If you’re nearing retirement and still carrying a mortgage you’re probably worried about managing your mortgage payments in retirement. And, who could blame you?
A new survey by the American Institute of CPAs found that retirees’ biggest concern is running out of money, and your monthly mortgage payment, which typically includes your real estate taxes and insurance, is a huge ongoing expense.
Traditionally, retirement professionals would advise you to avoid entering retirement with any debt, especially a mortgage payment. Yet for many retirees this isn’t an option and some financial planners even say it can be a smart decision. So does this make sense for you to pay off your mortgage before retirement or enter retirement managing an ongoing mortgage payment?
Here are four questions you need to ask yourself if you’re considering carrying a mortgage into retirement.
1: Can you pay your mortgage off before retiring?
The first thing you have to figure out is whether you have the resources to pay off the debt before you retire. If you’re one year away from retirement and still owe $100,000 on your home, you might not have many options beyond continuing to make mortgage payments once you retire. Unfortunately, many older workers don’t have enough money saved up to live comfortably in their golden years and you want to avoid draining your retirement savings for anything else, especially considering the tax penalties of doing so. The idea of not having a mortgage payment each month is nice, but it isn’t an option for everyone.
2: Are you financially prepared to carry a mortgage into retirement?
Many of the proposed benefits of carrying a mortgage into retirement have to do with how you could use your extra money instead of paying your mortgage off early. You might see a better return by investing this money, for example, compared to the interest rate on your home loan. If your retirement accounts are fully stocked and you’re ahead of your planned savings goals, you could feel comfortable keeping this monthly payment and try to earn more money instead. But if you worry about making these payments after you retire, do your best to pay it off first, whether through additional monthly payments or refinancing.
3: Do you want to stay in the house?
Another factor to consider is what your retirement plans are. Will you be downsizing? Traveling? Moving to a new home in a new country? If your retirement plans don’t include your present home, you might focus on selling it, rather than paying it off and enjoying your downtime in this house. If, however, you plan to stay put well into retirement, consider this: Can your budget tolerate this cost? If it can, this might not be an issue, but you don’t want to add any extra stress to your retirement years. If you do want to stay and your budget can’t accommodate an ongoing mortgage payment, a reverse mortgage might be an interesting option (though one fraught with its own special and unique issues).
4: Will managing an ongoing mortgage payment affect your child’s chance at homeownership?
Plenty of parents help their children with the down payment on their first home purchase. Others work on getting student loan debt paid off instead. And, if you can afford to do it, these are lovely ways to help your children. But if you’re still paying off your own home when your children are settling down, you might not have the funds available to assist them. Whether you’re able to help can, in some cases, have a huge impact on your child’s ability to own a home, so if this is a goal for you and your family, you’ll want to calculate how your own mortgage could get in the way.
Here’s what you should be thinking through:
There’s a lot to think about with a decision – and sums of money – this big. Your retirement savings, the number of years left in your career and your mortgage interest rate all play a factor, but just as important is your plan for what you want your retirement to look like. Don’t want to worry about paying your mortgage in those years? Now is the time to look at the details and pay it off faster (just don’t forget about continuing costs). But if you’ve been saving for decades and are confident about keeping this expense, you might be able to make more money by using your resources in other ways. As always, no matter what you decide, you should talk with your retirement planner and be sure the numbers add up.
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