Dear Rick:
I have a problem that I hope you can help me with. I have talked to a couple of people but I don’t trust them. I am 55 and recently unexpectedly unemployed. I get severance pay and that ends at the end of September. I am going to try to find another job but I doubt I’ll find one. My question deals with our finances. The problem comes after my severance ends. My wife’s salary alone won’t cover our living expenses. If I don’t get a job, I figure we’ll need about $2,000 a month to cover our expenses. I’m only concerned about the next five years, as when I’m 60, I will get a nearly $3,000 a month pension from a previous job. To cover my shortfall I am thinking about withdrawing money from my IRA. I have nearly $100,000 in my IRA. Option 2 is to have my wife take a 401(k) loan and to charge the rest. Our charge card only charges us nine percent. Option 3, my least favorite is to use a home equity loan. Our house is paid off and we’ve been approved to borrow about $95,000 based upon my wife’s salary alone.

Thank you,
Brad

Dear Brad:
I’m sorry to hear about your job situation. My advice is to stay positive in your search for a job. Remember, you’re not looking for a career at this point in time; you’re just looking for a job, and there is a difference between the two. In addition, you don’t necessarily have to get a full-time job, you can also think about working part time. Even working part time will help your financial situation.

In reviewing your situation and knowing that at most you have a five-year period that needs to be covered, I actually believe that option 3 is your best option. Not only are rates currently low for home equity loans and mortgages, but the interest is also tax deductible. After taxes, the money is going to cost you three percent or less. Compare that to the cost of the other two options. With option 1, because you are under 59½, when you withdraw money from your IRA, in addition to the taxes, you will also have to pay a 10 percent penalty. With option 2, even though your charge card interest rate is lower than most other charge cards, the interest is still very high and it is not tax deductible. In addition, let’s not forget that there is also a cost to borrowing from your 401(k) plan.

In recommending that Brad use a home equity loan, I am cognizant of the fact that most home equity loans have adjustable rate interest, which means that as interest rates rise, the cost of borrowing on a home equity loan will also rise. However, keep in mind that as interest rates rise, we’ll also see increases in the rates charged by other lenders, including charge card companies.

I believe that using the home equity loan gives someone the most amount of flexibility. After all, if something changes in the future, you can also go back to option 1, or option 2. You won’t necessarily have the same flexibility with either option 1 or 2.

It definitely pays to shop around for a home equity loan. Not all home equity loans are the same and there can certainly be major differences with regard to cost. My advice, go online, learn a little about home equity loans and then start shopping around for the home equity loan that best suits your situation. In shopping don’t forgot to look at your credit union, as they can be very competitive with costs and rates.

Good luck!

If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com