By Nancy Anderson
A sound plan during an employee’s working life helps one to avoid
worries linked to financial distress in retirement. Photo/FILE
NATION MEDIA GROUP
mortgage document
Many people, including myself,
dream of having a “mortgage burning” party the week they retire. The
very thought of making my last mortgage payment makes me jump for joy.
No mortgage payment means peace of mind, freedom and a strong sense of security. But is it a false sense of security?
Given today’s low interest rate
environment, it might make sense to hold onto a mortgage, since the cost
of money is relatively inexpensive. With the uncertainty around health
care costs, maybe it’s not smart to tie up assets in an illiquid
investment. The only way to get money out of a house is to sell it or
borrow against it. It may actually be a better option today to keep
paying a monthly mortgage payment in retirement rather than using assets
to pay it off.
Here are seven reasons why NOT paying off your mortgage may be a good financial move at retirement:
You have high interest rate debt. With 30-year fixed-rate
mortgages below 4.5%, it doesn’t make sense to make extra payments on a
low interest rate mortgage when you have high interest rate credit cards
or student loans.More on Forbes: 5 Financial Decisions Made In Your 50s That May Haunt You In Your 80s
You aren’t maxing out your retirement savings. One of my clients was paying an extra $170 per month toward her mortgage by simply rounding up her payment to an even $2,000 per month. While this financial move makes sense when taken in a vacuum, it didn’t make sense for her overall financial prospective.
In her case, those dollars could
make a bigger difference elsewhere, since she wasn’t capturing her
entire company matching contribution. I advised her to decrease her
mortgage payment (to the regular payment) and increase her 401(k) to
capture the full matching contribution. Her interest rate on her
mortgage was only 4.75%, while the company match “earned” her 50% since
they matched half of every dollar she invested up to 6% of her earnings.
Don’t be fooled by the promise of
a write-off though. People forget that everyone gets one—it’s called
the standard deduction. If you are married filing jointly, your standard
deduction is $12,400 for 2014 ($6,200 for single taxpayers—other click here).
For your mortgage to bring you a tax benefit, you have to have
deductions over and above this amount. If the interest on your mortgage
is less than the standard deduction, you aren’t getting an additional
tax benefit. If your mortgage interest puts you over and above that
amount, great! (note - this is not intended to be tax advice. Please consult your tax specialist for guidance specific to your situation. )
More on Forbes: How To Retire At 55Your assets are in retirement plans. If you are planning on withdrawing from your retirement plans to pay off the mortgage, you may get stung by the I.R.S. when tax time rolls around. Unless your funds are in a Roth IRA that you’ve held more than 5 years and you are over 59 ½, you may end up paying income taxes on your lump sum withdrawal from your retirement plan. So withdrawing from your 401(k) or IRA may end up putting you in a higher tax bracket and could negate the tax savings you made on the mortgage interest.
You might need funds to tap into. Fidelity estimates
that retirees will need $220,000 for medical expenses in retirement.
Retirees may need to tap their assets or increase their income to pay
for medical expenses or other unforeseen expenses in retirement. Once
funds are used to pay off the mortgage, it’s possible to tap into them
but can be quite a challenge. You’d need to borrow against your home
using a home equity line of credit, reverse mortgage or sale of the
property.
There is a chance you may move. If
you may be selling your house, it might be a smart move to hold onto
your cash instead of paying off the mortgage. First of all, on the odd
chance the real estate market goes south, you have more options (such as
a short sale) when you have a mortgage versus owning the property free
and clear
.
You are earning a decent rate on your funds. As
of this writing, the Dow Jones Industrial Average was up over 23% year
over year. Investors looking for income can find dividend paying stock
or funds that are yielding over 4%. When you can do better than your
mortgage rate with your investments, it might not make sense to use
those dollars to pay off low interest rate debt.
For many people, paying off their mortgage has less to do with math
and more to do with peace of mind. There may be other ways to get that
peace of mind without tying up your assets in a house. Consider taking
three to five years of mortgage payments and putting them in a separate
account. Then directly debit your house payment from it. You’ll have the
security of knowing your payment is set for at least a few years.More on Forbes: 365 Ways To Get Rich
Another idea is to earmark a
particular income stream to make the payment. Social Security income
comes to mind first. If you are one of the lucky few who have a pension,
set that aside for your mortgage. Since you had funds earmarked to pay
off the mortgage, use them to pay it instead. Use the dividends from an
investment account or set up a systematic withdrawal for your mortgage
payment. Even though you still have a house payment, having a plan to
pay it can give you peace of mind you are looking for.
The good news is this is one
decision that might not actually hurt you to procrastinate. If you hold
onto your lump sum, you can always pay your mortgage off later but once
you do, your options are limited.
More on Forbes:
Nancy L. Anderson, CFP ™ is a fee-only financial planner with LearnVest Planning Services and a blogger for Deer Valley Ski Resort. Company website is LearnVest.com (code Retire50). Follow Nancy on Facebook - Twitter.
The
opinions expressed are those of the author and may not be the views of
LearnVest Planning Services LLC (“LVPS”), a registered investment
adviser. The advice provided is not personalized investment advice, may
not be suitable for your individual situation, are not guarantees of
future performance and may differ materially from actual events that
occur. The author and LVPS are not endorsing, sponsoring or responsible
for errors or inaccuracies by the unaffiliated third party sources and
links identified herein on which the author reasonably relies.
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