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Pros/cons of paying off business mortgage with early lump sum pension
Old 06-08-2011, 12:43 AM   #1
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Pros/cons of paying off business mortgage with early lump sum pension

I left my previous job in 2000 to buy my own business (which includes some land and my residence). Presently I have a high rate, interest-only mortgage and I’m having difficulty trying to refinance and making ends meet in general. I am now eligible for early pension benefits (I’m 55) from 27 years with my previous employer, and want to use the lump sum to pay off the mortgage. I know I’d be giving up future pension income but I see the payoff as a kind of investment. With the mortgage paid off, I could put the business income that would otherwise be used for the mortgage into savings and I would have full equity in the property. I would have hopefully another 10-15 years doing the work I enjoy, after which time the property value would likely be high enough where I could sell at a decent profit, which would cover my remaining years. And if I die in the meantime my kids would have money from selling the property, which they wouldn’t have from a monthly pension. What would the pros and cons be for something like this? I have a feeling I'm missing something important. Any advice will be appreciated.


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Old 06-08-2011, 05:13 AM   #2
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Originally Posted by Gracyl View Post
I have a feeling I'm missing something important. Any advice will be appreciated.

I think what you are missing is that you would be taxed at regular income tax rates on the entire lump sum. If it is a large enough sum that will kick you into the top bracket on a substantial portion of the withdrawal.

Edit: Also, since you are retiring you can take an annuity without penalty but can you cash out the lump sum (without rolling it to an IRA and then taking 72t payments) without penalty?

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Old 06-09-2011, 05:01 AM   #3
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I, personally, would not give up future pension benefits. Why not use the initial pension proceeds to accelerate your mortgage pay down?
Yes, I have achieved work / life balance.
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Old 06-09-2011, 06:16 AM   #4
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Having a paid-off mortgage is nice when you have other liquid assets and/or income stream. But if your business income, or the business itself, has a serious downturn, having a paid off mortgage won't help you to buy groceries or pay the utility bills, etc.
I'm sure there are tax consequences to taking a lump sum, so that would be somethig else to factor in.
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