October 31, 2012

Retirement & A Mortgage: What To Do?


Last week I wrote about high school reunions, even though I have never been to one. Now I'm writing about retirement and a mortgage, even though I don't have one. Either I love showing off my ignorance or I am fearless. Maybe it is a combination of both. After all, a satisfying retirement is sometimes a walk on the wild side.

Even so the subject is important. Retirement brings its own unique set of concerns and decisions. Near the top of many lists is a decision about housing. Is it best to pay off the mortgage before retirement, or is that extra money better off being invested? If I pay off the house won't I lose a major tax deduction? But, what if I have a major health expense and can't pay the mortgage..could I end up retired and homeless?

Good questions with no clear cut answers. But, they are worth asking and taking a look at some of the ramifications. As an obvious disclaimer, I am not a tax expert or a financial guru, so what I offer is opinion and some basic thoughts from my own research. Please think through your own situation carefully, consult a trusted adviser, and proceed with caution.


If you do a Google search about retirement and mortgages the majority of the sites and articles that rise to the top suggest paying off your home loan before retirement. They do admit that many people can't do that, but it should be a goal.



 The reasons most often cited to pay off your mortgage:


1. Peace of mind. Even without a monthly payment you still have real estate taxes, HOA fees, maintenance, repairs and upgrades. But, if you delay fixing a leaking toilet for two months you won't risk losing your home. That big monthly Must Pay bill is gone.

2. Home equity is available. I strongly suggest this source of cash be used only for major repairs and upgrades to your property or something like a large medical expense. Home equity is not a piggy bank so you can take a 12 day cruise to Hawaii or buy a new truck. Too many people got stuck when they spent their home equity only to find the worth of the house dropped below the size of the loan. But, with home equity lines of credit at extremely low interest rates at the moment,  smart use can save you thousands in interest over more conventional loans.

3. You have more freedom to relocate or resize. Get in trouble with your mortgage and someone else might tell you when to move. Have no mortgage and you can decide when to downsize or move closer to the kids....or stay put.

4. You have a large source of retirement money available. If you move to a smaller home or condo or even rent an apartment, any profits after the house sale and purchase are yours. Though expensive and sometimes risky, reverse mortgages can provide a steady income from the equity you have in your residence too.

On the other side of the argument, these points are made:


1. Don't pull  money from other investments to pay off a cheap mortgage. Even losing the tax deduction of a mortgage may not be enough to make up for better performing investments. If you take a chunk of your retirement funds to pay off a mortgage the money left will not produce as much income or growth.


2. Tying up too much of your net worth in an illiquid asset. You own a $300,000 home free and clear. But, depending on the market conditions it might you 6-9 months or more to be able to sell the house and see any net profits. If you need quick cash a house is not the place to find it (except through a home equity loan which comes with its own risks).


3. If you have a low mortgage rate can you earn more in investments/ Then, use your cash to grow your nest egg. Depending on your investment strategy and resources, it is not too hard to get a rather safe return of 5% on your money. With a mortgage of under 4% are you willing to throw away that 1% of growth year and year?



Another consideration lies in what your plans are when you decide to move. For example, Betty and I plan on moving from our current home in four or five years. Housing prices have been rising in Phoenix for 15 months in a row so the future is looking brighter. 

We know that at some point we want to move into a continuing care community (CCC). The "buy-in" will be somewhere around $250,000. If we own a home or condo and need to move rather quickly into the CCC because of health issues, our buy-in money will be unavailable until we sell. That maybe too late.

So, we are giving serious thought to renting an apartment/town home when we move from our present home. The bulk of our profits from our current home will be invested for safe growth. While the yearly rent is lost in terms of equity or tax benefits, we will have liquidity when we are ready to move to the continuing care community. 


Again, I will remind you I am not a financial planner or expert. I have bumbled along pretty well for the past several decades, but there is always more to learn and consider. If you are a financial planner, investment guide, or CPA I welcome your input (as long as you aren't trying to sell something!). I hope readers like Sydney Lagier see this post and respond. I consider her a qualified expert and would welcome her thoughts.

All that said, you have thoughts, concerns, questions, and insight that will help of of us, expert or no. Please add your comments to this important subject. Since a home is generally the biggest expense for most of us in our lifetime, knowing what to do with that resource is vital.

33 comments:

  1. This is really timely for me. Since I plan to retire next June, I've been trying to figure out whether to pay mine off or not. We have a really low payment each month, easily handled by retirement funds. Also, paying it off would take about 20% of our total investments. In addition, we plan to move sometime in the next 5-10 years from this house to a smaller, more convenient one closer to town. Right now we're going to stay with the mortgage.
    Your posts are timely and much appreciated by this soon-to-be retired teacher.
    Jeff in OK

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    1. Glad this helped, Jeff.

      Paying off a mortgage before retirement is not an easy decision for a variety of reasons; you have cited three.

      Based on what Zillow showed me yesterday Betty and I have several more years before our move to an apartment makes sense.

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  2. My tax guy says it's ok to have a mortgage payment in retirement, it's not ok to have a car payment. In the state I live in there is a discount on property taxes based on your mortgage vs. income ratio. That along with the mortgage interest deduction on Federal taxes keeps me from considering renting. Really enjoy your column by the way, as I'm in my first year of retirement.

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    1. Interesting that your tax person says "No" to a car payment. I'd never heard that before. I guess that would be because the interest isn't deductible.

      We will get a break on property taxes once I turn 65, though I don't think it is very substantial.

      Welcome to the wonderful world of retirement!

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  3. I think this is as much an emotional decision as it is financial. I for one have always paid off our mortgages as aggressively as I could. We currently have none on our house in TN, and I paid off our daughter's mortgage as well in NY. To me not having the stress of that payment is worth the possibility of losing out on some investment income. Returns on cash held are virtually non-existent right now, so if you have the spare cash I would direct it towards paying down the mortgage, since the rate of return has to be better. The peace of mind you get, as you pointed out, is definitely worth it.

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    1. I opted for piece of mind when we bought our present house for cash right after my retirement. I never wanted to worry about missing payments or having something take the house away from me. True, taxes are still due, but that amount I could come up with in a hurry.

      No mortgage for the last 11 years has been a blessing.

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  4. Great points Bob. It's a tough call, for sure. When I retired I fully intended on paying off my remaining mortgage balance once our 4.25% adjustable rate mortgage went up. After I retired, it kept going DOWN--it's 2.875% now. I can't bring myself to take money out of something (either safe liquid assets or longer-term investments) to pay it down when I'm only getting a 2.875% savings. But then there's that peace of mind argument, which is a good one. I keep punting to the next year's adjustment letter to make this decision. I suppose once it starts going up, it will be an easier decision.

    As to your plan to sell and rent, I think it's a great one. Both for the liquidity reasons you mention as well as financially. When you think of "losing money" on rent, you have to remember that you were already "losing" some of that money on property taxes (which don't add to the value of the house), and even some repairs and maintenance that you won't be responsible for as a renter. If I live in my house until I die, it kills me that there will have been nearly 15 years of living expenses trapped inside that I could have enjoyed while I was still living. What's the point of that?

    I think you hit the main point, though, that there really is no one right answer. Everyone's situation is different and so is their own answer.

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    1. Hi, Sydney. I was hoping you'd see this post. Even without your name in it, the subject matter is your sweet spot.

      Absolutely, the "lost" money on rent isn't really all gone. The costs of maintaining and home are not unsubstantial. Add in property taxes and HOA fees and we would be out less than half the rent money for a typical year.

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  5. I have a first mortgage, a second mortgage & a car payment as a new retiree. I do not have any credit card debt, thank heavens!

    I am working to pay off the car & the 2nd, but will have to pay down on the first. I actually took Social Security which pays both my mortgages. We are adding to the 2nd & when that is paid off, everything will go towards paying down the first.

    To be honest, that was not exactly how I envisioned retirement, but we are doing well on the income we have.

    If someone is is planning a retirement, I wouldn't recommend the expenses I have, but it is definitely possible.

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    1. One of the many nice things about retirement is the ability to adjust to make things work for you. It may not be the optimal situation, but at least you have some control.

      You have a bit of a hill to climb,Pam, but it sounds as though you have a plan and a way to get there.

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  6. I have a different approach to this problem. I will not have a paid for house when I retire, but I never planned on staying in my current home (too big). The house I currently live in will be sold prior to retirement. However, the plan is to purchase an inexpensive small condo/townhome for the tax deduction (however small). The payment should be comparable to the cost of renting an apartment, but minus the headaches of maintaining a single family home.

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    1. For most of us downsizing is an important step to take in retirement. Readers like Chuck actually got a bigger place when he relocated to Tennessee, probably due to the different in housing prices between where he lived before and his new town.

      But, you, Gail, are on the right path to simply things a bit. When we downsized by 50% I thought it was a mistake (too extreme). But, now I am ready to cut again (more like 30% this time!) and leave all the upkeep and maintenance to others.

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    2. Thanks Bob. Of course all of my plans sound good assuming I can sell my home for a profit, and find an inexpensive condo. There are lots of available properties here in Raleigh now, but with my luck I won't find anything when it's time to buy another home.

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    3. I was thinking of buying a condo too, but I think I'll downsize to a smaller house or cottage first to avoid condo fees I won't have control over.

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  7. Bob, you present a very balanced approach. When I came into some money after my mom died, I paid off my mortgage. I don't know if that was a sound financial decision, but it did bring me great peace of mind. Because I pay off my credit card every month, once I paid off the mortgage, I began to live debt free. I don't have a great mind for finance, but I like the idea that I don't owe anyone any money. What I have is mine to do with as I see fit. I know others are better equipped than I am to figure out how to maximize their financial benefits, but I would be very reluctant to go into debt again. That's just me.

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    1. Being debt free is a great way to live. Likeyou, we have no mortgage, no car loans, and no credit card debt. I'm just not as comfortable when I owe others money.

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  8. As Galen said, you present a balanced view of a very complicated, and often emotional, issue. I have a mortgage that I can' refinance to a lower rate right now because of the dreaded income-to-debt ratio (low income and low debt - I know, doesn't make sense to me either). But I have a decent interest rate, and my payments are lower than 90% of the apartment rents in my area (for the units I would want to live in). I don't have any other debt, so for me the idea of continuing the mortgage is acceptable at this point. I've refinanced twice, and both times the extra cash paid off debt, otherwise I'd be 10 years away from paying off the original note.

    My mother, who is 83 and has been retired for 20 years, paid off her car and mortgage about 5 years ago with an inheritance, and she is happy as a clam. With her teacher retirement and Social Security, and no debt, she says she has more money than she knows what to do with.

    So it's a personal decision, and I appreciate your listing the pro's and con's of each side.

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    1. It really is both a personal decision and one affected by financial status. As my research into the subject made clear there is no one answer for everyone.

      Thanks, Cari.

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  9. We were fortunate to have thrifty genes and a good paying vocation, so our only debt was a home mortgage that we paid off when we were in our early 40s. I realize everyone doesn't have that option, but the peace of mind factor weighs heavily in our decision to not take out a loan (even though the long term rates are highly attractive; and I wouldn't second guess anyone with a higher risk tolerance who decided to take out a long term fixed loan even just as a financial planning tool).

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    1. When rates are as low as they are, now is not a bad time to have long term debt if you are comfortable with your ability to pay it, and you are locked into that low rate. Previous recessions ended with ARMs taking off like bottle rockets putting many in trouble.

      We have a home equity line of credit that is at 3.25%. I will use it for any major repair or enhancement of the house that is likely to last past the time we want to sell. I couldn't even begin to approach such an attractive rate for a typical home improvement loan.

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  10. Count me in with the folks who have no debt. You gave a very balanced view for people who are undecided about what to do and it will help somebody make an informed decision. Paid off the house, car, and carry no balances. I don't have to downsize as my house is small, and I can afford pretty much whatever I want. There's my secret, my wants are small. I am not well enough at the moment to travel, but hope that will change next year. For me, debt-free is the answer.

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  11. What a great discussion! If you are at retirement with a mortgage, you are not alone. Nearly 1/3 of people aged 65-75 still carry a mortgage!

    When talking to my clients, I am often asked: 1) Should I pay down my mortgage with my nest egg? 2) Should I continue maxing out retirement contributions, or should I try and make extra mortgage payments?

    Frequently, if a person has a reasonable mortgage rate, then the math favors growing retirement savings over paying off the mortgage. Of course, there are a number of non-financial reasons (peace of mind, lower expenses in retirement, etc.) that might favor getting rid of that mortgage.

    While there is no clear-cut answer to the question, here are a few common mistakes that you can avoid.

    Think twice about paying off that mortgage if:

    1) You would significantly deplete your nest egg - As Bob points out, once money goes into the house, it can be very hard to get it back out. In retirement, most of us will face significant unexpected expenses - repairing a roof, uncovered medical care, etc. As we know, medical expenses alone can be huge. On average, Medicare beneficiaries pay between $2,900 and $4,600 per year in out of pocket costs (depending on their age and supplemental insurance coverage). Fidelity estimates that a couple today would need $160k in savings just to cover their medical expenses in retirement. While reverse mortgages and lines of credit can provide access to some of your home equity, they can be expensive. Moreover, dealing with a bank when you would rather be helping a loved one through a medical setback can be challenging to say the least!

    Unfortunately, a growing number of people reach retirement without significant liquid savings and are often forced to pay for medical expenses with credit cards. Indeed, AARP notes that people 65+ are incurring credit card debt faster than any other group! Researchers at Demos have found that medical expenses are one of the biggest contributors to this debt!

    2) You would use your 401(k) or other retirement accounts - As Bob points out, a prudent investment portfolio may likely earn more than you pay in interest to the bank. More importantly, taxes can be bear. Be careful to make sure that a large one-time withdrawal would not push you into a significantly higher tax bracket. Consider splitting withdrawals over a couple of years so that you get to the top of the bracket, without graduating to the next level.

    3) You fail to maximize your 401(k) match - This is for those of us that are still working and can save in a 401(k) where our employer matches the money we put in. Depending on your employer, a company match can double the money you put into your account - overnight, guaranteed! If you have the option to get a company match, make sure that you take full advantage of that match before you start making any extra mortgage payments. In fact, Clemens Sialm, a researcher at the University of Michigan estimates that 60% of working people would be better off saving for retirement than making extra mortgage payments.

    Hope this helps!

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    1. Thanks for your professional insight, David. You have added important details to some of the points I made.

      Readers: David is involved in an interesting new project to help retirees plan for their future. If you click on his name above you'll go to his web site. I am not endorsing nor compensated for what David is doing, but it looks interesting and may be worth your exploring

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  12. I heard Dave Ramsey make a comment about this once that has stayed with me ever since - "Would you take money out of your home to invest, whether that be a money market fund, bonds or a CD? For most people the answer would be "no." Why? Because that would be considered risky. So then,why would you leave money in these accounts rather than pay off your home?"

    Paying off our home early was a definite goal prior to retirement. When the 2008/2009 financial meltdown struck, I can't tell how relieved we were that the money used to pay off our home some years early wasn't sitting in the stock market being slashed to bits. If we feel the need to get at our homeowner equity at some point, there are many financial vehicles out there to allow us to do so.

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  13. I am 52, and do not plan to retire until I am 60 - but today I paid off my primary residence mortgage here in Scottsdale. I was making .80% in interest in my ING account while paying 3.5% in interest on the mortgage. I still have an emergency fund. Man, does it feel good.

    Two ways to have a great retirement financially IMO - have a lot of money, or have no debt. I am working hard towards the former, but am assuring the latter.

    Truly enjoy your blog Bob. And I am past RV'er (now cabin owner in Alpine) - but will be an RV'er again - in our retirement.

    Steve

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    1. Yes, it foes feel good to own your home free and clear. I did the same thing at 52 when we bought our current house for cash. It is nice to know I can never be upside down or late on a payment ever again!

      Thanks for the compliment, Steve. Alpine is pretty and a nice getaway. We had a cabin in Payson for several years and enjoyed it tremendously.

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  14. Most people think that if they get to a point where they are ineligible for retirement benefits from a company, everything will be a lot easier. However, the difficulty in making that decision is still there, sometimes even worse. At this point in their lives, they should really take the time to think things through. Take time to decide and analyze which is better and take the time to talk to friends or browse the internet for ideas and tips.

    Nannie Toller

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  15. I won't make paying off the mortgage before retirement a priority.

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    1. It really is an individual decision based on lots of factors. For me, buying my current house for cash so I had no mortgage was the best thing I could do as I entered retirement.

      But, if paying it off requires stripping away a good chunk of an IRA or pension, then keeping a mortgage may be best. The only way to really know is to run the numbers.

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  16. My friend used to tell me that her father was confident of paying for their new house using his retirement fee. In the end, they realized that they should've saved the money for other priorities. The house was foreclosed and they ended up renting an apartment. Well, that could be a lesson to remember – pay your mortgage as soon as possible, and save your retirement fees for something more essential.

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    1. I think the majority of financial experts agree with you, Genny. Do not use the money you need for retirement to pay off a mortgage. It would be better to sell the home and downsize if the monthly payments are of concern.

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  17. A great, thought-provoking post, Bob. For a good dozen years, I had a paid-off house. It was a great feeling. Then we decided to buy a winter home. We now have a mortgage on our primary residence, and I diverted some of our retirement funds to invest in Phoenix real estate in 2009, at the bottom of the market.
    Time will tell whether or not this was a wise decision, but in the end, we all make choices to purchase, invest or save for retirement. As long as I don't mind the mortgage payment, at least I have the tax deduction in my favor. Still, I remember fondly, those days without a mortgage to worry about.

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    1. Just noticed the date on your post...it is September already!

      The house we have been living in for the past 11 years was bought for cash in 2002. It tripled in value, dropped back to almost what we paid for it, and is now up about 75% from what we bought it for. Real estate is not for the faint of heart.

      Our "second home" is the RV, but since we bought that for cash, also, I get no tax deduction there either.

      The Phoenix market is coming back very nicely. You should be fine.

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