carry my mortgage into retirement?

[flyingaway]

I totally disagree with this unless you actually adjust your AA to reflect the payoff of the mortgage.

For example, let's say you have $1 million of investments that are 60/40 and a $200k mortgage. You redeem investments and payoff the mortgage... if you now have $800k of investments that are 60/40 then comparing your fixed income return to your mortgage interest rate in making the payoff decision is incorrect... it should be your overall investment rate of return.

OTOH, if after paying off the mortgage you then have $800k that is now 75/25 then I agree with what you posted.

The main reason that many people quoted to keep mortgage in retirement (or before) is that they can make better return with the money being invested.

 

[pb4uski]

And I do.... much better in the time period since I took out my mortgage, but if I paid off my mortgage then I would not change my AA so my overall investment return is the correct rate to compare to my mortgage rate.

 

[JustCurious]

I'd love to just pay off the mortgage before retiring but, that will be an impossibility.

If it is impossible, why are you asking whether you should do it? This whole thread is academic.

 

[RunningBum]

The main reason that many people quoted to keep mortgage in retirement (or before) is that they can make better return with the money being invested.

A mortgage is an expense. If you have $3000 in other monthly expenses in addition to a $1000 mortgage expense, so you feel like you have to keep the money to pay the $3000 of expenses in fixed income? Most people don't.

I only kind of agree with what I wrote above, and kind of split the difference. Since I have no mortgage I feel like I can be a bit more aggressive with my AA. My rationale for this is that if I see that I'm not going to make it financially, I'd downsize my house. I don't include my house in my total investment assets I base my AA and WR on, but if I did it wouldn't be on the equity side.

 

[pb4uski]

I don't think of my mortgage as an expense at all. I think of it only as leverage that I am using to make a spread that is collateralized by my principal residence. With a few clicks I can pay it off at any time of my chosing and the monthly mortgage payments would no longer be required. Since I refinanced in early 2012, my portfolio has returned much more than what I have paid in interest. My AA is not affected by my mortgage in any way whatsoever.

I realize that many others are more emotional about having a mortgage and a mortgage payment... to me it is simply leverage. Now that said, if I was mortgage free I would not necessarily go out of my way to get a mortgage loan and invest the proceeds, but since the mortgage happened to be there when I retired I am taking advantage of it for the remainder of its term or until investment returns go sideways and it is no longer beneficial to me.

 

[albireo13]

If it is impossible, why are you asking whether you should do it? This whole thread is academic.

Actually, what I should have said was it will be impossible for me to pay it off out of monthly cash flow. I won't be working long enough to do that.

I could pay it off today out of retirement funds. However, it's already been exposed that it wouldn't make sense to do that.

 

[JustCurious]

I do not think it is advisable for you to retire with a 30 year mortgage hanging over your head, especially if you cannot pay it off without dipping in to retirement funds. Also, you said it makes you uncomfortable to retire with the 30 year mortgage hanging over your head, and I don't think it is advisable for you to retire if you are financially uncomfortable, your discomfort will not go away, it will only exacerbate once you retire and no longer have earned income coming in to pay that mortgage every month.

So, in short, it's not advisable to dip into retirement funds to pay off your mortgage, and it's not advisable for you to retire with the mortgage, so I do not think it is financially advisable for you to retire.

You also said in another thread that you have credit card debt and a car loan and less than 3k in cash reserves in addition to your 347k mortgage on your 460k house. You are asking questions about how to move around money or increase your cash reserves, which are all good questions, but if you step back and look at the bigger picture, I do not think you are in a situation where it would be advisable to retire in the next 3 years. I'm not saying you can't...clearly you have enough savings that you could do it and you would be ok for a while depending on your spending rate (which we do not know, that is an important factor), but I suspect based on the fact that you have a big mortgage and an expensive house that is not cheap to maintain (property tax, maintenance, insurance, utilities, HOA?) credit card debt and a car loan at 61 that you are used to living at or above your means and you may have a relatively high spending rate and you may be spending down your savings to keep yourself going in retirement for a while until the funds run out and that would make me uncomfortable.

 

[pb4uski]

.... it's not advisable to dip into retirement funds to pay off your mortgage, and it's not advisable for you to retire with the mortgage, so I do not think it is financially advisable for you to retire. ....

Since OP only has tax-deferred funds, unless the OP plans to work for another 30 years at some point in time he will use tax deferred funds to make his mortgage payments so your advice is a bit silly.

Money is fungible.... OP's tax-deferred accounts will provide income once he retires and a portion of that income will be used to service the mortgage... much more tax efficiently than taking a big lump sum out to pay of the mortgage.

OP has $1.8M in tax-deferred savings and a $350k mortgage.... would your advice be different if he didn't have a mortgage and had $1.45m in tax-deferred savings? The situations are really no different except paying off the mortgage over time through income generated by the $1.8M in tax-deferred accounts is just a more tax efficient way of paying off the mortgage.

Other than the additional taxes that would be paid if OP did a big lump sum withdrawal and paid off the mortgage the facts are identical as the mortgage will need to be paid eventually.

I retired with a new 15 year mortgage... just set up autopay and other than the mortgage company sending me a statement each month I hardly know that it is there.

 

[l8_apex]

As described by the posters above, there are the hard $ numbers, which really can only be figured out by doing forward looking tax returns and guessing future investment return rates.

There is also your comfort level.

One other thing that I don't think was mentioned: you take on more risk if you own your home outright. Say a natural disaster happens and you home is a total loss: if you've got a big mortgage on it, it's the bank's problem. If you own it, it's your problem.

I have a big exposure to real estate (6 rentals + my house). I have mortgages on all, and if the housing market collapses or some other calamity hits, I have the option of walking away. Is it ethical? Hard to say, but the banks had the luxury of writing the fine details of the mortgage, so they know the risks going into it, as did/do I.

The way things were done in the past are necessarily the way things will be done going forward...

 

[pb4uski]

You make a good point for those who live or own property in non-recourse states, but many states are recourse states.

 

[GravitySucks]

I retired with five years left on the mortgage. I consider the interest, taxes, insurance and maintenance expenses and the principle as transfer of assets.

 

[JustCurious]

Since OP only has tax-deferred funds, unless the OP plans to work for another 30 years at some point in time he will use tax deferred funds to make his mortgage payments so your advice is a bit silly.

I don't agree. Many people pay off their mortgage well before the scheduled date, so that is a false dichotomy. There is a third alternative, pay off the mortgage without working for another 30 years and without taking lump sum withdrawals from tax deferred accounts by working longer but for a period less than 30 years. We do not know the OP's income (there is admittedly a lot of important missing info) but he may be able to pay off the mortgage in say 5 years out of current income without touching savings.

Money is fungible.... OP's tax-deferred accounts will provide income once he retires and a portion of that income will be used to service the mortgage... much more tax efficiently than taking a big lump sum out to pay of the mortgage.

I agree that money is fungible, and I agree he could pay the mortgage from tax deferred accounts and that would be more efficient than a lump sum withdrawal. But that would be true whether he continues to work or not. So where we disagree is whether it is advisable to continue to work and pay off the mortgage before retiring, not whether it is advisable to take a lump sum withdrawal from tax deferred accounts.

OP has $1.8M in tax-deferred savings and a $350k mortgage.... would your advice be different if he didn't have a mortgage and had $1.45m in tax-deferred savings?

No, it wouldn't. As I said, we don't know his spending rate or his income and that is important information. If he spends 60k a year, then my advice would be he is ok in either situation, but if he spends 100k a year or more, then I would say it is not advisable in his situation, mortgage or not, because his withdrawal rate would probably be too high.

I think people are getting lost in the "should I pay off the mortgage from retirement funds" question and not looking at the big picture. The 4% safe withdrawal rate is preached around here so often as a guideline, and if you follow that guideline, 1.45m in retirement savings would support $58,000 in annual spending, right? So really shouldn't we find out what his spending rate is before answering the question? And I am willing to bet that someone with a new big 30 year mortgage (that used to be bigger before downsizing) and credit card debt and a car loan is spending more than $58,000 a year.

 

[l8_apex]

You make a good point for those who live or own property in non-recourse states, but many states are recourse states.

Yes, very true. Lots of details, particularly since some states are "limited recourse". My only experience with this topic was second-hand in NV where the bank didn't go after folks back in about 2010. I have no idea if they were the exception or what...

If it did come to that, one would have to see what the impacts would be to declaring bankruptcy (i.e. how much of one's retirement assets would be protected).

 

[W2R]

Whether or not to carry a mortgage in retirement is, of course, an individual decision and as you can see in this thread thus far, it is one of those topics upon which forum members never agree. That's fine. But I just wanted to point out that there is no "right answer". There are pros and cons on both sides, and not only that, but individual situations differ. The financial study of this question is one of those risk-vs-reward analyses IMO.

When I was planning my retirement, I felt that in my case it made more sense to not have a mortgage. So, I paid it off several years before retiring. Aside from the financial aspects, I love not having a mortgage to pay.

 

[Clone]

Whether or not to carry a mortgage in retirement is, of course, an individual decision and as you can see in this thread thus far, it is one of those topics upon which forum members never agree.

There are many interesting perspectives. The 2 primary views:

1- The risk of having money in the market. If we pay off the mortgage, we have less invested in the funds. Therefore less downside risk if the market tanks.

2- The benefit of having more money in the market. If we carry the mortgage, we have more invested in the market. If the market returns more than the mortgage, we end up money ahead.

Currently- Mortgage rates are low, and market returns are high. Therefore Option #2 feels pretty good for those folks who are carrying a mortgage.

It will continue to feel good until the market takes a serious crash for a prolonged period of time. All we need to know is when is the market going to make a big correction, and for how long?

W2R- Are you still the keeper of the crystal ball?

 

[68bucks]

Interesting thread, I have grappled with this same question for a long time. My adviser of course tells me it makes no sense to pay off the mortgage financially, I understand the math completely. I have hung on to the notion that no mortgage helps the cash flow a lot and there is the emotional aspect that I like, debt free. I think I have decided in the last couple months that I will RE at 57 in just under a year. I have a 2 year old, 30 year mortgage for about $250K. I always looked at the elimination of the mortgage as basically covering healthcare premiums, a trade off, and something key to making RE work for me. If I keep the mortgage cash flow is higher and therefore my AGI because almost all my money is tax deferred. I will be able to avoid any early distribution penalties though. Someone made the point that with a couple mouse clicks that I can pay it off. I never thought of it in that context really. It makes living with the mortgage easier I guess, psychologically. I also like the point made that the house is simply and asset that is leveraged to make better returns elsewhere, not that I would borrow for that reason either. If I did use retirement funds to pay it off I would do it over a few years to spread out the income.

One more twist in my deal, I have a 1/5 ARM so in a few years it will change. I did that planning, at the time, to pay it off before it reset, probably with retirement money in increments, and for the better interest rate. So, chunk it off in 3 years as planned, let it adjust and see where that goes, or refi to a fixed rate?

 

[W2R]

All we need to know is when is the market going to make a big correction, and for how long?

W2R- Are you still the keeper of the crystal ball?

Here it is! Unfortunately, it keeps giving me the wrong answers to my questions lately. Guess it needs to be tuned up.

 

[Pilot2013]

I have read (I think) on some other threads that people forego "owning" for renting in retirement, taking the proceeds from the home sale as part of retirement portfolio. I don't see the difference with this and going in to retirement with a mortgage balance.

 

[Perryinva]

I totally disagree with this unless you actually adjust your AA to reflect the payoff of the mortgage.

For example, let's say you have $1 million of investments that are 60/40 and a $200k mortgage. You redeem investments and payoff the mortgage... if you now have $800k of investments that are 60/40 then comparing your fixed income return to your mortgage interest rate in making the payoff decision is incorrect... it should be your overall investment rate of return.

OTOH, if after paying off the mortgage you then have $800k that is now 75/25 then I agree with what you posted.

Yes, this is exactly what I was thinking. The previous assumption was basically all funds in bonds, clearly not smart. It is a totally different equation if the source of the payoff is after tax, pre tax or tax free. Even somewhat conservative investments beat inflation handily. If the source is after tax, for people that invest per his site, it makes little sense to paynit off. If guaranteed income from pensions & SS easily cover you living and discretionary expenses, then there is no "increased cash flow", rather it becomes a cut and dry investment decision. Those are far more relevant decision factors.

Renting vs having a mortgage are totally different decision points, either based on market and location or absolute cost. Rarely do they go hand in hand. The net cost of renting what I want (which is available) vs purchase of the same property with a mortgage isn't even close; the mortgage is far cheaper, not even including the equity build or appreciation. In our market here, rarely does renting make sense except for short term, if you can afford the down payment and have good credit.

 

[freedomatlast]

Paying off early gives you a guaranteed 3.625% return minus the tax benefits. Can you get a higher return guaranteed any where else?

 

[Perryinva]

Whether or not to carry a mortgage in retirement is, of course, an individual decision.......
When I was planning my retirement, I felt that in my case it made more sense to not have a mortgage. So, I paid it off several years before retiring. Aside from the financial aspects, I love not having a mortgage to pay.

This is where I agree with pb4uski completely. Did you have a mortgage most of your life before retirement? When a job loss coupled with the mortgage could have been a disaster? Where you on pins and needles with that situation? That is what I don't understand. Either you can afford to own the home or not. I've had a mortgage or two most of my adult life. I dont worry anout it, ever. I monitor rates and when they drop, I refinance. I've refinanced at least 8 times in my life. Minimize unnecessary costs. In retirement, where there is no possibility of "job loss", and wealth accumulation should feasibly allow puchase of the home outright, a mortgage should be of even less concern. If you have to struggle to be retired and make your mortgage payment you are either living above your means or shouldn't be retired. I don't see the point in tying up $100s of 1000s of dollars in a at best, not easily almost inaccessible investment that at best makes 2.7%., based on my current 3% loan. Guaranteed? No, but that's a weak argument, as in the last 20 years I've easily beat that by 3 -30% per year.

 

[Sunset]

Interesting thread, I have grappled with this same question for a long time. My adviser of course tells me it makes no sense to pay off the mortgage financially, I understand the math completely. .....

Your advisor unless paid by the hour, makes more money if you have a mortgage. If his fee is 1% (which is not the highest I've seen) then he makes an extra $2,500 per year from you keeping your $250K in investments.

So you should include that in your calculations of the savings of paying off the mortgage.

 

[daylatedollarshort]

Interest expense on a $237K mortgage at 3.625 a year is $8,591. Investment income on $237K at 3.625 a year is $8,591. Before taxes, it is a wash. Personally, I would not sleep much better at night paying off a mortgage if the financial impact was zero.

I'd look at the impact of taxes, expected future investment returns and asset protection potential of having a mortgage. In some states the money might be safer in the retirement accounts and in other states the house. It depends where you live.

 

[joeea]

Would it be a bad idea to dip into my retirement to pay off the mortgage?
Emotionally, I don't like having a lot of debt.

Financially, I don't see that it makes sense to pay off your mortgage. You have a great rate, and presumably a tax situation that makes keeping a mortgage a favorable decision under today's tax laws. And presumably your retirement funds are invested in vehicles that are returning more than you are paying for your mortgage.

But you don't have to make that decision now.

Why don't you wait until you have been retired for a while and see how you feel emotionally then?

You'll certainly have the funds to pay off the mortgage later if you still feel the need for some reason.

Once you pay off the mortgage, it's much harder to change your mind.

 

[joeea]

Paying off early gives you a guaranteed 3.625% return minus the tax benefits. Can you get a higher return guaranteed any where else?

Do you invest all of your funds in instruments with guaranteed returns? If not, why not?