Money Talk: Personal finance Q&A: Rethink plan to add debt near retirement

Dear Liz: I would like to add on and remodel so my home will be nice for me when I retire in a few years (probably around age 65).

I have a recently refinanced 30-year mortgage at 4.1%, but I’ve been making additional principal payments on a 20-year schedule. I think I can do what I want for around $200,000. (But of course it may be more.)

Post-construction, I’m estimating that the house would have a market value of $800,000 to $900,000, but the real motivation is to have new heating and air conditioning, new windows and floors, and electrical wiring.

I think I deserve it, despite the major disruption that remodeling provides. My question is: Do I do this with cash, or should I finance it?

If things work out as planned, I’ll have a pension of around $7,000 a month that should take care of my living expenses (including the ability to pay a bit of a higher mortgage), and I have about $350,000 in post-tax savings.

I additionally have about $500,000 in pretax retirement accounts that I plan to draw off of for inflation as the years go by.

I have never been comfortable with a lot of risk — I’ve never even had a car payment — but I probably could have amassed more if I hadn’t been so financially conservative.

Answer: You’re contemplating adding a considerable amount of debt at a time in life when most people are eager to pay theirs off.

They want to reduce their living expenses and the amount they have to pull from retirement funds. Being debt-free is one way to reduce the chances of running short of money after you quit working.

That’s not to say debt in retirement is always bad — especially for people like you, who have enough pension income to cover living expenses plus a good amount of other savings.

Your investments, if properly deployed, are likely to earn a better return than the after-tax cost of your debt. That said, your conservative nature could make it hard for you to sleep at night if you face significant house payments after you stop working.

You should discuss your options with a fee-only financial planner who can evaluate your entire financial situation.

You can discuss tapping your savings for the remodel, taking on more debt, changing the scope of what you want or moving. If what you’re after is a more modern home, it may make more sense to move than to endure the expense and disruption of a major remodel.

If you do remodel, consider adding features that will allow you to age in place more safely, such as installing grab bars, widening hallways and doorways, improving lighting and eliminating steps where possible.

The National Assn. of Home Builders has an Aging-in-Place Remodeling Checklist on its site, at www.nahb.org.

Social Security benefits for spouses

Dear Liz: My husband and I will be retiring at the end of 2016. He will be 70 and will start taking his Social Security; I will be 65 soon after.

Thanks to your advice, I plan to sign up to get 50% of his Social Security benefit when I’m 66 (my full retirement age) and switch to my own benefit later.

But will my own Social Security be less because I won’t be earning any money between age 66 and 70? If so, would I be just as well off taking my own benefit at 66 or should I still wait until I’m 70? Money needs will not be an issue.

Answer: Your benefit will grow 8% every year you put off filing for your own retirement checks between age 66 and age 70. That’s a powerful incentive to delay, especially when you can get spousal benefits in the meantime.

If you did work after age 66, your benefit might increase a bit more depending on how much you earned.

Your Social Security benefit is based on your 35 highest-earning years, so a higher-earning year late in life could replace a lower-earning year earlier in life.

Your continued employment would have the biggest effect if those lower-earning years showed no or very little income.

Questions may be sent to Liz Weston, 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com. Distributed by No More Red Inc.