Now, this new scheme to do the 3 percent drawdown from savings so as to stock my checking account with enough cash to cover monthly expenses is not all beer and skittles.
The fly in the beer, alas, is the misbegotten mortgage on the downtown house, which under the influence of the Crash of the Bush Economy (duck! Evan’s got the Nerf Bat! :-D) has morphed from what looked like a wise move into a money-sucking black hole.
To cover my share of the mutual madness M’hijito and I got ourselves into, I’ll have to teach two sections of composition from now until the universe ends. It means that although my bills will be covered by savings and Social Security, almost everything I earn through adjunct teaching will go to pay the mortgage.
It’s annoying, but not dire: two classes don’t amount very much work. Three sections, more work than I’d like to do but not intolerable, would cover the mortgage and leave some pocket change.
Well. That assumes that we can talk the credit union into morphing our present loan modification into a permanent 40-year loan at 4 percent. If we can’t, then I’m screwed. M’hijito is planning to call the bank next week to arrange a meeting so we can negotiate the mortgage’s reset, since the modification expires in February.
This predicament would be a lot less annoying if the house were worth anything like what we paid for it. Though values in the central city dropped slower than those in the far-flung styrofoam-and-stucco suburbs, over the past year they’ve sunk into the sub-basement. We’re now about $100,000 underwater on the little house. Not counting the $35,000 we put into renovating it.
M’hijito says the house two lots down the street just sold for $140,000, and it’s larger and nicer than ours. We paid $235,000.
We’ll have to figure out what to do about that after he finishes graduate school, which will take another five years, assuming he works at it steadily. Coincidentally, about five years is as long as I figure I’ll be able to continue working, assuming my current ailment is something minor and not one of the several gawdawful things it could be.
Which reminds me…gotta get that will updated.
Meanwhile, if I live that long, for the next five years or so life will still be a little pinched—the $2,040/month budget just covers bills, with maybe $50 or $100 to spare for extra costs. But at least I won’t be wondering where even that minimal amount is going to come from. Though still won’t be any vacations, by working somewhat harder than I’d like to work in “retirement,” I can at least buy clothes and have an occasional meal out.
Image:
Zacharie Davies, Shack in Pigeon Forge, Tennessee. Creative Commons Attribution 3.0 Unported license.
Hey, no fair, I live in Pigeon Forge, TN. Although I must admit, I have seen worse than this.
@ Sharon: w00t! You mean there is a Pigeon Forge?
Hmmm… It sez here in Wikipedia the place has a population of 5,083. What’s it like there? Do you live there all year round?
Pigeon Forge is 5 miles from Gatlinburg and the Smoky Mountains. We also have Dollywood here. In case you’re unfamiliar, this is a theme park half owned by Dolly Parton. Dolly’s original home place looks somewhat like your picture. Pigeon Forge is very commercial with lots of touristy things. The town is 5 miles long and the traffic can be horrendous. I have lived here all my life and while I get very tired of the carnival atmosphere, I never tire of the mountains.
@ Sharon: Dollywood…I love it!
We have a couple of touristy burgs like that in my ken. Sedona is much larger than 5 miles across, but it is JUST JAMMED with tourists. They’ve tried to tame it with traffic circles, which confuse Southwestern drivers and just make a bigger mess. And Taos, NM, which seems like it’s all of two miles long, is bumper-to-bumper — literally. It can take you ten or twenty minutes to drive a block.
I remember driving through Tennessee when I was a little kid and thinking how incredibly beautiful it was. The mountains there really are lovely.
funny: I love your blog but feel bad for your plight and the weird laughs I get reading about it! Something like whistling past the graveyard, I think…
Unless one has excellent guidance, we seldom consider how our choice of career will effect our options when we are older…and, even then, we seldom listen to advice when we are young unless we are wise beyond our years.
I got lucky. I had a career in the Federal Government And, even then, some moves I made, looking back, look like I was trying to sabotage myself. I could have screwed it up but did OK and got out with a pension at 55.
Then I proceeded to screw up with some ill-considered real estate decisions! We decided to live in Mexico, sold our primary residence in the US, and then decided we missed our old stomping grounds…(look before you leap? What, me worry?).
So, here we are back in the States living in what used to be our rental property. We are a little upside down but the place only cost $95,000 and is costing less than $500 a month PITI. (We’re in SoAZ.)
We are sitting pretty now since that amount ($500) represents about 8% of our income but we do have a bunch of cash sitting in the Mexico place. We paid cash and so are seeing no return except that we vacation there and spend almost the entire summer there, as well.
I don’t know if the Mexican (Baja) market will ever turn around. We may be vacationing there for awhile! But it’s hard to complain too much. (Overlooks the ocean…go to sleep with the sound of waves.) Still, we’d like to sell to get our cash out, which I want to do before we buy another house and turn the place we live in now back into a rental.
Do you rent your investment property? Or does your son live there? Based on the info you have provided, the payment, assuming 20% down is about $1,300, right? The negative can’t be too much…what’s market rent…like $800? And you must get some tax write-offs on the loss, right?
Of course, any negative cashflow hurts when the money is tight! Good luck (hee-hee…sorry! Fade to me whistling…)
@tmgbooks.com: Our original mortgage was close to $1,300. When ASU closed our office and canned me and all my staff, we extracted a loan modification from the credit union, bringing the PITI down to around $1,000.
This year I scrounged up enough to pay the property tax up front, thanks to the drop in property taxes resulting from the real estate crash. By robbing Peter to pay Paul, I thus cut our monthly bill to around $940.
Since my share of the mortgage payments has been coming out of my retirement savings, this helps a little. It also brings the cost down low enough that I can now pay it out of cash flow instead of savings.
To pay the mortgage from savings would require me to take a 4 percent drawdown. In fact, that would be OK — it’s right at the recommended retirement drawdown, and my financial managers believe I could safely take out 5 percent. However, gut instinct tells me the longer I can delay a larger drawdown, the more likely it is that cash will be available to support me if I live into advanced old age.
Rentals in the area are less than we’re paying on the mortgage, and of course, when you rent you get a passel of headaches. Neither of us wants to be in the landlord business.
On the other hand, speaking of the landlord business, there are still plenty of wealthy Americans left…some of them no doubt would rent your Baja property as vacation digs. There just be Mexican agencies that handle properties owned by Americans who want to turn their houses into vacation rentals.
@funny: We use the Mexico place enough to warrant keeping it for ourselves. Even counting opportunity cost of the purchase price, it is costing us about $500 a month; and we are snowbirds in the sense that we escape the heat by going there for the summer…worth it just for that, as well. And we have a caretaker who keeps up the place for us…labor is very affordable there.
There is no way I would defer maintenance; I love the house too much!
I don’t get this safe withdrawal rate (SWR) business…I know it assumes market-average returns over the long-term but if you start with $100,000 (let’s say) and you lose 30% (as just happened) how is it safe to withdraw any amount once you are in the red until you have recovered 100%?
Wouldn’t you be spending principle once your balance falls below the original balance?
And, if you do spend principle, then how can you possibly recover when the market returns go up unless they go up much more than they went down?
And it could take years just to get back to even. I also understand that SWR depends on the exact mix (diversification), which made it worse for a couple of years there when the market was dropping like a rock AND returns on cash were hitting two percent!
I read lots of stories of retired people who had to go back to work for this very reason; ie, they were drawing down principle too quickly to ever recover.
I have taught financial management at the college level and written a few books on the topic, as well. In my calculations, one significant downturn spells the end of any SWR.
And does your planning include spending down principle or not? And what is your thinking in either case? (If you don’t mind sharing.)
@tmgbooks.com: Wow! You could spend $500 a month here in the summer just on power and water! 😀
Seriously, that’s a bargain if you can spend all three months down there, compared to what it would cost to hang out in a resort during the hot season.
Well, I find the SWR thing a bit mysterious, too, except infsofar as even at the maximum estimated SWR (about 5%), in normal times principal is earning more than the withdrawal, and so it would continue to grow. I hope not to have to eat into principal, but on the other hand, I’m pretty skeptical about my (or anyone’s) ability to predict the future. What I do know is that last month the fund earned $10,000+… So if I only drew down $1,093, I would have left $8,900 in there to continue to earn.
Yes indeedies, it did lose $180,000 in the crash of Unowho’s economy. However, it has now earned all of that back. Obviously, if I’d been drawing on it, it would have taken a lot longer.
And there’s good reason to expect that I won’t live long enough to consume much of the principal. Although my great-grandmother and great aunt lived to be 94 without benefit of any medical care (they were Christian Scientists) and my father and both his brothers made it to 84, both my mothers’ parents died in their late 40s of cancer; my mother died at my present age, also of cancer; and my father’s mother died before I was born, of unknown causes. Plus of course every time I get in the car and cruise the homicidal streets of Phoenix, the chances of an early demise increase.
My plan about spending down principal is to avoid it, to the extent possible, by continuing to work part-time as long as I can dodder into a classroom or sit in front of a computer. I think it’s unlikely that, at a 3 percent drawdown, much harm will come to the principal, particularly since a good chunk of it is now invested rather conservatively. That’s about the best I can do. Otherwise, I’ll have to let the future take care of itself.
Funny: Thanks for response. I know SWR can work and I know it has…but it must require some real faith when the market starts tanking!
When I read my last comment after it posted, I noticed I had used the word “principle” when I meant “principal.” That will teach me to comment before my third cup of coffee!
Your comment about driving is exactly right! Driving is extremely dangerous but because we do it every day we become oblivious to the risk. And cell phones and texting-while-driving have only increased the risk.
In fact, car accidents are the leading cause of death for males under 44. (CDC: Leading cause of death: Accidents; within that category car accidents number one.)