Retire debt free or get a boat loan

[belizesailor]

Originally Posted by Kenomac

Lot's of short sighted participants on this thread.

Borrow some 4% money against the house, and use it as rental income, then pay cash for the boat. Let other people pay for your boat and retirement.

Rich people didn't get that way by using their own money and punching a clock at work.

Much better advise than his so called FA gave him (a brokerage employee I assume, who wanted to use his cash to buy securities). Debt funding an income producing, potentially appreciating asset is a much better idea. Single family is not best option, but it sure beats a non income producing, depreciating boat.

[barnakiel]

Originally Posted by Kenomac

Money is very cheap right now, keep a very low interest loan on the house and pay cash for the boat.

This depends on what the house money costs you.

When you say low, what figure do you exactly mean?

EUR zone EUR house loan money seems to cost 4 to 7 per cent now depending on where one lives. (I think)

Money IS cheap at the capitalist level, say when a smart govt issues new debt, as the case might be, in Germany, at (virtually) negative or null rate. This trickles down to the banking system but, hardly, to the end consumer (the home loan borrower).

However, today I walked by a local bank (Spain) and the windows said 'very cheap 6 year loan'. I read the small print and it said nearly 11 per cent. Ooooopppsss. (Plain vanilla money, not a house loan that will be reasonably cheaper).

So how much is this 'cheap money' where you are and can you get more interest on your own or borrowed funds?

Asking this while my left eye is reading 10 y. yield 1.64 on 10 y US debt.

So to say you must be either making way (and I mean BIG WAY) more than that 10 y yield (not easy for a non-professional investor and difficult for many pros as well) or else you are borrowing close to the central bank/govt/banking sector rate (again, next to impossible to a retail investor).

Let me know what cheap stands for in your lore.

b.

[Cadence]

Originally Posted by gcaskew

I would be taking a $250000 lump sum out of my pension. This would still leave me plenty to live well on but would reduce my monthly draw by $1200 for the rest of our lives. Or finance a boat for 15 years and have it paid off and then have the $1200 from the payments till we die, also saving some on taxes.
We will be 53 when we retire soon.
Either way my monthly pension will be hit for $1200 - $1500 a month, but by financing after the boat is paid for the old boat payment amount stays in my account.

Now we have gotten down to some facts. It may not be bad advice at your age.
With inflation, in 15 years, you would probably wish you had that money per month. It sounds like a wash over the next 15 so nothing lost. At loan rates today you could be ahead since your retirement money will probably earn more invested in a mutual fund. Best of luck.

[SV THIRD DAY]

So now we are seeing why the Big Banks have so much money to throw around and bribe politicians. They get free money (in the USA near zero interest rate) from their countries central bank that are desperately trying to spur on economic growth. The banks then take this free money pool that their "too big to fail privileged" gives them access to and they then loan it the common folks, who are happy to pay their 3-7% interest rate over the term of the loan. All the Banker did was do some paperwork, and sha-zam...they make an easy 3-7% on money that was not even theirs to start with. See how the scam goes. The average folks are then told that to have all the right things and keep up with the Jones', they would be crazy to not pull more equity out of their house to buy that boat, buy that RV, get a brest augmentation surgery or go on Holiday. The bank doesn't care really if they can afford it or pay it back oh not really...why...because it was not the banks money to even start with and the Government has guaranteed the loan by what...well by the Folks tax money of course...ha ha ha...talk about scam.

It actually makes you laugh out loud when you think about it and type it out. But these smarter than smart masterminds that run the central banks have even fooled themselves into thinking they have overcome the business cycle, they are Gods not to be questioned or investigated.

[valhalla360]

Originally Posted by Kenomac

Lot's of short sighted participants on this thread.

Borrow some 4% money against the house, and use it as rental income, then pay cash for the boat. Let other people pay for your boat and retirement.

Rich people didn't get that way by using their own money and punching a clock at work.

Until the renters trash the place and suddenly, you have to make the payments while not getting any rent for 6-12months.

That's the problem with leverage. It magnifies risk. If you had a guaranteed investment it would be different but there is no such thing.

[valhalla360]

Originally Posted by SoundWave

1+ on that one.

Sailors like us, holding sundowners, are not yet part of my financial team.
Even at the lowest tax bracket, every dollar not taxed is an effective return in excess of 20%, and that will beat any investment fund going!

The problem is you are paying the bank 100% to avoid paying the govt 20%.

Stuffed under your mattress will beat that return.

[valhalla360]

Originally Posted by gcaskew

I would be taking a $250000 lump sum out of my pension. This would still leave me plenty to live well on but would reduce my monthly draw by $1200 for the rest of our lives. Or finance a boat for 15 years and have it paid off and then have the $1200 from the payments till we die, also saving some on taxes.
We will be 53 when we retire soon.
Either way my monthly pension will be hit for $1200 - $1500 a month, but by financing after the boat is paid for the old boat payment amount stays in my account.

First there is something wrong with your calculation (unless you are getting a negative interest rate loan). $1200/month payment for 15yrs, is only $216k.

Assuming 4% loan, figure closer to $1900/month payments or close to $340k paid over 15yrs. Take out the $250k, and invest the $90k saved over the 15yrs, and you hit the 15yr mark with the $250k mostly replaced.

The biggest issue I see is you are waited to plan for tax implications and now you are likely to jump up in tax bracket if you pull it out all at once. This is something you should have started planning out 4-5yrs ago. I know it's too late for you but for others reading this, if you can pull out $30-50k/yr, the tax implications may be minor. If you pull $250k out in a single year, odds are the taxes will be high.

If you do take a loan out (I don't recommend), try to pay it off in 3-5yrs by taking out just enough to miss jumping up a tax bracket.

As far as those telling you to pay the interest and invest to make it up, remember to discount your assumed returns. If something happens and you suddenly need a lot of cash, you may have to liquidate investments during a down period to make payments. By doing it up front, you can pick and choose when you sell.

[fishin4bogey]

I've never understood the concept of going into debt to save money. If you have the cash to pay for the boat, that's the way I'd go. Then I'd start hunting for a new financial planner.

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[Stu Jackson]

Originally Posted by valhalla360

The biggest issue I see is you are waited to plan for tax implications and now you are likely to jump up in tax bracket if you pull it out all at once. This is something you should have started planning out 4-5yrs ago. I know it's too late for you but for others reading this, if you can pull out $30-50k/yr, the tax implications may be minor. If you pull $250k out in a single year, odds are the taxes will be high.

A very critical issue. Regardless of how you got there.

As mentioned by some, only YOU can figure out what the IMPLICATIONS are for you.

[belizesailor]

Originally Posted by valhalla360

The problem is you are paying the bank 100% to avoid paying the govt 20%.

Stuffed under your mattress will beat that return.

Surprising how many people do that...they buy into the fantasy that the real estate brokers and mortgage bankers sell them...and never do the math.

[Stu Jackson]

Originally Posted by belizesailor

Surprising how many people do that...they buy into the fantasy that the real estate brokers and mortgage bankers sell them...and never do the math.

Well, that may be true, but the other part of the equation is CASH FLOW.

When we were young (hold cow, how can I 'member that?!?), we were renting. When we got married, we realized that we could get a house for the same amount of monthly outlay as the rent PLUS the tax breaks offered here in the US for mortgage interest. Or maybe even better off, if not equal.

Of course, things/situations at retirement are quite different. But the concepts are the same. If he takes $250K out of his retirement fund, unless it's a certain type of IRA, he most likely wasn't taxed on it when he put it in, but would be now. Many of us us did this, figuring we'd be in a much lower tax bracket when we withdrew the $$ when we were older.

But big chunks of change like this can have a significant impact on taxes. And we don't know his tax situation. Do we?

And reducing future monthly income in the terms that he mentioned can only be addressed if we know what his potential and planned future costs would be based on his planned lifestyle. And we don't know that either. Do we?

That's why decisions and absolutes in answer to the OP are relatively meaningless.

HE is the ONLY person who can answer the question.

You're right, he has to do the math.

[daletournier]

Originally Posted by Sojurnr

What belizesailor said, IN SPADES!

There is no possible legal way the interest deduction obtained by financing anything will offset the cost of renting the money. This is true regardless of what your marginal tax rate is.

Change advisors! Be sure the new one is a "Certified Financial Planner" and has excellent references as well. A CFP is held to a higher standard (talking USA here) than other financial advisors. They hold a "fiduciary" responsibility, whereas others are only held to a "reasonable man" standard of serving your needs. The "reasonable man" might choose to invest your money in things which enrich him but which aren't the best for you, and that's okay under the law. Not so the other. A "fiduciary" is held responsible to serve your best interest even at the cost of his own.

Another excellent test is to ask yourself and him/her, "How is your personal wealth-building doing?" If the answer to that question is anything less than stellar, move on.

JK

I so agree. I just had this out with my dad. Rather than take responsibility for his own money he hands it over to his financial planner (often a salesman). When I asked my dad how old is planner is he said "I guess late 50's" my response was "well how good can he be" his profession is money, trying to make it grow through investments but hes still working as he heads towards 60?
Would you ask an obese person for weight loss advice?
I'm sorry if I sound arrogant but I'm not a fan of the financial planning profession, alot of people lost alot of money in 2008-2009 relying on the advice of financial planners, and I believe will so again.

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[belizesailor]

Originally Posted by Stu Jackson

Well, that may be true, but the other part of the equation is CASH FLOW.

....

But big chunks of change like this can have a significant impact on taxes. And we don't know his tax situation. Do we?

...

HE is the ONLY person who can answer the question.

You're right, he has to do the math.

True, any decision must be tailored to his specific tax situation...probably better a CPA for that than a, usually bogus, FP.

But, but....

In almost all situations, financing a non income producing, depreciating asset is going to negatively effect cash flow and ultimately net worth.

And (assuming USA tax venue), unless he can claim the boat as his primary residence, he can't claim the mortgage interest. Even if he can, its a losing game, reducing his tax liability only by a percentage relative to his effective tax rate (spending $100 to save $30 for example). So, a negative impact on cash flow too.


OP: Please post a full financial statement.

Better yet: discuss this with a CPA.

[Kenomac]

Cheap money = 4% or less on a home mortgage in the US. Borrow against the house to pay for the boat. Then you're only paying $10k per year to use someone elses money plus getting the advantage of a home mortgage interest tax deduction. Use your $250k to invest in something that will return better than 3%, any return better than that and you'll be dollars ahead.

[Stu Jackson]

Originally Posted by belizesailor

True, any decision must be tailored to his specific tax situation...probably better a CPA for that than a, usually bogus, FP.

But, but....

In almost all situations, financing a non income producing, depreciating asset is going to negatively effect cash flow and ultimately net worth.

And (assuming USA tax venue), unless he can claim the boat as his primary residence, he can't claim the mortgage interest. Even if he can, its a losing game, reducing his tax liability only by a percentage relative to his effective tax rate (spending $100 to save $30 for example). So, a negative impact on cash flow too.


OP: Please post a full financial statement.

Better yet: discuss this with a CPA.

I agree, but, but, but...

Forget for a moment the depreciating asset, the boat. For this FINANCIAL analysis it could just as well be a turnip!

If it costs him $X to "rent" the money, BUT it costs him more in taxes because the tax hit on his BIG withdrawal is more, then that is the only choice he has to analyze. (And throw in the tax savings for the interest on the loan which would be part of the analysis.)

Isn't it?