Build retirement funds before paying down a mortgage

Dear Liz: My husband and I retired three years ago, right before the stock market dive. We just sold our home and have moved into what used to be our vacation home. My husband wants to use $130,000 we made on our first home to pay down our mortgage on the second house (we owe $300,000 on the mortgage at 4.8% interest; the home is worth $600,000). I want to use this money to pay our living expenses for a while so that we can leave our retirement accounts alone, which would give them more time to build back up to pre-crash levels. Which is better?

Answer: Your approach is likely the smarter one.

People who retire in bear markets are in far greater danger of running out of money than those who retire in better times, according to analyses by mutual fund company T. Rowe Price. That’s because bear market retirees draw from a shrinking pool, and the withdrawn money isn’t there to earn gains when investment markets rebound.

In most years, retirees have an almost 90% chance of being able to sustain their retirement income over a 30-year retirement if they limit their initial withdrawal to 4% of their investment portfolios, increasing the withdrawal 3% each year to offset inflation, T. Rowe Price found. But poor market performance in the first five years of retirement can reduce that strategy’s chances of success from nearly 90% to just 43%. In other words, you would be more likely to run out of money.

The best way to cope with a downturn, the company found, is to reduce withdrawal rates 25% until the markets improve.

If the proceeds from your home sale were enough to pay off your current mortgage, your husband could make the argument that reducing your monthly expenses would in turn reduce the amount you’d have to withdraw from your retirement accounts. But in this case, paying down your debt won’t change your monthly costs.

What you really should do, however, is take this question to a fee-only financial planner who can review your situation and advise you about your next moves. You can find referrals to fee-only financial planners from the Garrett Planning Network at http://www.garrettplanningnetwork.com and the National Assn. of Personal Financial Advisors at http://www.napfa.org.