retirement

Use pension lump-sum cash to buy house?

Don TaylorDear Retirement Adviser,
I have recently retired at age 63 with a $360,000 pension. Having raised four daughters, I have bad credit. Now, I'm having trouble getting a loan to buy a house. So I'm considering purchasing a home with cash, avoiding paying interest on a mortgage. Homes are relatively inexpensive here in Phoenix. I'd still have plenty of money left. And I have my Social Security benefits. What do you think?

Thank you,
-- Jeff Jump-start

Dear Jeff,
Are you blaming your bad credit on your four daughters? I guess just the idea of paying for four weddings helps to make that point. With time, you can fix your credit score. The pension decision, however, would be more permanent.

I think the decision whether to take the lump-sum value of your pension is one of the most difficult decisions a retiree faces. You want to be able to meet your retirement income needs and manage the risk of outlasting your income.

Housing costs, of course, are a key income need in retirement. If you use part of your $360,000 to buy a personal residence, you've taken care of part of that expense. That leaves property taxes, utilities, maintenance and insurance as recurring costs. By owning the home outright, you have the ability to later take out a home equity conversion mortgage or reverse mortgage to serve as a financial backstop.

You should consider avoiding taking Social Security at least until your full retirement age. If you are single, that means waiting until you're 66 years and 9 months old.

People typically decide on taking the lump sum thinking they'll fare better than if receiving the annuity payments being offered by the employer's pension plan. Some need to fund a retirement expense. It appears you are in the latter camp.

I think you'd be better off taking the lump sum and using some of the money to buy your home. You can also use some of the money for expenses to delay taking Social Security.

Work through this decision with a fee-only financial planner to better understand your retirement income options and investment decisions, including the tax implications of any decision you make.

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