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I’m currently a 40 yr old military officer approaching 20 years of service, after which I will retire. My retirement income from my service will provide ~$60k per year for the rest of my life, plus health insurance for both my wife and I. I currently have about $200k in personal retirement accounts.

The new job I anticipate starting in a couple years will pay around $150k initially, with a bump to $200k the second year and regular pay raises every year until I eventually reach about $300-350k per year. This industry also automatically puts about 12% or so of your annual salary in a 401k that you can match up to the max if you want.

Once we retire from the military and start this new career, my family and I are planning on moving to a part of the US that is pretty pricey. We’d be looking at buying a home that’s probably $800k-$1m. I’d also be able to use a VA home loan. We anticipate about $60k in equity when we sell our current home and have about $70k in just savings.

Would it be unwise to cash out my personal retirement accounts to put down on the home? I was thinking the return on that money could be greater in real estate, and it could be more recession-proof that way. Is that a bad idea?

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    Make sure you put your financial goals all in perspective against eachother - not just retirement and home ownership, but everything else that you may find important. Big considerations would include college savings for kids, if that is relevant for you. Feb 29 at 19:45
  • That’s a good point. Putting everything down on a home leaves nothing left to save for emergencies or college funds
    – Jake
    Feb 29 at 19:53
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    A side comment to all this is something you seem to have considered, but perhaps have not fully taken in: the guaranteed nature of your military pension provides you with an astounding level of low-risk retirement funding. If it is well-tracked to inflation in some way, then this type of guaranteed income is something that can significantly change how you save for retirement. Still probably good to make sure you contribute any amount needed to get employer-matched dollars, but otherwise, it likely makes sense to contribute not a penny more. Your sooner goals are the ones needing care. Feb 29 at 20:07
  • Related: Post-9/11 GI Bill education benefits can be transferred to your kids, though it requires you apply for this at least 4 years before separation. This is definitely something you need to investigate if you haven't done so already.
    – user71659
    Mar 1 at 3:39
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    You should also think through what happens if the job doesn't work out. Hope for the best, prepare for the worst. You pay the house and 3 months in you're fired. Can you handle it? / On the other hand - don't let worries ruin your dreams. But it seems you still need some more thinking on this one to come to a conclusion.
    – DonQuiKong
    Mar 1 at 6:38

3 Answers 3

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Here’s my question: would it be unwise to cash out my personal retirement accounts to put down on the home?

I assume you're talking about Traditional (not Roth) IRAs or some other equivalent "retirement account".

It's generally unwise to cash in retirement accounts before retirement age unless absolutely necessary (e.g. to avoid foreclosure or bankruptcy). IRA withdrawals are treated as income for tax purposes. Since you're already in a high tax bracket with your new job plus military retirement, you'll pay a lot more tax on that money now that you would at retirement.

On top of that, you are assessed a 10% penalty for withdrawing funds before reaching the age of 59.5.

If this is your first home purchase, you can withdraw $10k without penalty, but it will still be treated as income.

I would also be cautious looking at VA home loans. They are designed for veterans that cannot make a down payment or have low income, neither of which seem to apply to you. The fees that are charged may not be worth the benefits if you do not need them.

I would shop around for conventional loans with whatever you can put down. With 130k you can put 20% down on a 650k home. It might not be your dream home yet, but your options are to either borrow the rest of the down payment (making sure your lender is aware of this) or bite the bullet and pay PMI until you get to 80% LTV. You can borrow money for much less than the 10% penalty you'd incur plus the additional tax you'll pay.

This industry also automatically puts about 12% or so of your annual salary in a 401k that you can match up to the max if you want.

This seems backwards. Most companies automatically put in a smaller amount (like 3%), and then match what you put in up to some percentage, which can be anywhere from 6% to 15% or higher. An automatic 12% match is incredibly good. I would be tempted to put money towards your mortgage to pay it down to 80% before putting any more in retirement.

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  • That is exactly what I was looking for, thank you. My personal stuff is in IRAs, I left that part out. And yeah, the ~12% 401k thing is true, it’s a pretty wild perk. I’ve only ever done VA loans, so I’m not smart on PMI and LTV, I’ll have to get smarter on that. Thanks!
    – Jake
    Feb 29 at 17:45
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    PMI is Private Mortgage Insurance that you pay if you have less than 20% equity. It's not a huge amount and may not be bad at all with your income. Basically it protects the bank if they need to foreclose. LTV is Loan-to-Value ratio. If you owe 80% of the market value of the home (which can change over time) then your LTV is 80%. Once your loan gets to 80% you can apply to have PMI removed.
    – D Stanley
    Feb 29 at 18:03
  • Ok, I see. So if you put 20% down, no PMI would be needed I’m guessing?
    – Jake
    Feb 29 at 18:29
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    Depending on OP's target area, a 650k home could be either nonexistent or far too small for his family. The good news is that OP is far from the first person buying a home with less than 20%, and with his service history, he can add VA to the options everyone has including FHA, PMI, or a piggyback loan.
    – stannius
    Mar 1 at 16:46
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    There's no PMI for OP, they have VA loan available. In fact that's the whole point of a VA loan, is that it covers PMI for free. Mar 1 at 17:20
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would it be dumb to cash out my personal retirement accounts to put down on the home?

Yes, it's probably unwise. There are a lot of side effects to that, starting with the tax penalty. Assuming your retirement is tied up in traditional vehicles (401k, IRA), you can only withdraw $10K without penalty, beyond that early distributions require an additional 10% penalty tax on top of the income tax you'd pay on the distribution.

You'd also be losing tax-deferred growth and various ERISA protections.

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  • Yep, typed that up in a hurry. I should have said “unwise.” Thanks for pointing that out
    – Jake
    Feb 29 at 17:49
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    I made edits to not sound like such an ass, thanks
    – Jake
    Feb 29 at 20:26
  • @Jake appreciate it!
    – littleadv
    Feb 29 at 20:27
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Probably use the VA Loan

The primary reason to make any down payment at all on a home is to avoid PMI.

With a VA loan, you don't pay PMI regardless of the down payment amount. So it almost certainly doesn't make sense to cash out your retirement account to make a down payment if you can use a VA loan.

Also: High value homes can't use traditional mortgages, they use jumbo mortgages, which have slightly higher rates.

But VA loans side-step that. They are covered the same, regardless of the home value.

So it's possible that the cost of living in your new location might push you towards a VA loan just to avoid the jumbo loan issue.

A good realtor (esp. one who's worked with vets) will know these things and be able to advise you about the best mortgage option.

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    I would suggest an NMLS licensed mortgage broker to advise on mortgages, not a realtor (although realtors usually have a mortgage broker they work with).
    – littleadv
    Mar 1 at 21:46
  • VA loans don't have PMI, but they do have an upfront fee. PMI can be removed in various ways; once the upfront fee is paid the money is gone forever. Not saying that PMI is better than VA, just that you have to run the numbers before you decide one or the other is clearly better.
    – stannius
    Mar 4 at 21:06

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