Mortgage(s) in Retirement

[ShokWaveRider]

It never ceases to amaze me about how many folk still have mortgages on their main abode after (or during) retirement. I can understand it on a second home. I read about people refinancing etc. at good rates, not sure if all are retired or not. Would not paying off a mortgage be a main priority first, in order to have an affordable ER or R for that matter. It was certainly a priority for us before we retired the first time. I guess if one has a high steady income or something it may not affect them. But I somehow think that most of us are not in that position. While we are probably comfortable, I would think that NO Debt would be the order of the day. Am I wrong?

I am curious as to how many of us have mortgages on their primary property and perhaps the logic of why if it is not too personal. I live in an area in Florida where about 75% - 85% of my neighbors are retired. For some the homes are seasonal or second homes. I would say from the folk I know, they ALL have paid off their mortgages, and own their homes or both if they are seasonal free an clear. There ar a couple that I do not know either way, but I would think they do. I am in the minority as I still work part time but am similar in that I do not have any debt.

Assuming a retired couple is paying on average $1000+ in this day and age for their mortgage. Does that mean that they have to find that from their retirement income sources.

Or home is worth now about $600k (hopefully) we are mortgage free. This applies to about a $2,000 PM savings IMHO. (I picked that number out of the air because I have no idea really).

What about others here if you do not mind sharing. Also you opinions on having one verses not if it is applicable. And either way how does that effect the retirement quality of life.

SWR.

 

[MichaelB]

I take it you haven't seen other threads on this? Here is a small sample
http://www.early-retirement.org/forums/f30/the-simple-life-vs-mortgage-payoff-59276.html
http://www.early-retirement.org/for...mortgage-early-grows-in-popularity-60090.html
http://www.early-retirement.org/forums/f28/mortgage-or-pay-for-house-with-cash-60166.html
http://www.early-retirement.org/forums/f28/ric-edelman-and-having-a-big-mortgage-60372.html
http://www.early-retirement.org/forums/f30/question-about-paying-house-off-early-60775.html

 

[Texas Proud]

/snip/ I would think that NO Debt would be the order of the day. Am I wrong? /snip/

For some, yes, you are wrong... for most you are not...

I can give you two examples where you are wrong just in my family...

I have two sisters who are retired... the older one is just over 70... she was a teacher and gets a nice pension... her husband, before he died, spent too much money... refied the house and took out money.... so, her mortgage is almost as high as it was when they bought the house 30 years ago... I talked to her last night about her mortgage and her response. "I will have a mortgage until I die, I would rather spend my money on traveling while I can".... IOW, her pension is enough income to pay her mortgage payments and her living expenses... she would have to give up a good percent of her saving in order not to have a mortgage... she does not feel comfortable with that....

Another sister is less than 60... both her and her husband were forced out... both are getting pensions... they can afford everything at this time with the pension... to pay off the mortage, they would have to spend tax deferred money... it is not so smart to take out a lot of money, pay income taxes on it just so you do not have a mortgage....

Me, I am still a few years away from retiring, but am looking at a refi of my house and a VERY low rate... I do not see rates staying this low for the next 15 or 30 years, so I would rather arbitrage the money I would need to pay off the mortgage... I think I can do a bit better in the market.. I am looking at the 15 year mortgage as the rates seem to be lower enough than the 30 to go that way....


SOOO, in the end I gave you three examples in my family why the mortgage is not paid off and none of us feel the need to pay it off.... (but only 2 are retired)....

 

[youbet]

Am I wrong?

You do seem to be assuming that the person with a mortgage in retirement has a lower total net worth. Actually, all other things being equal, net worth is approximately the same with or without a mortgage.

For example, a one million bux portfolio minus a $50k mortgage = $950k net worth. Or, you take $50k from the one million bux portfolio and pay off the mortgage (and obtain that mortgage free bliss so many crave), your net worth is also $950k.

At today's low interest rates, I don't think holding or not holding debt makes much difference in retirement other than planning for the cash flow to make the monthly payments.

I paid mine off long before RE. But, looking at my portfolio I can see how I'd easily arrange the cash flow to make the payments if I had chosen to hold the mortgage. It's not a big deal one way or the other.

 

[Lsbcal]

...(snip)....
At today's low interest rates, I don't think holding or not holding debt makes much difference in retirement other than planning for the cash flow to make the monthly payments.
...

We are refinancing today at 3.375%.

Having the mortgage helped to balance withdrawals from retirement accounts for tax purposes. Also helped for taxes when doing Roth conversions.

It depends which way investments move as to which way works best. We do not know that in advance.

 

[youbet]

to pay off the mortage, they would have to spend tax deferred money... it is not so smart to take out a lot of money, pay income taxes on it just so you do not have a mortgage....

I helped a buddy go through this same calculation recently. He and his DW built a nifty, expensive new retirement home which they had always dreamed of having. Most of their wealth is in TIRA's and paying cash for the house would have involved a significant withdrawal putting them in a high marginal tax bracket. Instead, they took a low interest, 15 yr fixed mortgage and are making the payments with TIRA withdrawals made as needed over time.

Their plan seems to be working out OK. Of course, future changes in the tax code, investment performance, etc., will tell the final story.

 

[W2R]

I paid mine off three years before retiring, and I think it was a [-]good[/-] great decision. But did you know that the "pay of the mortgage or not" question is one of the most contentious on this forum? I'd suggest checking out this thread from our FAQ section:

http://www.early-retirement.org/for...f-the-mortgage-or-invest-the-money-30644.html

 

[jclarksnakes]

We paid off the mortgage 10 years ago. We like the "feeling" of being debt free but we do understand the benefits of taking a mortgage at these unbelievably low rates. If interest rates are 3 points higher five years from now we will probably be regretting that we did not take out a mortgage at todays low rates.

 

[ShokWaveRider]

You do seem to be assuming that the person with a mortgage in retirement has a lower total net worth. Actually, all other things being equal, net worth is approximately the same with or without a mortgage.

Not at all, please do not be that presumptive, just trying to understand individuals logic an reasoning. And I agree net worth is moot.

At today's low interest rates, I don't think holding or not holding debt makes much difference in retirement other than planning for the cash flow to make the monthly payments.

I paid mine off long before RE. But, looking at my portfolio I can see how I'd easily arrange the cash flow to make the payments if I had chosen to hold the mortgage. It's not a big deal one way or the other.

I disagree on this one. I was brought up to believe that debt not prudent. In the case of a mortgage interest payments are still interest payments. I believe in the Pay yourself first approach. Why give money to someone. else.

 

[Bestwifeever]

Conventional wisdom used to be not to have a mortgage in retirement so that one's fixed expenses could be met with a pension and social security. Of course refinancing was not an option for most folks until about 30 years ago, either, so that mortgage was being paid down and you could use the equity only if you sold the house and bought another one, with a new mortgage. And never mind the stock market--access to that was only through brokers and the average person didn't travel in that world, so if you had a nest egg you had it in the bank at interest rates just below what the mortgage rate was (which supported paying off the mortgage too).

Today? What pension? If you're comfortable with a mortgage, who wouldn't refinance at today's low rates looking ahead to what that pulled-out equity might earn in a few years? A heck of a lot of people have money in the market, in a 401k or their own accounts? So conventional wisdom is out the window and we each evaluate our own circumstances.

(We don't have a mortgage and aren't interested in refinancing to get one, but should we ever move we might consider it depending on our own circumstances.)

 

[ShokWaveRider]

We are refinancing today at 3.375%.

Having the mortgage helped to balance withdrawals from retirement accounts for tax purposes. Also helped for taxes when doing Roth conversions.

It depends which way investments move as to which way works best. We do not know that in advance.

Not sure I understand the Tax thing, but that is OK. For me the government does not give you anything you do not give them in the first place. If a Mortgage is $1000 in interest, that on average is only $333 in tax relief Still means one is paying $700 that is not reimbursed.

I will have to be convinced that paying interest on any debt is beneficial.

 

[GrayHare]

Yes on the mortgage. In a negative real interest rate environment like we have now as central banks worldwide are devaluing their currency, mortgage repayments are made with devalued (inflated) dollars. Since inflation more than covers the interest, in real terms a mortgage helps preserve retirement savings better than no mortgage.

This describes the supporting background http://www.financialsense.com/fsu/editorials/amerman/2007/0919.html

 

[ShokWaveRider]

Conventional wisdom used to be not to have a mortgage in retirement so that one's fixed expenses could be met with a pension and social security. Of course refinancing was not an option for most folks until about 30 years ago, either, so that mortgage was being paid down and you could use the equity only if you sold the house and bought another one, with a new mortgage. And never mind the stock market--access to that was only through brokers and the average person didn't travel in that world, so if you had a nest egg you had it in the bank at interest rates just below what the mortgage rate was (which supported paying off the mortgage too).

Today? What pension? If you're comfortable with a mortgage, who wouldn't refinance at today's low rates looking ahead to what that pulled-out equity might earn in a few years? A heck of a lot of people have money in the market, in a 401k or their own accounts? So conventional wisdom is out the window and we each evaluate our own circumstances.

(We don't have a mortgage and aren't interested in refinancing to get one, but should we ever move we might consider it depending on our own circumstances.)

This makes a lot of sense. Personal circumstances is the key. But if one can afford to pay off a mortgage, low interest rate or not (assuming that the money will not be subject to other implications, tax penalties, losing money of loaded investments etc.) I cannot think of a good reason to have one.

 

[farmerEd]

I am firmly in the camp of no mortgage is a good thing. Paid mine off 10 years ago when I er'ed and have never regretted it - and can't understand why anyone would want to do otherwise, but there are some smart folks that disagree with me, and so, to each his own.

 

[Animorph]

Strictly a financial decision for us. My assumption for future portfolio returns is greater than my current mortgage interest rate. So I should come out ahead by leaving that money in the market, for as long as possible.

 

[dmdunca44]

We have a mortgage in retirement. Why? Well, when we built our "forever" home, we had enough cash to pay for about 2/3 of the cost. (We married and purchased our first home only 20 years ago). Our current home appraised last year for $400K and our balance is $115K. We COULD pay it off, but our mortgage rate is 3.25% and our nest egg is earning more than that. (Plus we'd have to pay taxes on the withdrawals, so it would cost us even more). We have reliable income from pensions/SS and have no problem making the payments.

Having said all that, we hate having a mortgage and are putting an additional $500/mo on the principle to pay it off within the next 4-5 years.

 

[ShokWaveRider]

Strictly a financial decision for us. My assumption for future portfolio returns is greater than my current mortgage interest rate. So I should come out ahead by leaving that money in the market, for as long as possible.

Now that is the best reason I have heard. That is a no brainier really and makes sense. So if one is paying 3.5% in a mortgage and getting 10% in return invested funds. The mortgage is actually costing 2.2% (assuming 33% back in taxes) they are paying 3% in taxes on the 10% so net net they are ahead ~3% makes a lot of sense. But hopefully the return warrants the expense.

 

[Gill]

I, also, have a mortgage in retirement and have actually had several on five different houses since retiring 14 years ago. It's partly a function of cash flow. About 60% of my net worth is in a Traditional and a Roth IRA and the balance is in my taxable portfolio invested in Vanguard equity mutual funds, all having a low tax basis. I also have a sizeable portfolio of I-Bonds purchased ten years or so ago paying better rates than current mortgage rates.

I'm happy with the mortgage which has a maturity beyond my 100th birthday. I could pay it off today if I wished, but to me it makes no sense to do so.
Bruce

 

[Texas Proud]

This makes a lot of sense. Personal circumstances is the key. But if one can afford to pay off a mortgage, low interest rate or not (assuming that the money will not be subject to other implications, tax penalties, losing money of loaded investments etc.) I cannot think of a good reason to have one.

Now that is the best reason I have heard. That is a no brainier really and makes sense. So if one is paying 3.5% in a mortgage and getting 10% in return invested funds. The mortgage is actually costing 2.2% (assuming 33% back in taxes) they are paying 3% in taxes on the 10% so net net they are ahead ~3% makes a lot of sense. But hopefully the return warrants the expense.

On your first post.... you take out the reason for my one sister...

On the second post.... you agree with my reason, arbitrage....

What do you have to say about my other sister who just does not feel the same way as you She could pay off the mortgage, but would feel that she did not have enough emergency funds if she did....

 

[Lsbcal]

Not sure I understand the Tax thing, but that is OK. For me the government does not give you anything you do not give them in the first place. If a Mortgage is $1000 in interest, that on average is only $333 in tax relief Still means one is paying $700 that is not reimbursed.

I will have to be convinced that paying interest on any debt is beneficial.

Taxes are just part of the picture. I won't bore you with my financial details but it does matter what one does with the leverage. Just saying that one size does not fit all.

Debt is really not a belief system. Most companies carry some debt as do governments, real estate investors, etc. It is part of the financial picture and of course, too much debt is a bad idea as we are seeing in recent years.

 

[grasshopper]

In 2003 I had shares in GNMA equal to the amount left on our mortgage. We sold the fund paid off our mortgage, trading RE asset to RE asset. This was 3 years before we were even thinking about retirement. We socked away a lot of cash in 3 years and realized FI. Not having a mortgage and FI helped us make the decision to RE.

 

[pb4uski]

Strictly a financial decision for us. My assumption for future portfolio returns is greater than my current mortgage interest rate. So I should come out ahead by leaving that money in the market, for as long as possible.

+1 I expect to earn 5.5% or better on my investments and am paying 3.375% on my mortgage, so I hope to come out ahead. If my investments cannot provide at least a 3.375% return then having a mortgage will be the least of my worries. While others have peace of mind being mortgage free, I have peace of mind knowing that at anytime I wish I could write a check and pay it off if I wanted to.

 

[ChainsBeGone]

I purchased a home this year with a 30 year mortgage. I will retire in 8 months at age 48, fully FIRED, with mortgage, property tax, utilities, and allotment for annual home maintenance repairs making up about 30% of my retired income. No other debt, with COLA'd pension, and health care as part of my retirement benefit. I could have kept working another 4-5 years and paid cash for the house, but I'd rather retire now, make mortgage payments, and if I chose, pay off the mortgage when I reach 59 1/2 and can access Roth IRAs/Traditional IRAs. My career (Army) has caused me to move 13 times in 25 years, and never back to the same place, and never to where we know we want to retire. Consequently, we've not had the opportunity to buy a house, keep it for years, and pay down a mortgage while we lived in it. My 14th move will be to our retirement home. For us, a mortgage means 4-5 extra years of FIRED.

 

[Finance Dave]

Now that is the best reason I have heard. That is a no brainier really and makes sense. So if one is paying 3.5% in a mortgage and getting 10% in return invested funds. The mortgage is actually costing 2.2% (assuming 33% back in taxes) they are paying 3% in taxes on the 10% so net net they are ahead ~3% makes a lot of sense. But hopefully the return warrants the expense.

Not sure I'd call it a "no brainer"...what if the market declines 40% and stays there for 3 years? Then how do you live? By withdrawing money that's worth 30% less?

IMO, you must have enough money in "stable" accounts that you can live for at least as many years as you think could be the longest possible downturn in the market. In the long run things will likely be fine...but even our beloved S&P has recently had a 10-year period where values were flat.

 

[Finance Dave]

I cannot think of a good reason to have one.

Perhaps you don't consider this a "good" reason, but in Indiana where I live, you lose a property tax deduction if you don't have a mortgage...it's called the "mortgage exemption". Property taxes increase when your mortgage is paid off...the bank files a document with the county assessor and this happens automatically.

The amount is modest...for us $300/year on a house worth about $350k.

For the record, we "sort of" paid our mortgage off last November. We are not yet FIREd, and have high incomes. We noted last year that we had 3 years left on our 15-year fixed rate loan at 5.125%. We then noted we could get a HELOC for 3.25% with no closing costs or fees. So, the math seemed pretty easy...take out a HELOC for the amount due on the mortgage, and pay it off...so we did. Now we owe the same amount (less any payments made since then) on our HELOC that we did on the primary mortgage. When we got our bonuses in April of this year, we put all $25k of the money (after taxes were deducted) against the HELOC...so now the balance is very small...and we should have it paid off in about 16 months.

One watch-out with this strategy...HELOCs are VARIABLE rate loans. So if you plan to use one for a longer term, you are exposing yourself to interest rate risk. In our case, the rate was fixed for one year, and then is tied to a federal reserve rate....which Geitner clearly noted they would not be increasing for "the foreseeable future"...so we felt pretty good that we could pay it off before rates increased. As a last resort...we could use our emergency fund to pay it off....we carry an e-fund of 9 months expenses...and most experts recommend 3-6...so we have a bit of cushion there.

IMO there is a certain "peace of mind" to having the mortgage paid. There are occasions where we'll take on debt...but we always have a solid plan to avoid risks. For example, if we buy a new car and Ford is offering 0% financing, we'll do it...even if we have the money to pay for the car cash....then we'll put that money in a CD or similar fund and pay off the loan as needed.