16 January 2018

Should You Pay Off Your Mortgage When Retiring?

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Today, your pension has likely been replaced by a company-sponsored 401(k) plan that, mostly, you fund yourself. Few companies offer health insurance for retirees anymore, and those who still do are eliminating or scaling back. And your mortgage? Increasingly Americans are going into retirement with big debt, especially mortgage debt. 

According to a new report, Baby Boomers & Their Homes: On Their Own Terms – released last week by The Demand Institute, a think tank jointly operated by The Conference Board and Nielsen, Baby Boomers are carrying much more mortgage debt than earlier generations at this life stage. And 40% were planning major home improvement projects over the next year, which would increase that debt.

Other findings of the survey of more than 4,000 Boomer households (ages 50-69):

• For Boomer movers, the common wisdom says to downsize. But most are actually looking for nicer homes and more space, not less. In fact, 45% of movers will upsize, and 56% of those who plan to move will take out a new mortgage.

• Meanwhile, most Boomers who currently own their own houses still owe money on those homes. The median outstanding mortgage balance for a 50- to 69- year-old household has grown 142% since 1992.​

​So, the big question for those looking at retirement: Should you pay off your mortgage when you retire?

And the answer is: It depends.

Jeff Warnkin financial adviser at, JL Smith Group in Avon, Ohio, says even though there is no yes or no or right or wrong answer, he prefers clients to pay off their mortgage. Still, he says, it is not a stand-alone decision. It should be part of a larger plan.

The planners agree that you should not take money from your retirement account to pay off a mortgage. Note that you have to pay taxes on money you take out of your retirement account to pay off your mortgage.

Pre-retirees have two choices. The best way to have a mortgage at zero on day one of retirement is to prepay the mortgage.

Emily Sanders, managing director at United Capital in Atlanta, looks at a mortgage in terms of how many years before it's paid off, as well as the interest rate.  Sanders says another wrinkle has to do with tax deductibility. Sometimes a client believes the mortgage interest is tax deductible, and when she drills down, she finds that it is not fully deductible for some high-earning clients.

John Gajkowski, co-founder of Money Managers Financial Group in Chicago, said when he sits down with clients to discuss the mortgage, there is a financial aspect and an emotional element. If they can afford to continue to pay the mortgage financially, it makes sense because it gives them greater control of their money. The house keeps appreciating. And they still have control of their money. They have two assets working for them, as opposed to having all the money in the house.

Click here to access the full article on USA Today. 

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