Change in Mortgage Thinking in Retirement

[CRLLS]

It is generally accepted to be “financially” better to carry the mortgage on than to pay it off whenever investment returns outpace the mortgage rates. All retirement calculators say we are good to carry our mortgage for an infinite number of years. As a result of the above, a mortgage payment was always in our plan.

I have recently re-assessed this from many different angles and have decided to change my long held plan. By paying off the mortgage now, it reduces our annual income needs. I am thinking that is a better plan in the event of a major market correction. It also allows us to be more aggressive in our AA, not that higher returns are needed. The potentially higher returns of a higher stock allocation over the long term, could help to cover LTC without having to tap into the home, or provide an added inheritance for our heirs. We could be comfortable at or above our current lifestyle on either SS alone, or our remaining assets even considering a 30%-40% downturn in the market.

The dollars needed to pay off the mortgage will come from our Roth’s so there will be no taxable event. We are both >65 and have had the Roths for over 10 years. No tax related issues there. We are looking at Roth conversions over the next 4+years to reduce the RMD’s and to replenish our Roths’ available cash for some untaxed, unexpected expenses. Once RMD’s hit, we will have the RMDs’ taxes to pay whether we use that money or reinvest.

I know that this is a personal decision on so many levels. It seems that I am gravitating toward simplifying the monthly recurring bills as time moves on rather than trying to squeeze out the last penny from every aspect of our life. I wonder how many others have changed their retirement financial plans, mortgage or other, as they actually entered RE?

 

[athena53]

I haven't- monthly payment (P&I only) is $700, interest rate is 3%. Not a big deal.

 

[bobandsherry]

Whatever works for you. I just know with rate of 3.125%, we have come out ahead by having money in the market. We also have a decent amount then readily available if an something comes up and requires funds quickly. Chances of getting loan after retirement decreases and rates increase. Only benefit I could see for us is it would give more headroom for ACA subsidy without the monthly outflow. But with change in adminstration it's a guess at best as to what ACA will morph into, so holding steady on the course for now.

 

[CRLLS]

Athena53, our monthly P&I is <$600 but that represents about 15% of our monthly expenses. It is not a "big deal" for us, as you say.

Another example of our change in thinking/simplifying is we have historically paid out real estate taxes in 2 installments a day or two ahead of each installment deadline. This year, we paid the full amount well ahead of the 1st installment deadline. We are now paying bills when they are received rather than scheduling them a couple of days before the deadline. This "delaying payment" mentality of ours may come from way-back when we were earning as much as 15% in MM accounts at our local banks. It sometimes takes a long time to break a habit.

 

[ncbill]

mortgage as a % of monthly expenses is what matters.

right now I'm helping an older relative (early 70s) who has SS (taken at 62) plus about $500/month in dividends as their only income.

their mortgage/HELOC payment is close to 50% of their monthly spend.

they would be in MUCH better financial shape without the above.

 

[W2R]

I have recently re-assessed this from many different angles and have decided to change my long held plan. By paying off the mortgage now, it reduces our annual income needs. I am thinking that is a better plan in the event of a major market correction. […]

Part of my financial plan for retirement has always been to have a house with no mortgage. For me this is the only rational option. Not only do I have no mortgage, but also I cut back on my regular monthly bills by getting rid of my landline, going to a low cost cell phone carrier, and eliminating any TV except through a free OTA antenna. The objective is to minimize the monthly requirements for a bare bones existence, reducing income needs. If I should have extra income some years, it can be used for wants instead of needs but I won't have to stress out if I don't have that extra income some years.

But don't expect forum members to agree that this is a good idea, even in retirement. Many of the arguments against doing this ignore the risks inherent in the market. Despite the reality of these risks, whether or not to pay off a mortgage is one of the most hotly argued topics here.

 

[pb4uski]

We kept our mortgage... in fact, I did a refinancing with cash out just before I retired that reduced our interest rate by 1% to 3.375%. Since I did the refinancing in 2012, we are far ahead of where we would be if we had paid off the mortgage... by probably $35k+... not chump change though I concede that we were exposed to some modest risk. Our mortgage started at ~10% of our retirement assets and is currently ~5.5% of our retirement assets. Our mortgage payments are ~18% of our budget, but interest is only ~4.6% of the budget... the other 13.4% is just moving money from one pocket (cash) to another (home equity).

My sleep at night is that anytime that I desire I can pay off that mortgage with a few clicks... in fact at this point our cash allocation exceeds our mortgage.

I don't understand why anyone would utiize Roth funds which have a unique status of being totally tax-free for the rest of time when other alternatives exist... even keeping the mortgage.

IF you adjust your AA to reflect the payoff then it probably isn't a bad move...just suboptimal IMO.... however, many people off their mortgage and leave their AA the same.

 

[calmloki]

We have always paid off borrowed funds as quickly as possible and have made a substantial amount by having others pay interest to us. That said, I tried really hard to not pay off a PenFed 3% home loan since we could make more money by lending/investing. It was a constant inner battle, but we had about the same amount in PenFed certificates earning 3+% as we had borrowed, so the cost was zero while giving us a big chunk in CDs as a safety net so we could invest the rest.

Couldn't stand it. Too much money had built up in piddily interest savings accounts waiting for an opportune moment, too much taxable income increasing the medicare premiums, our taxes look like home interest wouldn't be worth writing off........ and I just GOTTA do something with money, so we paid off our Penfed mortgage. So now we have no house payment and I can stew over the couple of points our credit scores have dropped: we only have one type of account, no car or home loans.

 

[Dash man]

We paid off our mortgage in 2010 with no regrets. We still have sufficient cash for emergency needs, or to help family should they ask. We love not having to worry about the monthly payment and feel very secure, even if things went south in the markets.

 

[jkern]

I paid off my mortgage in 04. No regrets!!

 

[jollystomper]

I am also in the "depends on what % of your expenses is your mortgage" camp.


Our mortgage rate is 2.875%, is less than 6% of our monthly expenses, and will be paid in less than 10 years at this rate. So for now we are not in a rush to pay it off.

Of course, circumstances can change and cause us to review this strategy. But as things are going now, we can sleep at night with it.

 

[RunningBum]

It's all just money. If you're pulling a bunch from the Roth now to pay off the mortgage, you could pull out some each month or year to make the payments, with the same tax free withdrawals. And you'd be able to use other funds (tIRA or taxable) if that happened to fit your situation at the time. It really doesn't matter much, but since the Roth grows tax free I think you're even more likely to have better returns then your mortgage rate.

I have to give a disclaimer that I paid off my house from taxable as I was building it. Good thing, since I paid with pre-dotcom bust money in 2001. Had I taken on a mortgage I would've come out a lot worse. The stock I sold for most of it is still less than 50% of what it was at the time.

The strangest story I heard was someone here who was trying to figure out how to survive until they could tap retirement funds at 59.5, but they also wanted to pay off their mortgage. They just couldn't understand that a mortgage was a perfect way to leverage money to stretch what they had to 59.5, since the mortgage extended well past that.

 

[CRLLS]

…..

I don't understand why anyone would utiize Roth funds which have a unique status of being totally tax-free for the rest of time when other alternatives exist... even keeping the mortgage...…..

I rationalize it as:

a) I could use our IRA withdrawals, which are taxed, ending up depleting more from our Assets.

b) After depleting a major amount of cash supplementing our p/t retirement over the last 9 years, there is only a relatively small amount of cash left outside our retirement accounts.

c) I still have a fair amount of tax-free emergency funds in our Roths, that should cover any unexpected major (>>$10k) expenses even after I use some to pay off the Mortgage

d) The Roth money isn't really tax free money, it was taxed on entry. IRA money is taxed on exit, so using the fungible argument, there is no real difference (assuming the same tax rates).

e) I am planning to use the headroom above our expenses up to the top of 12% tax bracket to do Roth conversions over the next 5 years, replenishing 1/2 of the Roth loss within the next 6 months or so. Next year it would be fully replaced. This allows more $ to enter the Roth over time.

f) Currently, our very-safe WR, in addition to our other incomes (current and planned) is much greater than our needs.

g)Currently we are using only our IRAs and DW's SS, If I treat the Roths as sacrosanct, I expect that we will never ever need to tap into the Roth.

I) As far as our heirs are concerned, optimizing their inheritance is low on our priority list. Our needs and comforts come 1st. I fully expect that they will get a fair amount. We'll let them deal with optimizing it then.

g) Having no mortgage payment and no interest payment "for the rest of time" is essentially the same as having the Roth investments available tax free "for the rest of time".

h)and our list goes on...…

The above is part of my thought process. I'm not sure if any of it changes if we are planning on moving in the next couple of years. I expect not.

As I stated in my OP, I know paying off a mortgage is not the best "financial" plan. Perhaps using Roth dollars for the mortgage is also not the best either. I am listening and still have time to adjust our plan. I ordered the payoff statement today.

 

[joeea]

their mortgage/HELOC payment is close to 50% of their monthly spend.

they would be in MUCH better financial shape without the above.

Certainly everyone would be much better off without having a mortgage payment.

But unless you can snap your finger and make it disappear magically, the money has to come from somewhere.

 

[joeea]

By paying off the mortgage now, it reduces our annual income needs.

The dollars needed to pay off the mortgage will come from our Roth’s so there will be no taxable event.

What percent of your retirement assets are you giving up now so that you can reduce your annual income needs?

I wonder how many others have changed their retirement financial plans, mortgage or other, as they actually entered RE?

Many change their plans. Some change them many times.

My plans seem fine at the moment. I don't expect to change them.

 

[RunningBum]

I rationalize it as:



e) I am planning to use the headroom above our expenses up to the top of 12% tax bracket to do Roth conversions over the next 5 years, replenishing 1/2 of the Roth loss within the next 6 months or so. Next year it would be fully replaced. This allows more $ to enter the Roth over time.

Taking a lot of money out of a Roth in order to, in part, put some of it back, has me scratching my head.

 

[joeea]

Many of the arguments against doing this ignore the risks inherent in the market. Despite the reality of these risks, whether or not to pay off a mortgage is one of the most hotly argued topics here.

If the risks inherent in the market were really the issue, it would be trivial to take the pay-off money out of the market and keep it in cash.

That way, you would always be able to pay the mortgage no matter what shape the market was in. And you would still have more liquidity.

 

[CRLLS]

What percent of your retirement assets are you giving up now so that you can reduce your annual income needs?

<6% reduction of assets would be used to offset >15% of income "needs". Needs being defined as keeping our current lifestyle.

 

[CRLLS]

Taking a lot of money out of a Roth in order to, in part, put some of it back, has me scratching my head.

I know it sounds crazy. In reality, whether I take out of Roth (and then replenish from the IRA) or IRA directly is a wash, except for: If I take it all from IRA, to pay off the MTG today, then I will bump into the 22% tax bracket. If I take from the Roth, I can manage IRA W/D to stay in the 12% bracket. If I take from the Roth today, then I can wait until later this year to do the conversion when I'll have a better picture of our annual expenses and convert accordingly. Being over 59-1/2 and having the Roths for 10 years makes it basically the same as a savings account for us. Except it earns interest free of taxes. At least that is how I am thinking.

I've never been accused of thinking like normal people.

 

[joeea]

<6% reduction of assets would be used to offset >15% of income "needs". Needs being defined as keeping our current lifestyle.

Then I guess I don't understand the point. Given that this is such a small percent of your assets you can't really be worried about a market downturn having any significant effect.

Just about everyone who pays off their mortgage feels good about it. Just about everyone who chooses not to pay off their mortgage feels good about it.

So, pay off the mortgage, don't look back, and feel good!

Happy retirement!

 

[USGrant1962]

<6% reduction of assets would be used to offset >15% of income "needs". Needs being defined as keeping our current lifestyle.

This is why I paid mine off. ~7% of my portfolio (not a reduction in assets by the way) to eliminate ~20% of my monthly ER cashflow. And a mortgage is mandatory cash flow, not really subject to adjustment if the market tanks. I was pretty comfortable taking some portfolio dollars off the table last year with CAPE >30 and intermediate bonds paying <3%.

 

[RetireBy90]

I wonder how many of us, starting with me, are holding on to old lessons learned in a different time. Back in the day, when I could apply extra principal to get it paid off as soon as possible. Got the 15 year mortgage when we could afford. But back in the day rates used to be considerably higher and I didn't have a lot left after paying bills. My $$ lessons and attitude were learned back in 70's and 80's so I'll carry a conservative bias with me. Like the Gen Z that went through Great Recession and those that went through the Great Depression attitudes are shaped by what they lived through.


However, times now are different in many ways. I'll leave it to others to list the many ways today is different than the 70's and 80's but as a people and me personally, we rely on the lessons of how to prosper in a different time. Perhaps some attitudes or lessons should remain, but some don't apply in the same ways.


Have you adapted your attitudes to today's fiscal environment ? Cheap $$ and many other differences ?


Just got me thinking...

 

[Texas Proud]

I am in the low interest rate camp and I am not going to give up that low of interest when I can earn more in the market...


The amount I earn over what I pay is over $4K per year... so why pay it off and earn less




But I am also in the camp that when it is paid off I will not get another... unless I move... and that is only if mtg interest rates do not go too high...

 

[HI Bill]

I say pay it off....I hate mortgages and loans...when it's paid off, in a dire emergency, you could always take out a reverse mortgage. I sleep better knowing I have no debt... (this is mostly a psychological issue).

 

[bobandsherry]

Kind of interesting... if people have confidence in FireCalc and their various rates of return, then wouldn't money kept invested in the market over the long haul will more than outperform paying off low rate mortgage? IMHO, too many variables involved to even consider that there is a one size fits all or even most....