Is It Smart For Caterpillar Employees to Withdraw From Their 401(k)'s to Buy a Home?

For Caterpillar employees nearing Retirement, experts like Michael Corgiat of The Retirement Group can help ensure major financial decisions like using a 401(k) to buy a home are made with a long-term strategy in mind - meeting immediate needs while preserving your wealth over time.

'Brent Wolf of The Retirement Group cautions Caterpillar retirees against using large Retirement accounts for home purchases and suggests renting or downsizing may provide the flexibility to protect future goals.'

In this article:

• 1. Financial impact of 401(k) funds used to buy a home in retirement.

• 2. Pros & cons of buying versus renting a home in retirement.

• 3. Estate planning and liquidity for Caterpillar retirees.

And at the threshold of Caterpillar retirement, the question of how to spend your money to live comfortably becomes more important than ever. One gentleman nearing retirement may move to Georgia. A man with U.S. 350,000 in savings, U.S. 500,000 in a 401(k), and monthly Social Security payments of U.S. 3,000 weighs his options.

He plans to use U.S. 350,000 from savings and U.S. 100,000 from his 401(k) to buy a U.S. 450,000 condominium in Georgia. He also considers pulling another U.S. 20,000 from his 401(k) as an emergency fund. This will keep U.S. 380,000 invested and would yield about U.S. 15,000 a year at a 4% annual withdrawal rate. With Social Security income, this is expected to cover his living expenses, vacations, and major purchases.

The question is whether investing and renting is more profitable than purchasing a property in whole.

Some say the appeal of homeownership stems from avoiding rising rents. But the choice is neither black nor white. If you take a quick look, you pay about U.S. 1,000 a month for taxes and fees to buy the condominium, while renting one would run you about U.S. 2,500.

For estate planning purposes, homeownership is a consideration for Caterpillar retirees. A report from the National Association of Home Builders for June 2021 said homeownership can boost a person's net worth and homes account for nearly half of the assets of U.S. households over 65. So buying a property might be a place to live as well as a tool for legacy planning and wealth transfer to the next generation.

Caterpillar employees nearing retirement can get insight from certified financial planners (CFPs). As a Boston CFP, Sandra Gilpatrick estimates that the proposed investment, the condo, would return about 4% on savings. An annual return of 7% would be more likely if the gentleman kept his asset allocation at 60% fixed income and 40% equities. Gilpatrick also discusses unanticipated costs of homeownership. Principal worries are escalating housing association fees, rising property taxes, special assessments, and real estate transaction costs. And using that 401(k) could put the person in a higher tax bracket—potentially triggering the Medicare surcharge, the IRMAA.

Another Kansas CFP, Jamie Bosse, agrees and stresses the tax implications. But that U.S. 120,000 withdrawn from a 401(k) is not the whole amount after tax deductions. At the combined 27% federal and state tax rate, the net is about U.S. 87,600.

Some advisors suggest renting at first when moving to avoid a major financial commitment. By purchasing the condo, the gentleman has also put more than half of his assets at risk, making the gentleman less liquidity-based.

A macroeconomic lens adds additional caution against rash real estate investments. Notably, pre-pandemic home prices have jumped almost 50 percent despite rising mortgage rates in the United States. The housing affordability today is comparable to that of 2007, before the worst real estate downturn since the Great Depression, the Federal Reserve Bank of Atlanta said. There is danger nationwide and locally in Atlanta.

Otherwise, the funds would have stable returns when invested properly. Now, ten-year U.S. Treasury bonds yield 4.3%. Short-term municipal bonds like the iShares Short-Term National Muni Bond pay a 3% yield that is tax-free and low in risk. Such long-term municipal bonds have an effective tax-free yield of 3.4%, while the Schwab U.S. REIT ETF pays 4%.

Financial situations of Caterpillar employees vary widely. But renting seems prudent now because it gives you liquidity and various investment options.

You could use your 401(k) to buy a home in retirement like a chess master considering an endgame move. As with either case, one must anticipate the consequences of a quick decision down the road. Just as sacrificing a powerful chess piece to temporarily take over the board might risk a checkmate in the future, spending Caterpillar retirement funds to buy a home might be comfortable now but risky in the long haul. Before making a definitive decision, consider all angles, threats, and the changing environment.

Added Fact:

A study by the American Association of Retired Persons (AARP) for 2023 concluded that aging homeowners are increasingly downsizing their homes during retirement. This unlocks the equity locked up in their larger homes and reduces ongoing housing and maintenance costs. But some Caterpillar workers approaching retirement find downsizing a smart financial move that frees cash for other retirement goals without tapping into 401(k)s. Such a trend shows how carefully you choose your housing when you reach retirement.

Added Analogy:

You could compare the decision to use your 401(k) to buy a home in retirement to being a ship captain in rough water. As a captain must plot his course to avoid hidden reefs and unpredictable storms, so must Caterpillar employees approaching retirement plan their financial course as well.

Imagine your 401(k) as a vessel for your life savings. And using it to purchase a house means launching the ship toward some pretty dangerous island. The island provides immediate comfort and shelter but financial waters are unknown and unexpected costs and uncertainties may lurk beneath the surface.

Take instead the advice of a veteran sailor who downsizes their ship to free up resources without risking the whole voyage. Downsizing keeps your financial vessel afloat as you sail into retirement. This lets you sail retirement's seas confidently without compromising long term financial security.

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Just as a captain consults his navigational charts, financial experts and the broader economic climate should be considered before making such a big decision. The financial waters ahead may be unpredictable, but with planning you can retire comfortably and safely.

Sources:

1. Cedarhurst Living . 'A Complete Guide to Financial Planning for Senior Living.'  Cedarhurst Living , September 2024,  www.cedarhurstliving.com/complete-guide-financial-planning-senior-living?utm_source=chatgpt.com . Accessed 27 Feb. 2025.

2. H&R Block . 'Taxes on 401(k) Withdrawal: 401(k) Distribution Rules.'  H&R Block , April 2024,  www.hrblock.com/tax-center/income/retirement-income/taxes-on-401k-distribution/?srsltid=AfmBOopwY0ozdLNuGStFFyHvJU_Ic2kOaM1OrSWqL-ZAAQy70-IzWk97&utm_source=chatgpt.com . Accessed 27 Feb. 2025.

3. SeniorLiving.org . 'Planning for Housing in Retirement.'  SeniorLiving.org , October 2024,  www.seniorliving.org/retirement/?utm_source=chatgpt.com . Accessed 27 Feb. 2025.

4. Annuity.com . 'The Role of Housing Decisions in Financial Security.'  Annuity.com , August 2024,  www.annuity.com/estate-planning/the-role-of-housing-decisions-in-financial-security/?utm_source=chatgpt.com . Accessed 27 Feb. 2025.

5. Thomson Reuters . '401(k) Tax FAQ: Tax Considerations for Contributions and Withdrawals.'  Thomson Reuters Tax & Accounting , June 2024,  www.tax.thomsonreuters.com/blog/401k-tax-faq-tax-considerations-for-contributions-and-withdrawals/?utm_source=chatgpt.com . Accessed 27 Feb. 2025.