Q & A

The latest Star Tribune column.

Q: Greetings Oh Money Manager! We are both 53, with my husband planning to retire from a state job in 2 years... We pay our credit card in full every month. We are old school in wanting to have our home paid off before Tim retires. I did not do a good job of saving for college for our 2 sons. We have been splitting school costs with our oldest (a senior at the U of MN) the past 2 years, having completely covered his 1st year at Stout. Our youngest is at UW-Madison. We would like to cover our youngest for his 1st year too, and actually do more for both of them.-wanting them to know the value of a dollar too- though they are very thrifty. I am also looking at probably $5000.00 worth of cement work and a new kitchen and family room floor. Would the best thing to do be take out a 2nd mortgage on our home?... should we live dangerously and not get a fixed rate?... Thanks. Ann

A: Greetings. You have a lot going on. A looming retirement. Two sons in college. Home renovations. The desire to pay off your mortgage. So, before I get to the specifics of your question, I want to emphasize that goals and investments need to be prioritized.

You may have already done this, but the first thing I would do is use the next two years to prepare for retirement. You're both young. What do you want to do for the next three decades or so? What do you want your lifestyle to be? Will you start a second career?

One guiding principle for thinking these issues through is the life you live currently. Think about the activities you love now. Then figure out how you can continue doing versions of those pastimes and live those values in retirement.

The next two years is also a good time to play with financial figures. A reasonable rule-of-thumb to start off with is that you'll need 70% to 90% of your pre-retirement income to fund your later years. But whether you will need more or less depends on what you want to do. Some people may need only 60% of their pre-retirement income if they own their own home outright, their idea of a good time is to take long hikes or bike rides, their tax bite declines, and many work related expenses disappear. Someone else may need to 120% of what they earned before retirement if their tax rate goes up because they have done so well in their retirement savings plan, and their goal is to travel to all the exotic spots in the world they dreamed of visiting but couldn't find the time with the twin demands of kids and work.

I think it's terrific that you want to help out your sons with their college education. One thought is to hold off until they graduate. Then you can always help them pay off their student loans at that point. In other words, figure out your retirement plans, build your savings, and then when they graduate help with paying off those student loans (or maybe a son might prefer that you help him by investing in an entrepreneurial venture).

The general rule on home renovations is that you'll recover only about 40% of the cost of any work done, with kitchens and bathrooms having the highest return on your money and luxuries the least. Still, you can get years of pleasure out of a remodeled kitchen and family room. Once you've made priorities with investments and decided how to handle college investments, then a home equity loan can be a source of money for home repairs and renovations. I prefer fixed rate home equity loans so you won't get hit hard by rising interest rates during the life of the loan.

Last, deep in the soul of every homeowner is the desire to own their place outright. There is nothing wrong with that. But I would make sure that your overall portfolio is well diversified, and that you have your financial blueprint in place before taking that step.

Q: We NEED to invest in our house, right now. (roof, water damage, + ) The house is completely paid for and has more than tripled in value since we bought it. Is borrowing from a retirement account, (with an obligatory repayment schedule) in order to pay interest to ourselves a valid idea? Is it a Good Idea?? Thanks. Robyn.

A: I can't say that borrowing against your retirement savings plan is a "Good Idea". Yes, I've heard the mantra that you are borrowing from yourself and you repay yourself. But I don't think the finances are there.

Briefly, here are the details. Loans can't exceed 50% of the value of your account up to a maximum of $50,000. You usually have five years to pay off your loan, although you can get longer years if the money was borrowed for a home purchase. The interest rate you pay is usually the prime rate plus one or two additional percentage points. Your loan is repaid through automatic payroll deduction.

The drawbacks include if you leave work to go to another job or simply lose your job, most plans will required you to pay off the loan within 30 to 60 days. Otherwise, the government will consider the loan an early withdrawal and you'll pay a 10% penalty, plus income taxes on the amount you withdrew. You'll also pay Uncle Sam some extra money since you're borrowing pretax dollars and repaying it with after- tax dollars (and then you'll pay taxes on these same dollars again in retirement). But the biggest penalty, however, is that your retirement savings aren't compounding.

In general, I think it makes more sense to refinance your mortgage, establish a home equity line of credit, or take out a home equity loan to make home repairs. I’d run the numbers to see which one works out best for you.

Q: My wife has completed roll overs to Fidelity for 3 of her retirement funds. When she tried to roll over her fund from a former employer, she was told she could only roll over 20% first year, 10% each subsequent year. Is this legal?.... Kim

A: Yes, it's legal. The law gives employers a lot of discretion in the withdrawal rules when it comes to 403(b)s. The terms are all laid out in the plan document. I would ask for a copy and check it out on your own. One reason for the restriction may be the agreement your company struck with the firm managing the 403(b). I would still set up a rollover IRA, and then make every year a direct institution-to-institution transfer (really trustee-to-trustee) to your rollover IRA. This way you avoid any tax complications.