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I am about 45 years old and recently began to receive a US government pension, which I do not require for current expenses. The monthly payment is about a quarter of my living expenses, but due to my other employment the pension is "excess" and I want to save/invest it.

Half the excess will go to covering the expense of owning a house. The house is about 95% mortgaged at 2% annual rate until 2045, although it's rented out, the monthly cash flow considering all expenses is negative. Because of the 2% rate I will avoid making more than minimum payments on the mortgage, and not likely that selling the house is going to be sensible.

So, on the one hand I have a very stable known pension income, and on the other hand a large and growing sum completely tied in one property. I have a feeling that the location (Honolulu) may be more volatile or disconnected from US real estate markets but I'm not sure.

With the other half of my pension, at my age, what's a good strategy to hedge the real estate risk and ensure I have a stable retirement income in about 20-25 years.

  • I'm curious, what's the name of the profession for people who analyze and advise on these kind of things? I did visit a "financial planner" at one point, but all they knew how to do was pitch commissioned "investments". – J. Win. Jul 14 '18 at 10:54
  • Do you have any other retirement accounts connected with your new job such as a 401K with company match? is the government pension indexed to inflation? do you currently live on the same island as the rental house? and do you expect to live on that island for the foreseeable future? – mhoran_psprep Jul 14 '18 at 10:54
  • Some financial advisors make money off their commissions, others charge a flat fee to make a plan. You want one that takes a flat rate or hourly rate to make plan. You then execute that plan. They don't care which fund you pick. Then in a few years if your situation changes: married, divorced, kids, then you get an updated plan. – mhoran_psprep Jul 14 '18 at 10:57
  • I have no other substantial savings, the government pension gets an annual "COLA" but historically a bit less than inflation. I will work at remote site job contracts a few years until my savings gets where I need it, so no stable home and no 401k. – J. Win. Jul 14 '18 at 10:57
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It sounds like, essentially, a 2% fixed-rate mortgage for nearly 30 years. That's extraordinary.

The payments on a 2% fixed-rate 30-year mortgage are more principal than interest from the start. Even if you are cash-flow negative, you're still building equity in the house, so hopefully that's still a gain overall, even if you don't see the gain in your bank account every month.

If you're 95% mortgaged, you would have private mortgage insurance, I'd suspect. If this is the case, once you get the loan balance down to 80%, request that this be removed; it will save you money each month.

If you don't have any other debts, have an emergency fund, and are otherwise investing in other vehicles, then paying down your mortgage is the next thing to do, regardless of how good the rate is. The payment doesn't go away until you pay off the loan in full. Then, things get a lot more fun.

  • Pension at 45 suggests to me that this might be a VA loan, which would also explain the low interest rate. VA loans don't have PMI. – Brythan Jul 15 '18 at 2:15
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    As I read “paying down your mortgage is the next thing to do, regardless of how good the rate is. The payment doesn't go away until you pay off the loan in full” I felt the tears start to well up. Even ten year treasuries are above this. After taxes, this is less than inflation. I’d keep that loan until the very last month. – JoeTaxpayer Jul 15 '18 at 2:23
  • @Brythan Good point; I didn't know that. – mbhunter Jul 15 '18 at 3:20
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    @JoeTaxpayer I suppose that it's not a particularly onerous loan to carry, but I had a car loan at the same rate. I still paid that thing off about two years ahead of schedule. It freed up the payment for other things that much faster. It's more of a cash flow thing than an income-production thing. – mbhunter Jul 15 '18 at 3:22
  • The history of the rate is a little interesting. It was a hardship refinancing around 2010, WellsFargo came back a few years later saying they didnt mean to make it 2% for 40 years, that was just an introductory period. Well, the papers we signed were clear and 2% it is. I'm not interested in releasing Wells Fargo early from their mistake, nor in freeing up the payment for other things. And yes, tax deductible 2% interest payments are less than inflation. My question is, how could I hedge against the lack of diversity. – J. Win. Jul 15 '18 at 7:55
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all real estate is local, until it's not (2007 crash). Honolulu is particularly volatile. It will dump hard when Asia has a recession as much money comes into the area from Asia. Consider what would happen if China declares "no more foreign real estate investments." Poof, there goes a large buying segment.

One has to ask. If you have little equity and negative cash flow, why not get out while you can even at a loss? You're betting on better cash flow in the future but have negative cash flow now. That's a risk on top of a likely downturn in real estate. Consider what happens if the market drops only 10%. You're then underwater and it could take years to break even. A consideration is to get out at the top and remove risk from the equation. Invest your pension in something with a positive ROI.

  • You are right about volatility, but I think the 2% rate makes it worthwhile. – J. Win. Jul 15 '18 at 7:41
  • My cash flow is tied to rental rates, which are more stable than house prices; this is related to being on an island with limited land and growing population. And, since the negative cash flow is more than offset by growing equity, I've already decided to keep the property. My question is what investments might balance the risk of being in one single asset. – J. Win. Jul 15 '18 at 8:01

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