Should You Have a Mortgage in Retirement?
A growing personal finance debate centers around whether or not individuals should have a mortgage when they retire. A surprising number of retirees maintain a mortgage — 4 in 10 in 2007 — but is this good financial management?
US News says that most people are better off paying down the debt before they retire, but that the answer is not clear cut. As such, they recommend the following should be considered when making your final decision:
Compare returns. Some retirees keep their mortgages in hopes of achieving a higher rate of return elsewhere.
Weigh the tax breaks. The interest you pay on your home mortgage is tax deductible. But you only benefit from this tax perk if all of your itemized tax deductions add up to more than the standard deduction that most taxpayers receive automatically.
Preserve your retirement accounts. It can be tempting to dip into your retirement stash to pay off your mortgage. However, your tax bite could jump if you withdrew a large sum from your tax-deferred retirement accounts in a single year.
Consider refinancing. Refinancing from a variable-rate loan to a fixed-rate mortgage can help minimize mortgage payments in retirement.
Keep some savings. Although eliminating your mortgage is a worthy goal, high-interest debt such as credit cards and car loans should be paid off before a mortgage.
Like much of personal finance, the best decision on this subject will vary from person to person based on circumstances, goals, preferences, and so on. But in general, we're of the opinion that a retiree should be mortgage-free before he leaves the work world.
What's your take on the issue?
Should You Carry a Mortgage into Retirement? [US News]
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Comments:
When I got my first mortgage, it was a 30-year and would have put me over age 65 (which admittedly may not be my retirement age) by a few years. Since then, I've taken advantage of rate cuts and refied it down to a 20-year mortgage, putting me a few years ahead of age 65. My goal is to have my mortgage paid off before I retire. I would have liked to have paid it off before my kids go to college, but alas that didn't work out.
My parents picked up their house in their 50's. with a 30 year mortgage. They won't ever see the benefit really
I intend on having no mortgage in the next 10 years. I'm a long ways off, but that is my goal. Not having a mortgage payment will be a huge monkey off my back! And just imagine how much extra I can tuck away for retirement.
I keep that in mind when I'm idly looking at refinancing--I won't take on a 30-year loan now, so I'd only do a shorter-term fixed loan that still managed payments low enough to be feasible.
To everyone who has parents who didn't buy homes until they were in their 40s or 50s - why did they buy a home? My question is not, "why did they buy so late," because obviously some people cannot afford a home, regardless of age, but I want to know why did they choose to buy a home, knowing they will have a mortgage for 30 years, and instead not continue renting?
There's also the issue of moving to a new home at retirement, which introduces a whole other set of pros and cons to weigh. My wife's parents sold their home at retirement and used the proceeds to buy a smaller one in one lump sum cash payment. Although I understand their motivation at the time -- not to spend the rest of their lives paying off another mortgage -- they did spend the rest of their lives "house rich but cash poor." It was an instance where I think a good advisor -- competently doing his or her job -- could have helped them to balance their debt and savings in a better way.
@pecan 3.14159265: For all of the usual reasons people choose to buy a home over renting.
The ability to improve/build on the home as they see fit, paint the walls, own however many pets they want, not having to deal with surprise inspections or deal with a landlord, wanting more for their money.
A lot of times you can end up paying less for that mortgage than you do for rent, and have a much larger, nicer living environment in return.
@pecan 3.14159265: In my family's case:
1.) My dad's job moved to a much lower cost-of-living area (from Boston to Providence) and there was a relocating stipend involved. In addition, in the area where they now live, renting is decidedly not the norm.
2.) Living under landlords blows. Several times in my parents' (and my) life, they / we were renting apartments in houses [I grew up in the corner of the world where two- and three-family houses are the norm] that were fairly suddenly foreclosed upon or sold, forcing their / our lives into sudden chaos. My parents wanted some stability.
When something breaks in my parents' house, they can call a plumber or an electrician and have it fixed. When my mom didn't like where a closet was, she put up some drywall and took down some drywall and flat out moved it. She's been able to make the bathroom and kitchen and living room any damn color she wants. (My dad couldn't care less as long as it's not something like puce or fuchsia.) When it snows, they deal with it.
After 30 years of relying on landlords who wouldn't call a plumber, who let the back porch rot, who didn't de-ice the front steps and who let the railing bolts rust, so that my mom fell down them and the cast-iron railing landed on top of her, after not being able to build a treehouse or hang a hammock, after being subject to the whims of others, they wanted to own their own damn property. And I don't blame them.
@pecan 3.14159265: They probably want to retire and live in the same home. With renting, you could find yourself moving pretty often.
If you have a lot of equity in your house I would say get the biggest mortgage you possibly can. Use that money as a buffer for anything. If you die, guess what? Try collecting from a dead person. You do not owe a huge inheritance to your children, and I think it is smarter to use that money for your family while you are still alive. I don't see it as a good thing for your relatives to see your death as a financial windfall.
I coach people everyday on matters such as this. Just because it is a 30 year note does not mean it will TAKE 30 years to pay it off.
I have clients that just got into their house, 30 year fixed note. In about 9 years, they will be debt free INCLUDING that house.
You should not have any debt when you retire, you should be able to enjoy retirement without fear.
@gaywolverine If a person dies with debt, the companies try to get any of the living relatives to assume the debt. If they do, the mortgage is still there thus creating a financial windfall. Otherwise, in addition to losing a loved one, they are not forced to quickly move all belongings out of a house before the Probate period is up.
@gaywolverine: So those "reverse" mortgages aren't good deals then?
Though I always loved the Jeanne Calment reverse mortgage story:
"In 1965, aged 90, with no living heirs, Jeanne Calment signed a deal to sell her former apartment to lawyer André-François Raffray, on a contingency contract. Raffray, then aged 47, agreed to pay her a monthly sum of 2,500 francs until she died, an agreement sometimes called a "reverse mortgage". Raffray ended up paying Calment more than the equivalent of $180,000, which was more than double the apartment's value. After Raffray's death from cancer at the age of 77, in 1995, his widow continued the payments until Calment's death."
I would say having a mortgage-free house should be a precondition of retirement. That said, let me respond to U.S. News' list of exceptions.
1. My parents damn near lost their shirts over the financial crisis of 2008-9. If you're retired, you're finished investing. You have no business in the stock market whatsoever. Given that returns on relatively safe investments, such as money market funds, T-bills, and such, is pretty pitiful right now, the advantages of paying off your mortgage is clear.
2. The fact that certain expenses are tax-deductible is no reason to incur such expenses. Consider the fact that you are no longer paying mortgage interest to be the same as income, and you need income to retire.
3. If you're worried about bumping yourself into a higher tax bracket for the year you decide to pay off your mortgage, do the math. You might schedule your payoff for the first week of January, and do two withdrawals, one in December, and the other after the New Year.
Also go to Wikipedia and look up "progressive taxation." Pay particular attention to the part where it says only income above X dollars gets taxed at the higher rate. Republican politicians and the sort of conservative columnist who writes for U.S. News would have you believe that going one dollar above X means ALL your income gets taxed at the higher rate. NOT TRUE.
4. If you are still holding an ARM at retirement age, you should know better. If you were one of those people who treated your house as an ATM machine until your equity evaporated in a puff of smoke, best of luck on that refi - you'll need it.
5. Ditto for credit card debt, car loans, etc. If you still owe a bunch of money on that stuff, you are simply not financially ready for retirement, period.
@rjhancock: Though it's worth noting that there's no reason for the relatives to assume the debt, and that most people would rather move furniture over a weekend than take on payment of another mortgage.
@Etoiles:
Everything you said there plus being late for work because your car is snowed in AGAIN as you work evenings/nights and the landlord only clears the snow at lunch, if they bother at all.
If chains/spikes were legal here, I'd put them on and stop caring, but alas, they're not.
@pecan 3.14159265: Unless the mortgage payment (net after tax effects) is significantly more than the rental payment, why wouldn't they? If they're going to be stuck paying rent every month, why not pay a mortgage instead and build some equity, have the flexibility to make any changes they want to their home and perhaps have an asset to leave to their kids?
@pecan 3.14159265: I got a late start on building my financial stability. Call it falling in with the wrong crowd when I was younger, or whatever, but I didn't buy my first house until I was almost 40.
@Etoiles: I'd be willing to guess that in these times, most people aren't in situations where they can afford to buy a home until their late 30s/40s. I own a condo now, but I don't plan on living here forever. Unless I manage to make some sort of obscene profit on this place, I doubt I'll have a big enough chunk of cash for a down payment on a new place until I'm 40. I make good money, but I'm single and don't see myself married/engaged/cohabiting in this lifetime.
My guess is so they don't have to live in an appartment complex and a lot of rental homes are not so desirable, at least where I live.
I never understood the "keeping the mortgage for the tax deduction" argument. The interest on the mortgage has to be greater that the actual deduction, right? If you don't pay taxes on 9,000 in interest, you save about 3,000 off your tax bill. If you don't pay the interest at all, you have to pay an extra 3,000 in taxes on the extra 9,000 in income. In the first case you're still out 6,000 in interest paid to the bank. In the second case, you have an extra $6,000 IN YOUR HAND. Plus, only the interest is deductible so by the time you're in the last 10 years of a 30 year mortgage, the deduction is shrinking rapidly.
My goal is no mortage (which I should reach by age 57). To me it means greater flexibility in retirement. It means I can get by on a lower income, which means my nest egg lasts longer, or doesn't have to be as large to begin with. It also means the equity is there to be tapped should the need arise.
@pecan 3.14159265: You can also pay down the mortgage faster. I have a 30-year mortgage (with no early payment penalties) and I certainly don't expect to be paying it for 30 years.
@Etoiles: We were in the exact same situation when I was growing up, and my parents bought a house when they were in their 50s for many of the same reasons. My only concern is that they are now approaching retirement, and I am worried that they will have trouble making their payments as the cost of living goes up....
Side note: Growing up without owning a house is also why I took out a mortgage at age 27, pre-paid like mad, and now just have 18 months or so to go.
No mortgage in retirement! Absolutely not! If your house is paid off, it takes a MUCH bigger financial shock to kick you out of your house than if you have to have monthly mortgage cash to come up with. Yes, you could probably get better returns by not paying it off, but that is a matter of statistics, and is therefore a gamble.
My grandfater retired in 1973. In 1974, the stock market tanked. As a long term investor who got his start during the great depression, my grandfather decided to re-mortgage his house and use the money to buy stocks. He got a 4% fixed rate mortgage through the VA and used it to buy a basket of large-cap stocks that had been beaten down in price but were paying 10% dividends. The dividends paid the mortgage bill for about a year and a half and then sold about 2/3rds of the stocks to pay off the mortgage. The rest he kept. 25 years later it was worth almost 700,000 and paying 17,000 in dividends.
@mechteach: Yeah, I think that's what makes me want to own a place someday so badly. Though right now it's just not in the cards (my fiancé and I value mobility at this time, and the area in which we are living is not really an entry-level ownership area unless we want a condo that's smaller than the apartment we're renting).
@mechteach: I think this is the crux of my question. The cost of living is going up. You're retiring, living off your assets and savings, and not making as much money as before. To me, I wonder how sustainable it is to pay for a mortgage, for the power to run the home and the upkeep of a home.
Everyone should seek to own their home free and clear by the time they retire. Worst case scenario, you will have a place to live - any financial crisis is only magnified when your home isn't your own. Shelter is a critical human need, so pay off that mortgage!
What people are forgetting here is that many of us pay rent, myself included and that's never going to go away. I bought my first house when I was 26 and my 2nd when I was 33 and gave it to my wife in a divorce when I was 50. I'm done owning houses (I'm 55). So, what's the difference if you have a mortgage or pay rent. Someone please tell me.
I've read a lot of financial advice telling people that is what they should be doing now, that the market is down. Go ahead and refinance...cash out and then buy stocks. Problem is, no one has any money, and with home prices so low, no one has any equity! The best I could do is bump up my 401k contributions...
@econobiker: I think I am in love with that story. Especially the part about living long with red wine and chocolate. Except that I feel really, really terribly for Raffray. Ouch.
@bishophicks: Yeah, it makes no sense unless your marginal tax rate is 100%. And not even Obama is likely to jack it up that high. ;)
People are silly. They'll flush away $1000 to avoid giving $200 to the government.
Some retirees keep their mortgages in hopes of achieving a higher rate of return elsewhere.
That's a dumb idea. It's exactly the same thing as borrowing money against your house in order to invest. You'd think people would have learned their lesson about leveraged investing by now.
My mom's mortgage payment in the late 90's, early 00's was $100 a month. In 20-30 years, your mortgage payment will be 'smaller' due to inflation too.
@Eyebrows McGee (now with more baby!): As a first time homebuyer I'm in the same philosophy as you, maybe make that extra 13th or 14th payment each year to knock it from a 30 to a 22 year loan, or less if you really try.
@HurtsSoGood: I'm a long ways from retirement but agree 100% with this philosophy. I don't think retirement should come at a certain age but come with a knowledge that all of your debts are paid off and you can live off of substantially less money per year (no working income) because you just have day to day debts.
It is not "your house" until the mortgage is paid off. Until that day, the finance company that you have your mortgage with is the real owner of the house. Many thousands of folks are learning that lesson right now during the foreclosure craze.
@pecan 3.14159265: Which is another good reason to be paying down my own mortgage, so I can help them with their payments when they will inevitably need it...sigh.
@Etoiles: I'm lucky to live in an affordable city (one of these, yay: [is.gd]) - I know that many aren't as fortunate.
@Mr.Duke: sad but true; yet where are people to live after retirement?
of course, how is the typical company supposed to pay off the mtg in the 1st place?
@floraposte: heck yes. when my dad passes, the house can go back to the bank. i am NOT paying for it. wouldn't even if i could afford it.
@Etoiles: preach it!
i just wish i'd not been such as fool as to allow our finances to get to where owning a house will never happen.
I believe the best option is to be totally out of debt, including your mortgage by the time you retire.
Second, if I were to do things over, I would have gotten a shorter mortgage earlier. Mortgage interest rates when we bought our first house were 18%, then 14%, then 10%, then hung at 8% for awhile, to 6.5%, so we did several refis to get better rates. Our last mortgage is a 9 year.
I have a bit more than 3 years left on my mortgage, balance of the mortgage is around $30K, our rural home was appraised 6 years ago by two appraisers for $275K.
We also have no other debt and plan to keep it that way. 401K and investments took a serious beating, but are well on their way back.
Eventually, we will move into a nearby small town when our health forces the issue.
My spouse is looking at another rural home, this one is on a paved road and is much newer than our 1910 vintage home, but I really don't want to get a mortgage to buy it.
I'm 56, she's 58 and both of us want to work until Social Security kicks in, maybe longer.
My biggest concern is keeping my job, since my employer has offshored around 70,000 US jobs to low cost countries in the last 5 years and shows no desire to slow this pace. This explains my reluctance to get a mortgage to buy the property my wife wants.
As unstable as the economy is and with unemployment still growing, I'd have a very hard time convincing that refinancing your home to cash out equity to reinvest in the stock market due to the risk this entails. A lot of people don't have much equity since market values of homes have plunged. The stock market is probably good for it over the long term. Interest rates are low, but you're also risking the loss of your home if your income stops due to loss of your job. Yes, you can sell some stock if necessary to make the house payments, but this could happen during a bear market when your stock are at a low point..
I don't scream at old family members when they talk about their money. I will whine at you, however.
A few of my relatives keep small mortgages so that their banks will take care of taxes, property insurance, and senior tax freeze applications. The old people are billed monthly and the bank takes care of everything.
Also, one uncle likes having an extra bank between him and his fat lazy-ass son.
I relocated 8 years ago and my wife and I bought a house in the new location. I took out TWO mortgages ... a small 30 yr 1st mortgage, and a bigger 2nd mortgage. I paid off the 2nd in about 5 years while I was working, and now I am retired and have a $250 per month payment (no escrow), which is virtually inconsequential. The mortgage is so small that nobody is interested in refinancing ... refi costs way exceed any benefits from lower interest rates. The kids can fend for themselves ... there's a slim chance we may even eventually take out a reverse mortgage!
Well, it would have been nice if my parents could have afforded their first house before the year my dad was 57 and my mom was 48, but they couldn't. So that was the year they bought their first house. With a 30-year mortgage.
Not everyone gets to go settle down and live the picket-fence American Dream at age 35. Barring any unexpected inheritances, my fiancé and I probably won't be able to put a good-sized down payment on anything until we're in our 40s. Which means we'd still be paying it off in our 70s.