Retire debt free or get a boat loan

[ErBrown]

This thread does a pretty good job of illustrating just how many options there are for funding something like this. I'm not sure there's a right answer but can share what we're planning to to.

We're now about 10 months away from our planned departure date and have just put our second home on the market. We love the place and have been living in it for the last year while we rent out our condo in the city. If the lake house was in a location that we could easily rent it to help fund the cruising we'd do it, as we both like the idea of coming back here more than the condo. Unfortunately that's not the case, so it's on the market and will likely sell soon. When it does we've decided we'll use the proceeds to pay off the boat loan and the condo, which will allow us to leave 100% dept free.

We originally planned to pay cash for the boat but our financial guy talked us into investing the money so it could grow and the loan was in the 4% range, so this worked well. My concern with this moving forward is that I don't like the idea of being worried about making payments when the market drops again, and it's bound to happen sooner or later. So we figure by maintaining a significant investment account we can withdraw somewhere in the 4% range annually and fund the cruising long term if that works out. This will also ensure we're never more than 12 months away from returning to our condo (when our tenants lease is up). The fact that it will also be owned free and clear allows the rent to supplement our cruising kitty, though we're not counting on this since initially the proceeds will go into a separate account to fund repairs when they're needed.

For us at least, the peace of mind of knowing that we don't owe anyone anything and regardless of what the market does will have the boat and a home to come back to, is worth it. I'm sure given the right market conditions investing the proceeds from the house COULD be the better financial decision but I view this like a good anchor. I just want to know it will be there when I need it.

Then again, our boat is in a price range well below those being talked about here, so as with everything else YMMV.

-EB

[sailorboy1]

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.

Are you/have you considered a loan from your retirement account?

[The Garbone]

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.

Those be some odd numbers.

I will be in close to the same place in 7 years when I am 51. With penalties for being under 65 and limits on what can be put in Roth IRAs don't see 1/4 mill on a hole in the water as a good choice.

At $1200 a month with a house in the world I would be going on a Catalina 30 not a 45 ft catamaran.

I would get a new adviser.

[denverd0n]

Originally Posted by Capt_Flrp

My financial adviser suggests that taking out a loan so that I can deduct the interest at tax time is extremely erroneous.

And for you it might be, but for other people it might make perfect sense.

Let's apply some fictional numbers to illustrate the point...

Let's say that you have an investment account that has recently been earning an average of 5% return per year. Let's say you can take money out of this account to pay for your boat, or you can get a loan at 5% interest per year. It's a wash either way, right? Well, no, because if you can deduct the interest paid from your taxes then the loan will not cost you 5% per year. If you're in the 30% tax bracket then in the end the loan will only cost you 3.5% per year. Obviously, if you can earn 5% while paying 3.5% then you are ahead of the game.

But, of course, it's not quite that simple. For example, the 3.5% that you will be paying is an absolutely guaranteed amount. The 5% that you're earning on your investments is probably not guaranteed; it may go up, it may go down. So now you also have to consider, just how sure are you that your investments are going to continue to earn more than 3.5% over the life of the loan? If you are very, very sure then it makes sense to borrow the money. If you are not so sure then maybe you should pay cash.

Then, too, there is the inner satisfaction of knowing that you have no debt and you're not beholden to anyone else for your boat. No one can tell you what kind of insurance you have to get, and no one else's name is on the title. That is worth something. Is it worth the 1.5% you would forgo to get it? Maybe so. Maybe not. That's something each person has to decide for themselves.

Like I said, these are fictional numbers, but they are representative of the calculation that needs to be done in a case like this, and as you can see it is a relatively simple calculation. The final calculation--the value you put on being debt-free--that's a whole different matter, and often not a simple calculation at all.

[Cadence]

I hope the Op has a good financial adviser. I haven't done my own taxes in 35 yrs.+ so obviously I can not throw around any hypothetical numbers. I for one, only ask of him the legality and tax ramifications. He would not advise other than that but might lead a horse to water. I think he is stroking me. Said I was worth more than him.

The point being a good advisor does not advise on the risk factor only the numbers. I believe the OP said retirement fund that can be a no. of things.

[belizesailor]

Originally Posted by sailorboy1

Are you/have you considered a loan from your retirement account?

From watching the experience of others this is a bad option. Worse than the home equity trap because if you dont pay it off in time (short term as I recall) it is treated as a disbursement with penalties + taxes due on balance.

There are those who invest funds from their self-directed IRAs in mortgages, but I doubt most would consider a boat (usually they are secured by real estate). Foreclosing on real estate in most venues is relativley easy, but repo'ing a boat from an international venue can get messy and expensive.

[denverd0n]

Regarding borrowing from retirement accounts...

You cannot borrow from an IRA. Quoting the IRS:
"Loans are not permitted from IRAs or from IRA-based plans such as SEPs, SARSEPs and SIMPLE IRA plans. Loans are only possible from qualified plans that satisfy the requirements of 401(a), from annuity plans that satisfy the requirements of 403(a) or 403(b), and from governmental plans. (IRC Section 72(p)(4); Reg. Section 1.72(p)-1, Q&A-2)"

If you have a plan that qualifies for borrowing from it, then the usual rule is that the loan must be repaid in 5 years. There is, however, an exception for loans to purchase your principal residence (and a boat can qualify as a residence, but remember it must be your principal residence). In that case there is no set term limit, but the IRS has denied excessively long loan terms. They have, on the other hand, approved loan terms up to 15 years in such cases.