Dear MarketWatch,
I am 40 years old, married, with two school-age kids. We have $500,000 in a 6-month CD earning 5%, which is approximately $2,000 per month. I am considering moving the $500,000 into a brokerage account and living off the monthly interest earnings for the next five years.
Our debts are:
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Mortgage: $250,000 (a $2,300 payment per month).
Acreage lot: $45,000 ($450 per month).
No car or credit-card debt.
Our assets include:
An emergency fund: $95,000.
Various retirement accounts: $250,000.
Our other monthly expenses: $3,000.
I would like to leave my corporate job. Our income will be $5,500 per month. Should I pay off the mortgage or go with the plan to make money through investments (knowing it will fluctuate depending on the market)?
Want a Break
Related: My adviser of 10 years left and his replacement is young. My retirement nest egg might be seven or eight figures. Should I find someone else?
Dear Want,
Before making any decision, I would take a lot more time to think this plan through. If you left your job and your family income was $5,500 a month as you said, your expenses would exceed the amount of money coming in, when you add in the payments for your mortgage and acreage. You could offset it with interest or investment returns, yes, but you may feel like you’re holding your breath every month to do so. For example, taking money out when the market is downward-trending could be quite stressful, and you may not want that kind of stress in the long-run.
People live off of interest and investment returns, for sure, but every situation is unique. They may have even more money in those accounts, which would generate more income, or they might not have as many expenses, including the cost of raising kids, which can be quite expensive.
I’m not entirely sure how you would pay off the mortgage unless you were to drain your retirement accounts. Doing so could be devastating to your future financial comfort, and taking that kind of distribution is typically a last resort, especially as this is not an emergency. Emergency accounts are also important, and if you were to drop from two incomes to one, it should be left untouched. Advisers typically suggest three to six months’ worth of living expenses, where a dual-income family can err on the side of less, and a family with one source of income would strive for more.
You also have to keep in mind that you have about 25 years until a traditional retirement age, and if you were to leave the workforce, you would be cutting yourself off from various benefits, in particular those retirement accounts as well as potentially lowering your Social Security income later in life. Social Security uses a formula that includes your top earning years, and if you were to stop working, you could end up with lower earning years to feed the formula. (That said, you could still technically contribute to a spousal IRA if you have extra cash to do so.)
Still, many families rely on only one income source while raising a family, so if you were to do that, be sure to set up a few more guardrails. For instance, review all of your spending and make sure every dollar is really going where you and your family want it to go. Cut out subscriptions or excess shopping for items you don’t actually care about, and become more intentional with your money. Even if your money is generating interest and returns, you want to keep as much of it in that account as possible so that it can reap the benefits of compound interest. That will help you continue to build up your nest egg until you return to work.
You may want to ask yourself why you’re looking at this as an all-or-nothing approach. Instead of leaving your corporate job and relying on this portfolio, you could consider another form of work, even if it brings in minimal money. It could be part-time work or consulting work. I’ve seen plenty of parents also grow a social-media following with a passion project, if you were interested in something like that. This could allow you to stay away from your investments entirely and even save more for your future goals, including retirement or educational expenses. If you found a part-time job with benefits, such as a retirement account or healthcare, that’s even better.
And while you are taking this time away from the workplace, keep up with the trends in your field so that your re-entry may be smoother. Keep your resume handy, retain any certifications you need for your line of work, brush up on skills and readings that pertain to your industry and continue to network, if even only occasionally. Rejoining the workforce can be hard for anyone, but if you stay connected, you might have an easier time when you’re ready.
