Should she keep the IRA or punt?
Posted
Mar 23 2009, 06:15 PM
by
Karen Datko
Rating:
This guest post comes from "vh" at Funny about Money.
This month's statement from Fidelity shows another $10,000 loss in my big IRA, despite my financial advisers' having moved as much as possible into conservative investments, gold and cash.
At the age of 63 -- damn! soon to be 64! -- I'm watching my retirement investments melt away. That IRA has dropped in value from a high of $326,000 to $193,000. Total savings have dropped from more than $600,000 to less than $420,000. Meanwhile, we owe $100,000 more than the investment house is presently worth, and I took out a second on my own house to renovate said investment.
I'm wondering if it's time to do something completely, utterly, totally contrarian. Hang on to your hats, folks, because this is one scary idea:
Maybe I should cash out that big IRA before it's all gone. I have enough set aside in savings to pay off the small second mortgage on my house; if instead I combined that with the amount remaining in the IRA, I could use the money to pay off the loan on the investment house. My son could then continue to pay me the amount he's been paying toward the mortgage as a variety of "rent."
I would repay him his share of our combined investment in the house so far. This would provide him enough to go back to school, which he would like to do.
If he decides to go to the University of Arizona, which has a better graduate program in public administration than the Great Desert University's, I could either rent his house, providing a nice bit of cash flow, or I could rent mine for even more, move into his, use the rental on my house to cherry out the little house downtown, and collect a ton of money.
Because I no longer have enough in savings to support me in old age, I'm going to have to work until I drop. When the deans physically throw me out of the place (assuming I haven't died before then), I would have the rental income from one house, Social Security, and income from taking out a reverse mortgage on whichever house I'm living in.
Hmm. I wonder what that would look like?
Let's assume a miracle happens and the Obamaites succeed in turning the economy around. Let's assume that starts to happen in, say, three months, during which I continue to lose at the rate of 10 grand a month.
Several options present themselves:
- Stay the course. Change nothing in the investment strategy.
- Pay off the house; have my son pay the amount he's been paying, only to me.
- Pay off the house; my son goes to school elsewhere and I rent his house.
- Pay off the house; my son leaves for graduate school; I move into his place and rent my house.
I ran some figures in Excel. My math is not very good, so these prognostications may be out in left field. But if I'm right, it looks like I would be better off to pay the mortgage and have M'hijito pay me a monthly "rental" in the amount that he's now paying the mortgage company. I'd still have enough to refund him his investment in the house, which would pay a big chunk of his graduate school tuition, or at least revive his Roth IRA.
I posited three mortgage-payoff scenarios and estimated my net income if I retired at age 66 (which ain't gunna happen) or at age 70 (the earliest I can imagine being able to afford retirement). I assumed equity investments would continue to drop 10% a month for the next three months and then begin to rise at about 3% a year from now forward. In Scenario One, M'hijito stays in the house and pays me rent of $600 a month. In Scenario Two, he goes to graduate school in Tucson and I rent his house for $950 a month. In Scenario Three, he goes to Tucson, I move into his house, and I rent my house for $1,000 a month.
I listed all the bottom lines in Excel and then sorted to show the numbers ranging from least income to most income.
Compared with staying the course (leaving my investments where they are and continuing to pay the mortgage), all three pay-off-the-mortgage scenarios seem to look better, unless M'hijito stays in the house and I'm forced to retire or am laid off at age 66. 
The big unknown is whether I will keep my job. If I'm canned before I reach age 70, we lose a very big bet. But if I can hang on until age 70 and I'm not purely raped by the taxman, then I end up with a net income fairly close to my present net.
On the other hand, if I'm canned, we're screwed anyway.
My son would get back the money he put into the down payment. He could continue to live in the house as long as he pleased, but he would no longer be chained to the thing: He would be free to go to school or take a better job elsewhere.
If I moved to his house, when I really get desperate for money (which will inevitably happen as my health starts to fail and medical care costs soar), I could take out a reverse mortgage on the place. M'hijito would then lose that house after I die, unless he wanted to pay off the reverse mortgage, but he would inherit my paid-off house, which by then would be making a nice rental income for him, or (with some fix-up) would be a good place for him to live.
Whaddaya think? Crazy? Or not crazy?
Related reading at Funny about Money:
Doesn't anyone hear that alarm going off?
The worst financial mistake you didn't make
What's that light at the end of the tunnel?
