Our Most Common (and Surprising) Retirement Recommendations
One of the most common questions we’re asked is, “What’s the best thing I can do to prepare for retirement?”
There are probably as many answers for that as there are variations of unique circumstances and situations. Everyone has different levels of savings, pensions, and lifestyle goals for what can be an exciting – but also scary – phase of life.
However, one recommendation is a common thread in many of our discussions. It’s not a cure-all, but this one solution tends to solve a number of issues at once. But it still takes clients by surprise when we give them our advice: pay off your mortgage.
Across the US, the number of retirees carrying a mortgage into retirement has been steadily climbing. In the years between 1989 and 2013, the number of households holding a mortgage in the ages 65-74 almost doubled, going from 21% to 39%. And those age 75+ fared even worse, with only 6% having a mortgage in 1989 and 19% as of 2013 (more than 3 times more).
This trend, which the Washington Post labeled “the new retirement time bomb,” is alarming. The War Generation was adamant that their debts be gone before their paychecks end. Their Baby Boomer children haven’t held onto this idea.
“Avoid using debt” is our second stewardship principle for a reason. Debt can be a very useful financial tool, but it can also be a money straitjacket. Whether you’re in retirement already or rounding the bend for your final lap at work, there are 3 primary benefits retirees get by freeing themselves of their mortgage.
1. Lower cost of living
This one is the most obvious. The mortgage payment is often a family’s largest single monthly check. If you don’t have to pay this bill, you don’t need as much money to live on. That may mean more money to spend on travel or grandkids, or it may mean less stress on investments, pensions, annuities, or Social Security payments.
2. Greater peace of mind
If an asset has debt attached to it, it’s not fully “yours.” If you doubt that, stop paying the bank for a few months and see what happens. Once the mortgage is paid off and you have a clear title, it’s very difficult for you to lose your home.
3. More flexibility
Along with the greater peace of mind, you’ll also have more flexibility if you own your home outright. Decide to move to another city? Rent out your old home or wait to sell it until you’re in the right season. Either way, you won’t get into the dreaded two mortgage situation.
4. Known return (or rather, loss)
Your home is not an investment. But there’s an old adage that you should keep a mortgage as long as possible and invest the surplus cash instead of paying down the debt. This assumes that the mortgage is a relatively low interest rate, say 3.5%, and that the investments return a higher rate, such as 7%.
My guess is this proverb is spread by those who benefit from sales of investment products. Because this rarely works in reality. I’m not saying the math isn’t possible; I’m saying the behavior isn’t probable. It’s very uncommon that I find a fiscally responsible family who had the discipline to both invest consistently and hold their long term investments for the greater gain.
The great problem with this concept is that it assumes a particular investment return. It is true that the market has returned an average like that with the total stock market over long periods, but it’s not a given. And you may have to wait patiently to get it. It’s an average because some years might be higher, and in some years you might lose more than you pay out in your mortgage. There are many other variables based on the particular investments selected and whether the investor can stomach volatility.
You know what is a given? You will achieve a negative return via your loan’s interest rate. For many homeowners it makes sense to eliminate their known losses instead of chasing potential returns.
What about the interest deduction? Is it worth keeping your loan for the mortgage interest deduction? Probably not. First off, it only helps if you itemize. Second, an interest deduction is a tax break for giving someone else your money. And it’s not dollar for dollar. Even if you’re in the relatively high tax bracket of 33%, you only get back $0.33 of every dollar you pay to the bank. You’ve still lost the $0.77.
Some warnings
Of course, everyone’s retirement is unique. So it’s important that you get advice specific to your individual situation. Though paying down the mortgage is our most common retirement recommendation, there are situations when it is actually bad advice. An advisor can help you evaluate if this is something you should do.
For instance, this post assumes that you can pay off your home and still maintain adequate liquidity and a robust emergency fund. If paying off the mortgage means draining all your cash, you should hold off.
I also assume you’re planning to stay in the house. If your plan is to pack up the day after retirement and permanently move to Daytona Beach, then it might not be best to kick out the bank right away.
So whether your coworkers are getting ready to break out the retirement party or you’ve already settled in with your post-work routine, consider paying off the mortgage to gain the freedom and flexibility of shedding debt.
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