carry my mortgage into retirement?

[albireo13]

We just downsized last year from a big-a$$ house to something smaller, lower maintenance. Unfortunately, now have fresh 30y mortgage of $347K at 3.625%. Have about $110K in equity.

I am 61yo and would like to leave the rat race in < 3yrs if possible. I currently have $770K in liquid retirement assets (IRA,401K)

Also have 176K in older pension. Wife has $842K lump sum retirement assets. She is 57yo.

Cash flow estimates tell me we will be ok to carry the mortgage into retirement. However, 30yrs is a long time to have that hanging over our heads and it makes me uncomfortable.

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.

 

[DrRoy]

That's not a bad rate. It really comes down to what you are comfortable with. Also, is your return on the assets that you would have to sell higher than the 3.625%? If so, you might keep it. How about refinancing into a 15 yr or paying down the principle faster?

 

[albireo13]

Considering tax deduction, I'm actually paying ~2.6%.

Probably doesn't make sense to pay it off. Still .. the cash flow would look much nicer. : )

 

[retired1]

Carrying mortgage into retirement is certainly not the best feeling. Dipping into retirement funds to pay for mortgage is always a bad idea. We paid additional principal payments with every payment. Every time we had extra chunk of money, we'd throw to mortgage. It has saved us lots of $ in interest.

 

[bclover]

lol, I must be an anomaly, I have no problem whatsoever having a mortgage in retirement. Like you my interest is low (3.125%) and I calculated my firecalc score with the the monthly mortgage.

so I'm comfortable with having the mortgage payment, now I say that with a caveat. I have the funds liquid in an after tax account. so if all heck breaks loose I can pay it off. that's a huge comfort.

 

[Red Badger]

We retired with 9 years left on a 15 year mortgage(3 1/8 interest). We see no valid reason for early pay off. The mortgage is just one more item on our monthly expenses YMMV.

 

[iloveyoga]

You will find a lot of opinions on this topic here. We have not had a mortgage for over 7 years and I love not worrying about it. Very liberating for me, IMO.

 

[albireo13]

well, our 7-10 year plan is to downsize further, hopefully to a smaller mortgage, to possibly a condo. In this case there's no rush to pay it off. I'd be only earning 2.6% on that money.

I'm just looking for every way possible to streamline my entry into retirement.

 

[LOL!]

My mom got a new mortgage in her 70's, so age has little to do with a mortgage.

But finances has everything to do with a mortgage.

If one needs to withdraw more money every year to make payments, then those withdrawals -- unless from a Roth -- will probably increase your adjusted gross income which could in turn change your tax credits, health premium credits, headroom needed to make Roth conversions, whether your social security is taxed, whether you pay a tax rate of 0% on LTCG and qualified dividend income, and so on.

That is, the consequences could be huge, but you wouldn't necessarily know it without running "What if?" tax returns.

Of course, if you take a big chunk out of tax-deferred retirement assets you would get hit with a big tax bill, but if you have a taxable account and can get money out without too much in the way of taxes (return of capital is tax-free, capital gains can be offset by losses, capital gains are taxed at a lower rate), then it might be better to take a one-time hit and then enjoy tax-savings for many years to come.

In other words, you have to do some sample tax returns and cannot rely on advice that you get on the internet.

 

[pb4uski]

....Would it be a bad idea to dip into my retirement to pay off the mortgage? ...

Yes, it is a bad idea. Your retirement account withdrawals will be taxed and probably throw you into a higher tax bracket. If you have substantial qualified dividends or long-term capital gains from equities in taxable accounts it throws you from the 15% tax bracket to the 25% tax bracket that is especially bad as your marginal tax rate is 30% until ordinary income fills in the 15% bracket.

Also, it is more likely than not that your investment income on retirement assets will exceed your mortgage interest.

If yu do refi or change homes, look at a 15 year as rates are about 1/2% lower.

 

[Aerides]

I would also recommend re-fi to a 30, and pay down more aggressively these next couple of years if you like, then decide at retirement which way to go.

Paying it off might not always make financial sense, but there is a luxury of knowing "it's paid for" that doesn't have a price tag.

 

[bingybear]

Considering tax deduction, I'm actually paying ~2.6%.

Probably doesn't make sense to pay it off. Still .. the cash flow would look much nicer. : )

Why I ask is I itemized before ER because my state, local, and real estate taxes exceeded to the standard deduction. In ER this is not so. I assume the interest reduction assume all the interest is deductible. Will it be? Or will much of the interest go to offset the standard deduction?

you note you have a chunk in 401k/IRA and wife has a lump sum (I'm assuming this would be moved to IRA?? Do you have any after tax funds? If you are pulling $ out of retirement account that will be taxed. This may burn more retirement $ than needed.

If you plan on downsizing, it may be easier before you retire as loans may be easier to get while you have an income.

 

[albireo13]

yes, likely to downsize again to simplify before retiring.
Last year was a big upheaval with moving expenses and some repair bills, etc.
Now we are in a much better place, cashflow-wise so, the next few years will be focussed on saving and clearing off debt.
With excess cash, I am thinking maybe we create some liquid after-tax savings instead of paying down the mortgage.

 

[Red Badger]

I would also recommend re-fi to a 30, and pay down more aggressively these next couple of years if you like, then decide at retirement which way to go.

Paying it off might not always make financial sense, but there is a luxury of knowing "it's paid for" that doesn't have a price tag.

+1 on last sentence. While we carry our mortgage in retirement, many others here have said they sleep better at night by paying it off, irrespective of the financial merits of doing so. I completely understand. For us, a big part of jumping into the abyss was our planning. Ike said it best, "plans are useless but planning is essential."

Good luck!

 

[RunningBum]

It matters very little, subject to individual tax situations. People seem to worry about carrying a large monthly expense, but the alternative is a considerably smaller retirement nest egg. Works out to more or less of a wash. Having a paid off mortgage can make it easier to sleep, but so is having a larger investment account, with the ability to pay it off anytime you wish.

If you have to sell funds with large gains to pay it off, you will take a big tax hit now. But as was said above, if you have more expenses in retirement you may need to be selling each year, which can push gains into being taxable, limit favorable Roth conversions, or take you out of an ACA subsidy. So figure out what works best for you, and sleep well with either one less big expense, or a bigger pot of gold.

 

[Blue Collar Guy]

You will find a lot of opinions on this topic here. We have not had a mortgage for over 7 years and I love not worrying about it. Very liberating for me, IMO.

Me too, If the stock market tanks and im using those funds to pay off my mortgage it could get expensive.

 

[wmc1000]

We carried a mortgage into retirement but our rate is only 2.75% and we are paying an extra $650 per mo. so it will be gone in the next 5 years. If the market tanks we can stop paying the extra principal if need be. Have fund sources outside of market investments that will cover basic expenses in a worst case scenario so those funds wouldn't need to be accessed anyway.

 

[brucethebroker]

Another situation where the true answer is not a payment, or no payment. Paying off the mortgage does not remove your entire monthly payment, just the "financial" side of the payment. Taxes and insurance are still payable, yet rarely figured into the "pay off your mortgage before retirement" argument.

In our case, with a 3.5% mortgage, the principal and interest is about $375, but our total payment is about $600 each month (including property taxes and insurance). Paying off the P&I would only save us $375 monthly, NOT $600. Because taxes are paid semi-annually and insurance annually, there is a tendency to think $600 a month will be freed up if we went mortgage free.

Personally, I would rather have the $$ in the bank and pay the 3.5%.

 

[Bamaman]

I just like to keep my business in retirement simple. And not having any liabilities gives me a certain peace of mind.

If we still had a mortgage, chances are we would have to Mickey money around to make payments and that would require Rollover IRA withdrawals not being made until RMDs at age 70 1/2.

 

[pb4uski]

....If we still had a mortgage, chances are we would have to Mickey money around to make payments and that would require Rollover IRA withdrawals not being made until RMDs at age 70 1/2.

Not at all in our case. When we refinanced our 15 year mortgage I set up 1 80 automatic payments and haven't had to touch them.

Plus, the mortgage interest deduction increases the amount that I can convert into Roths each year and stay in the 15% tax bracket because our our property and state income taxes ~ the standard deduction so our itemized deductions exceed the standard deduction by the amount of our mortgage interest and charitable contributions.

But all of this is academic because the OP does only has tax-deferred funds and was asking if he should do big withdrawals and pay the taxes to generate funds to pay off his $347k mortgage.... are people advocating paying off the mortgage in this thread really advocating that he withdraw $347k of tax-deferred money and pay the tax (let's say $70k... so total withdrawals of $417k) just in order to be debt-free?

 

[albireo13]

"But all of this is academic because the OP does only has tax-deferred funds and was asking if he should do big withdrawals and pay the taxes to generate funds to pay off his $347k mortgage.... are people advocating paying off the mortgage in this thread really advocating that he withdraw $347k of tax-deferred money and pay the tax (let's say $70k... so total withdrawals of $417k) just in order to be debt-free?"

True. The tax impact view is interesting. As I continue to pay the mortgage, it is with after-tax money so the tax hit is the same. However, if I carry the mortgage into retirement I will be paying it with after-tax money where we are (hopefully) at a lower tax rate. Thus, in the long run it seems like a win to invest now, instead of paying down the mortgage.

 

[albireo13]

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

 

[flyingaway]

Mortgage is a fixed payment, it should be compared with the fixed income portion of your portfolio. So unless you have an aggressive portfolio in retirement, it does not make financial sense to keep a mortgage in retirement in which many retirees have conservative portfolios. Some people consider a mortgage as a negative bond fund, it reduces the corresponding portion of your bond holding.
The OP has a few years to retirement, I would suggest to pay down the mortgage as quickly as possible.

 

[bingybear]

I had to ask about after tax $ as some RE questions only list retirement accounts and forget about after tax accounts. For me the taxable account has made RE much easier. ER at 53, mortgage retired at 32. But then, my house is worth significantly less than yours.
You had noted about effective interest after itemizing. Watch over estimating this. In retirement will you still be itemizing every year? If yes, will there be enough other deductions to exceed the standard deductions not including mortgage interest (do you really get a benefit on taxes).
Obviously you know you'd likely get killed on taxes if you paid off the mortgage in one go since you would have to take it out of retirement accounts. However, some like to keep a mortgage as you can still invest the $ that you would have used to pay it off. If inflation continues you get to pay off the mortgage with inflated $.
We talked about getting a mortgage before RE. DW nixed it.
Do look at the mix of retirement funds. There are some nice advantages having a mix:TIRA, RIRA and after tax. HSA is another useful one that is often overlooked.

Seriously estimate your taxes in ER. Mine are significantly different than when working. It can lead to different decisions than what you'd make when working.

 

[pb4uski]

Mortgage is a fixed payment, it should be compared with the fixed income portion of your portfolio. So unless you have an aggressive portfolio in retirement, it does not make financial sense to keep a mortgage in retirement in which many retirees have conservative portfolios. Some people consider a mortgage as a negative bond fund, it reduces the corresponding portion of your bond holding. ....

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.