To Pay or Not to Pay – that is a dilemma facing many Baby Boomers today. As retirement is approaching, do you pay off the mortgage or not?
You are 3, 5, 10 years away from retirement. And you have 5, 10, 15 years left on your mortgage.
Do you pay the mortgage off early? If so, which bucket of money do you use?
In interest of full disclosure, this financial advisor prefers retirees to be debt free at retirement. Less cash flow is required for monthly expenses which is less strain on investments. In a market downturn, retirees sleep better in a debt free home.
However, being mortgage free may not be the right fit for every retiree. You may be able to tax deduct your mortgage interest. With the new tax law, fewer people filed itemized deductions with their tax return because of the higher standard deduction. In 2017, 32 million taxpayers itemized on their tax return, compared to 13.8 households under the new tax law.
How do you pay off the mortgage early?
It is important that you choose wisely on which monies you use to pay off the mortgage early. Not all money is created the same – some have different tax impacts and investment returns.
Increase your mortgage payment
Paying an additional $200-$500 in your mortgage payment will pay down the mortgage faster. Or you can apply bonuses, to the principal reducing your debt. These options require lead time.
Cash out investments
Using investments to pay off your mortgage balance may make sense if you have a small nut to tackle like $30,000 to $50,000. Being debt free is a good goal. Be careful not to jeopardize your liquidity and emergency reserve to accomplish this goal.
You also have the consideration of the return on your money. You may be paying interest of 4%, yet your investment has earned 8%. Do you liquidate? That is a question of many factors such as risk tolerance, cash flow, availability of other assets.
Once you reach 59 1/2, you can access your retirement account without a 10% penalty. Whether you are working or retired, you want to evaluate your tax picture in using retirement funds. Taking $30,000 to pay off the mortgage could easily push you into a higher tax bracket. Consider an alternative of taking $10,000 a year for 3 years – you may pay less taxes.
This is a wonderful bucket to draw from as it is tax free money. If you have a $100,000 in your ROTH, and a $30,000 mortgage balance, use the ROTH money to be debt free. However, if you have $100,000 in your ROTH and $90,000 mortgage balance, you would deplete this wonderful asset. If you are able to cash flow the mortgage payment, it may make more sense to preserve your ROTH for another day.
Downsize Your Home
Be sure you do the math correctly- Up Front! Don’t over estimate the value of your home. Don’t under estimate the cost of replacing a home. Don’t forget closing costs, moving costs and modifications to the new home. (There are always changes – blinds, flooring, furniture.)
Downsizing can be challenging – letting go of space and the stuff that fills that space. (*Check out our blog on Downsizing.) In deciding how much space you need, consider a guest room or two, as adult children may be a ‘long’ term guest. They return home to save money to buy a house; pay off student loans, go back to school, or going through a divorce.
Refinance Your Home
If all the above options don’t fit and you like where your live; then consider refinancing your mortgage. Having a smaller mortgage payment, will be easier to cash flow. Refinance while you have employment – it makes it easier.
Cash flow pressures can dampen your happiness and sense of well being in retirement. Being mortgage free is one way to reduce your monthly cash flow needs.
Our office is here to help you find YOUR solution to your retirement needs. We can help you answer the question of ‘Do I pay off the mortgage or not?’
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