Costco Connection - March 2012

FINANCIALconnection

Also:

■ Mortgage or invest?
■ Retirement strategies

Ask Suze
Orman
I.O.U. on IRA?

Email your personal-
finance questions to:
suze@costco.com.
Please include
“Suze Orman Q&A”
in the subject line; or fax to
(425) 313-6718; or mail to
Q&A with Suze Orman
The Costco Connection
P.O. Box 34088
Seattle, WA 98124-1088.

By Suze Orman

Is there any way I can use money that is in my traditional IRA to purchase a second home and not get a big tax hit? Can I borrow money from the IRA and pay it back at an acceptable rate?

Scott W.

Palm Desert, California

Suze will answer
selected questions in
this bimonthly column.
She regrets that
unpublished questions
cannot be answered
individually.

YOU CAN’T BORROW from an IRA. And while there is a special tax break for IRA withdrawals used for home down payments, you don’t qualify. The IRS allows first-time home buyers to withdraw as much as $10,000 from a traditional IRA for a down payment without having to pay the typical 10 percent penalty on withdrawals made before age 59½. (Income tax is still owed on an early withdrawal from a traditional IRA.) The one catch is that the home being purchased must be a primary residence, not a vacation home. So you’re out of luck.

And honestly, why are you thinking of raiding your retirement savings to buy a vacation home? Unless you have plenty of retirement savings to cover your expenses, vacation homes are a want. Retirement income is a need. Don’t raid one for the other.

In the January 2012 issue of The Costco Connection you write, “A good rule of thumb is to plan that in retirement you limit your withdrawals in the first year to just 4 percent of your total savings.” My husband and I are both 75 and still working. Since we are 10 years beyond the 65 retirement age, what is a safe withdrawal rate for us if this year is our first year of retirement? Also, we would love to know a formula for retiring even later than 75.

Eileen F.

Rowayton, Connecticut

Suze Orman’s TV
show airs Saturday
nights on CNBC. Suze
can be contacted at
www.suzeorman.com.

We are 63 years old and do not have children. We have a new 30-year mortgage at a 4 percent interest rate. We have no credit card debt. Our pensions and Social Security checks give us enough to live comfortably. We have $750,000 in investments and savings. We will be coming into $275,000. My question is: Should we put this money into paying down our mortgage, or should we invest it?

BRIAN BOWEN SMI TH

Pauline C. Estero, Florida

NORMALLY I TELL people to aim to have their mortgage paid off before they retire, in large part because I don’t want retirees to be overburdened by the mortgage payment once they stop earning an income. Yet that doesn’t seem to be an issue here. So the answer doesn’t really depend on what is best financially. My question for you is how the mortgage makes you feel. If you would feel more secure without the mortgage, then by all means you should look into paying it down.

But I would also suggest that you could do both. Use some of the $275,000 to pay down the mortgage and then invest a portion as well. If your pensions and Social Security are indeed plenty to support your lifestyle, you can earmark the interest earnings on the invested money for extra mortgage payments.

.
ms
THE 4 PERCENT rule of thumb is not a sacrosanct
formula. There really isn’t a one-size-fits-all for-
mula. What you can afford to withdraw is a function
of so many personal issues: your age, your expected
life span, what you expect your living expenses to be
in retirement (100 percent of your pre-retirement
expenses? 80 percent?) and how your money is
invested. The more you have in bonds and the less
in stocks, the more conservative you will need to be,
given that your investment returns will likely be
lower than a more aggressive portfolio.