Retirement experts Scott Hanson and Pat McClain explain the hidden benefits of paying off your mortgage.
Scott Hanson: Jerry, you're with Hanson McClain.
Jerry: Thanks. I'm a 62-year-old professional fiduciary, own a company with my wife, and we're selling the company to two people that we hired. Selling it for just under half a million dollars with an off-balance sheet loan secured by the stock. So we're going to be getting $3500 to $4000 a month for the next 10 years, and that'll be at a capital gain rate, so I'm pretty happy with that. The issue for me is that the rest of my investments...I have a $165,000 Jackson variable rate annuity, and it's a 7-year annuity, and you can take 10% out. It's in blended funds.
Scott Hanson: Yeah.
Jerry: So it's moderate growth. And I think we can take like 10% out per year, and the rest of the investments we have about $150,000 mixed with IRA CDs and Janus Fund, mutual funds, some stocks, things like that. But our house is about $250,000 and I owe about 40 grand on it. So I'm thinking, if I'm trying to retire in about two years, would it make sense to start pulling that 10% out of Jackson annuity each year and make just a lump sum payment against the house so it's paid off in three years?
Scott Hanson: I like the house. We both like the idea of the house being paid off.
Pat McClain: So you said that you're selling the business for $500,000, so there'll be three components to that. One will be return of your basis, which probably is pretty low.
Scott Hanson: Most of it's capital gain.
Pat McClain: And most of it's capital gain and then you have a little bit of interest.
Jerry: Most of it's capital gain, correct, that's right.
Pat McClain: Little bit of interest on there.
Jerry: That's right.
Pat McClain: So how much you have in CDs?
Jerry: Well, it's a mix of not just CDs. It's stocks, it's IRA CDs, it's some mutual funds, about $150,000.
Scott Hanson: Why don't you pay the home off out of something from there?
Pat McClain: Yeah. How much you have in CDs or stock?
Scott Hanson: Outside of retirement accounts?
Jerry: Oh. That's...I didn't even think about that, in the CDs, I got about $45,000.
Pat McClain: Yeah. So that would be the first place I went, and then you'd say, "Well, I don't want to use up all my liquid money." But you have money in stocks, and you've got $16,500 that is liquid every year in this Jackson annuity.
Scott Hanson: That Jackson annuity, is it in a retirement account or outside of a retirement account?
Jerry: It's in a retirement account.
Scott Hanson: Yeah. Why do you have an annuity inside of a retirement account?
Jerry: Oh, I'm sorry. It's a non-qualified annuity.
Pat McClain: It's non-qualified.
Jerry: Yeah, it's non-qualified.
Scott Hanson: So you might actually be best off letting that thing grow for the next 10 years until your business is paid off, so you've got income for 10 years. Our concern is, what happens 10 years from now? How do you replace that income?
Pat McClain: I would be inclined to actually use the bank CD and then allowing everything else to grow until...
Scott Hanson: And don't take Social Security until probably age 70.
Jerry: Yeah, that totally makes sense about using the CDs because it's earning, like, point nothing.
Pat McClain: Correct. And essentially, you've got liquidity elsewhere in the portfolio because you're over age 59.5, so you've got a safety net there. So I'd use the bank CD.
Jerry: We'll be pulling in somewhere around $3000 a month on Social Security. So the plan is with Social Security and the payment on the note secured by the stock of the company, we're going to be knocking down $6500 to $7000 a month and not even have to touch the investments.
Scott Hanson: When do you plan on starting Social Security?
Jerry: Well, I was planning on it around 64, 65.
Pat McClain: How's your health?
Jerry: Probably not as good as it should be. Having been in the military and been in Vietnam and stuff, there's things there that are probably going to catch up with me some day. Otherwise, I'm in good health, but you never know.
Scott Hanson: You know what I would recommend, Jerry? I would recommend, as you being a professional fiduciary, that's where you made your life in, I would recommend hiring an independent advisor who is a fiduciary, and either paying them an hourly fee or having your funds managed by them on a fiduciary basis where someone's got a legal obligation to put your interests above their own. Because you really need to work through things like when's the best time to start Social Security.
Pat McClain: And you might find that it's better for either you to start it and your wife not to, or vice versa. There's a lot of decisions there.
Jerry: And we have. We've actually talked about that. I scheduled out quite a few different things, different scenarios on us.
Pat McClain: Okay.
Jerry: How the funds would last, how we'd scale down and be able to use more of our funds and not have to be in such a large house and have the expenses associated to that, the property taxes.
Pat McClain: Yeah. But the first thing you should do is take the money out of the bank and pay off the house loan.
Scott Hanson: Yep.
Jerry: I absolutely agree. I was just looking like, where should I take it from? I'm not real happy with the Jackson annuity, because it is tied up, but I love the idea of taking it from the IRA CD. That makes a whole lot of sense.
Scott Hanson: Yeah. And because it's already in the annuity, I think we would prefer seeing the tax-deferred growth for the years while you're getting that payment from your business.
Jerry: And I don't have to touch my liquidity which I've got, of about $75,000 to $80,000. I can just leave that in there.
Pat McClain: Perfect. Perfect. We appreciate the call.