaranteed better to keep the mortgage and let the 401k grow.  But it depends on lots of details you left out.  

Agreed

Nobody wants a mortgage, but at your age. I don’t know why we’re leaning towards COBRA  instead of Medicare/ Medicaid in the first place.

Additionally, you need to think about your wife’s ability to live- not just keep the house.

A lot of times- guys like you pass, and their wife tells me that the last thing that you wanted was for them to have the house…. they can’t afford the bills, the utilities or groceries, and somehow they believe that the reverse mortgage is horrible because the husband said that it’s better to be debt-free——

It is as long as you can live, but it’s a horrible situation to put someone in the mindset that to honor the departed - they need to live in poverty

I also have to question why people say they are retired and still have a mortgage.  

I know plenty of retired people with a mortgage.  The common denomiator with all of them, is that they have some level of wealth, and "could" write a check for their mortgage balance should they choose.  But instead, they kept refinancing it with extending 30 year terms.  That's because they invest their money and don't mind paying 2.5% on a mortgage when they are averaging 9% across all their investment portfolio.

Now, today, if they had an 8% mortgage, they simply pay that off, most likely.

How is your 401k invested?  50% MIP CL2, 25% FID Growth Pool A, 25% FXAIX
What is your typical annualized rate of return? 1 yr-12.4%, YTD - 5.25%
What is the balance of your 401k?  $200k
How much is owed on the home?  $142k
What is the current interest rate on the home?  4.375

I get $3k/month from SS, my wife gets $1k/month.  I have a side job that gives me about $500-$750/month

Late bloomer/late starter here.  Yeah, I was stupid, but when I did get on board, I put 25% in the 401k and company match was 50%.  Biden cost me almost $50k and it took three years to make that back.

That's not a terrible interest rate and your 401k will outgrow your mortgage over time.  
Most likely the best choice is to keep the mortgage.  

Again, if the wife is the beneficiary on your 401k then she would be have the flexibility of cash - she could keep the 401k or pay off the mortgage depending on her needs at the time.  

Since you started late, can you spare any of that side job cash for a Roth IRA?  Gains would be tax-free and it sounds like every little bit would help.

A couple things.  MIP CL2 is a loser, when cash is paying 5%.  I'd immediately dump all of that and move to a money market fund in the 401k, such as SPAXX, for now.  When cash drops or interest rates start falling, you can move back into a bond fund.  However, I don't know what options you have for cash in your 401k.  The core cash fund in my 401k is BTC SHRT-TERM INV which is currently yielding 5.52%.

Next, while your mortgage rate is not awesome, it is still getting beat by your portfolio.  I'd not be in a rush to pay a shitload of taxes dumping that, just to remove an expense.  I don't think you'd see a major benefit.

Have you thought about if something happens to you, planning for your wife's reduction in social security benefits?  Also, her taxes will go up, as she will lose your standard deduction/exemption.  In cases like that, I'd want to have that money to draw from when needed.  $200k throws off around $1000 a month that can go towards income to cover any shortfalls.

With a 200k 401k, when you turn 73 you will have mandatory RMD's (required minimum distributions).  Estimated to start at around $9000 per year, peaking at around $20k per year.  This will be income which can be used to make the mortgage payments.  If you pass and your wife inherits the 401k, the RMD will be recalculated based on her age at that time.

Most people don't consider this. My recently widowed mother is discovering all this.  She has enough income but suddenly having to file a tax return as Single was a real eye opener for her.

I think if you're over a certain age and have been married for x number of years you should be able to retain the married filing jointly tax rate... but our gov really wants to stick it to the widows and widowers.

My mother also had to learn about this, due to my father passing in Feb 2023.  Together they had a good income and paid zero in taxes.  Suddenly, she gets his SS payment, but it is reduced because she was a teacher and her pension causes her SS benefits to be reduced.  On top of all that, a portion of her SS is now taxed, as well as any interest income she earns.

Luckily, her expenses are very low and with a locked in long term CD ladder I built for her, the income from that offsets what she lost and has a comfortable budget.  But the government is getting a cut now.

SPAXX is not an option in my plan.  Looks like I can convert to a rollover IRA, then convert the MIP to SPAXX and keep the FXAIX, but the FID Growth Pool A, which has a 15.79% YTD ROR is not available in the IRA.

Ideas?

Backstory:  In 2021, due to Covid and uncertainty, my portfolio lost 25% in value.  Based on advice from the Arfcom experts, I moved all of my investments to MIP since I was retiring in less than three years.  It didn't make money, but it didn't lose money, and it allowed me to keep making contributions and getting the 50% company match. (Footnote - on January 1, they changed their policy to 8% cap.  I got out just in time)

In 2023, I started moving back into stocks as the market was picking up again.  In reality, i could just keep the 401k and move MIP to FXAIX and FID Pool A.

I would NOT sell MIP and move to FXAIX and Fid Pool A as those are 100% equities.  Common advisory logic says you should target a 50/50 or 60/40 mix of equities to fixed income asset allocations while in retirement.  If there is a downturn in the market, and you need income from the 401k, you could be forced to sell equities and lock in your losses.

I agree with Arfcom's previous guidance to split your 401k into a 50/50 portfolio like you have now..... the only difference is your fixed income assets are a loser to cash *right now* and there is no risk of moving to that and getting an immediate benefit.  Most 401k plans have some kind of cash account/fund, but it will vary what they pay.

What I would do in your shoes, is sell all the assets in the 401k, roll the 401k to a personal IRA, then structure the allocation based on your risk profile.  What ratio that is of stocks to bonds/cash is up to you.  FXAIX could easily cover the equity side, FID Pool A is simply a managed equity fund that includes S&P500 stocks and mid caps, but it also has a very high expense ratio of 0.43%.  I would not get married to it just because of recency bias.

The 4% drawdown rule is based on a 60/40 portfolio.... so a $200k portfolio where you maintain 60% equities and 40% fixed income assets would theoretically produce the capacity for $8000 per year ($667 per month) of income with limited risk of outliving the money.  I dont know what your P&I portion of your mortgage is, but if that can cover it, that's not a bad plan.  Obviously, you also need a plan for big expenses like a home repair, auto purchase, uncovered medical, etc.

For instance, for my mother who is ~75, she wants no market risk, and so we did a ladder of CD's going out 5 years that pays monthly, averaging 4.5%.  This generates the income she needs to be very comfortable, and satisfies her RMD requirement as she withdraws from the account.  With zero (or very near zero) risk.  But we also understand that in 4-5 years her interest based returns could be much lower if interest rates drop.

It’s a numbers game, and depends on stuff like-

- how much your mortgage payment is, the balance, and interest rate
-the size of your 401(k) and how much it’s making … is your 401(k) aggressive or have you migrated toward more stable, fixed-income stuff?

Remember that the interest on your mortgage is probably tax deductible. If you have to pay a tax penalty to pay off something that’s tax deductible, that is usually a bad idea.


My general guideline would be, if your 401(k) is making more than you’re paying in mortgage interest every year, don’t do it.

ARFCOM financial advice sucks - never listen to this place (including me).  It might be worth consulting a CFP or something to help look at the big picture/numbers.

Due to the standard deduction, the percentage of American tax returns where mortgage interest is a tax benefit is VERY, VERY small.  When the TCJA was put in place, it dropped dramatically.  Only 13% of tax filers used itemized deductions prior to TCJA, and now that number is MUCH lower.  So for MOST people, there is no tax deduction for mortgage interest.  This might change some when TCJA expires for the 2026 tax year.

Haha hence the last part of my post…

Some level of wealth, but not fuck you money.

I had a coworker retire that was still making mobile home payments.  He died a year later, so maybe that was a good decision.

Kind of doubting that you were told to panic sell 100% of your 410k stocks and dump it all into a dollar preserving fund that has generated a 10 year average return of 1.66% (had to look it up), unless the question was what fund to put money into so you “don’t lose any more” or something like that.  

Because going 100% into that fund, and directing new investment dollars into it (instead of buying stock shares when they were priced lower) just means you locked in a lot of losses.  Hard to say how much, since you bought halfway back in sometime in 2023, but you lost a lot of the rebound for what you did buy back in with, probably lost money on what is still in that fund, and you certainly lost due to inflation, despite what you said about how you “didn’t lose money”.

Certainly a cautionary tale about making sure you are comfortable with your asset allocation, and adjusting it as you near retirement based on your situation and risk tolerance.


Anyhow- you probably need to post more info about the mortgage situation for good advice there.  Guessing term insurance is off the table.  How long you have left to pay and how much you are paying monthly kind of matters, as does what the overall expense situation is each month as compared to income. Then figure out what expenses and income might end up as if you pass away first, and whether your wife could handle that.  Also depends on whether there are any other assets she will be able to sell or not (guns, Corvettes, etc).  Then there is the question as to whether she can maintain the house anyhow, or whether downsizing makes sense?  

Probably you need that part time job though…either pay down the mortgage, or invest it someplace making actual returns so it can be used to pay off the mortgage if needed.  Doubt that I would liquidate near 3/4 of a 401k to pay off the house currently though.  

You might be able to get some cheap (free) life insurance by opening a bank account with various banks/credit unions.  My CU offers 10k free, of course they try to upsell it for more, but you just decline.  Do that 5 times at 5 credit unions that offer it for 50k of coverage?  As the mortgage gets closer to being paid off you need less money to cover it, and 50k might be a big help.  Just a thought, might not be possible….might only offer it to younger account holders too.

What part don't you understand?

FWIW,

I retired my paychecks in December (still actively non-uniform Reserving), and we only had a few years left on the mortgage, about 37K, so we paid it off with some of my 457, to reduce our expenses.
The mortgage payment was higher than we liked, and the interest on it was in the 6% range, so for us, it was an easy decision.

Because our balance wasn't too bad, I didn't have to take a huge amount of of the 457, but clearly, your balance is a bit stiffer.

For us, we asked the rhetorical question, could what was in our 457 make enough over the next few years, to pay the monthly mortgage, and it could not.
But, everything is a different situation.

Jay

Out of curiosity - with mortgage refinance rates being in the 2.5% - 3.5% range for many years, why were you keeping a mortgage at 6%?

Fair question:
They would not let us refinance with the balance of years we had.
They always wanted us to add years, and we didn't want years added.

Jay

If you’re just worried about your old lady having a place to stay should you kick it, look at reverse mortgages.  There’s an AM radio show here that talks about them all the time and sounds like you can pull equity out, live in the house for life, then heirs can either buy it or let the lender keep it once the time comes.  

He’s a Texas guy but says he can help out of staters as well by getting them in contact with someone

https://www.reversemortgages4texans.com/

https://www.ar15.com/forums/general/Retirement-Account-Confiscation-What-Will-It-Look-Like-/5-2712304/

Lol doomer fantasy #87 for anyone who is jealous of others’  retirement savings…

There's almost never a prepayment penalty. You can just pay it off in less time than the term. You can accept a longer term & just run an amortization schedule for the term you want & pay the larger payment, you just have to make sure that they apply the extra correctly.

That's a bingo.

Great info here, appreciate you sharing your knowledge @FALARAK.  I've yet to hire a tax attorney and often worry about whether we're setting ourselves up for a successful retirement and how taxes are going to impact us. These are types of decisions that are difficult for folks who need some guidance.

Update in OP

I'm not familiar with a SEP, but if if has advantages that a regular rollover IRA doesn't then I would do it.  

I would put tax implications as the top deciding factor for everything in your situation - once you stop working SS income and RMDs will place a floor on your income(and thus tax bracket).  
Keep in mind that taxes for 2026 will rise significantly unless congress extends the TCJA tax cuts(seems unlikely to happen).  

Additionally, think about the fact that when one of you dies the other will have to file taxes as a single taxpayer - that will be a big spike in tax burden for whoever lives longer.  
I would carefully evaluate your tax situation from now until your RMDs kick in.  Depending on your income, Roth conversions in 2024-2025 while you have both lower income and lower taxes could save you a lot of money in taxes over the next 3-ish years.

As for replacing your FDGRX there are many options.  Since you specifically cite YTD returns(ie. short term), Fidelity's contrafund has outperformed FDGRX over the last 3 years.  

Two things:

1.  Keep in mind SPAXX is not necessarily a long-term solution.  Interest rates WILL go down at some point, and this will be a dog.  If the returns are not beating inflation, or drop below bond fund returns, you will need to reallocate.  This reallocation needs to be early in the cycle, not late.  So pay attention to the rate of return on SPAXX and get some help on better fixed income assets in the future.

2.  Fidelity Growth Company Commingled Pool Class A, is an investor share class of FDGRX.  Which, is closed to new investors.  It is a managed fund, with very high expense ratio (fees you pay).  I'd not get really stuck on this.  Over the past 10 years, it has beat the S&P500, however, in the past 3 years it has not.  There is no guarantee it will continue to beat the S&P500, and it is much more volatile.  There have been many 10-year periods where the S&P beat this fund.  That said, if you want this more aggressive component, and accept the high fees, there won't be an identical fund or ETF to this as it is managed and will change significantly over time.  Here is a great conversation with well articulated perspectives, both for and against.

If you want to keep it - see if your 401k allows for partial rollovers.  If so, roll over everything else and keep your 30% allocation in the 401k.  You do get access to a lower expense ratio in the 401k.

Assuming you have a good <4% mortgage, you would be foolish to pay it off.

70% stocks/30% bonds is a typical allocation. Using the Trinity study you can withdraw 4% of your portfolio in perpetuity. Rebalance once a year. Your portfolio would be very conservative and may have trouble keeping up with inflation.

Check what you have availible. A decent dividend and growth fund along with bond exposure is really all you need.

So I did a Rollover IRA and moved my 401k into it.  The SEP IRA can only be funded by my side hustle, not a rollover, so I will be funding it from my part time job.  I put 45% in SPAXX, 5% in FBTC (Fidelity Bitcoin ETF),  25% in FITLX and 25% in FXAIX.  As of today, I am up 12%, mostly on  the FBTC.  I may rebalance in a couple of weeks after seeing where everything is going.

If you put some of that spaxx money into CDs or treasury bonds you can get 5.3% or more rather than the 5% of spaxx.  Doesn't seem like a lot, but 5.3 is 6% more than 5.0!

You can also look into FAGIX, it's a bond fund with high fees but currently yields 6%, about 20% higher returns than spaxx.  It's price does vary a bit though, but not significantly.