financialcounselor

Retirement is no Time to Take on Big Debts

In Uncategorized on July 3, 2012 at 12:22 am

Today’s essay is a warning. Call it a word of caution, specifically for people nearing retirement. But to be honest, young people could benefit from this story too.
Our protagonist in this tale is a man named Jim who sought me out for advice about his financial situation. Jim was in a real predicament because of a mistake I see a lot of older people make. That mistake is making a big purchase later on in life.
Jim bought a luxury condo at age 61. He was working at the time, making great money–$80,000 a year. But he was laid off only a year after he bought it, and with the economy being what it is, Jim decided he would never find another job making anywhere close to his salary. So he decided to collect his social security benefits. But because he was only 62, his social security income only amounted to $1,500 a month, a far cry from the thousands he had been pulling in.
So to keep up with the cost of the condo, plus his other bills, Jim was withdrawing $1,500 every month from his IRA. Jim had been doing this for a few years by the time I spoke with him, and he only had $40,000 left in it. You don’t need to be Stephen Hawking to see that the IRA money was not going to last very long. If he kept taking $1,500 out every month, it would be gone in 26 months. Two years. And here Jim was only 65 years old.
My advice to him was to let go of the condo. “At this point Jim, you may need to cut your losses,” I said. “You can only keep up with the cost of the thing until your IRA money runs out which will be in two years, and at that point you’ll lose the condo and you’ll have no cash in the bank with only $1,500 to live on every month. If you let it go now, at least you’ve got that forty grand to lean on.”
Now Jim couldn’t control getting laid off of course, but buying that condo and blindly trying to keep up with it killed Jim’s shot at a comfortable retirement. That was his mistake. Unless he gets a job, which he may have to do, Jim will only have $1,500 to live on each month for the rest of his life.
It didn’t have to be that way. When he bought that condo at age 61 Jim had over $100,000 in his IRA plus $20,000 in the bank, which was used as a down payment for the mortgage. And Jim had been making $80,000 a year. If a luxury home was what he wanted for his retirement, Jim should have been saving up so he could pay cash for a place and retire without a mortgage payment. With retirement on the horizon, a person should be looking to set themselves up with a low cost of living, not a high one.

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