Should my wife and I deplete our cash reserves, withdraw from my 401(k), or use a HELOC to finance home improvements?

I am a 61 year old retired married man. My pension is $3,723 per month. I plan to start collecting Social Security ($2,048 a month before taxes) at age 62. I have $300,000 in a 401(k) account which is invested in a fixed-interest fund. My wife is 51 years old and will retire in nine years with a pension of approximately $3,460 per month. She will have approximately $900,000 in her 401(k) at retirement and plans to collect a similar amount of Social Security at age 62.

We borrowed $115,000 from a relative to purchase a house worth $265,000 and are in the process of securing a mortgage to pay it back. We are currently debating the length of the mortgage (input on this would be appreciated). We plan on updating and improving the house over the course of the next two to three years and plan to spend around $80,000. We have no other outstanding debt and have $70,000 in cash and a vacant lot currently for sale worth $85,000 as our only liquid assets. Should we deplete our cash reserves, withdraw from my 401(k), or use a HELOC to finance home improvements?

Debt, Financial Planning, Retirement, Pensions, Social Security, Real Estate
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Get as big a first mortgage as you can (more than $115,000 if possible; 70% LTV would get you $185,000).  With over $7,000 in monthly pension income plus her salary, you should easily qualify.  A HELOC is a good fallback but rates on HELOCs are higher so try for the first mortgage.  A 30-year mortgage will have a much lower payment than a 15-year so go for the lowest payment.  Don't touch your savings.

I am really writing to tell you to wait on collecting Social Security.  You are much better off not taking the smaller payout at 62, and waiting until 66 for the bigger check.  The difference is about 8% per year.  Sell the land and live on the proceeds for the next four years.

If you do this, also invest the $70,000 ($155,000 if you sell the land) in something that pays a higher rate than your mortgage.  You can do this with relatively low risk if you own REITs or a preferred-stock fund.  Good luck.

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