Q: In September, I’ll be 59 1/2, and I plan on retiring before the end of the year. I have $1.7 million in a private pension fund and about $1.4 million in property value that’s split between two homes.

I have one remaining debt going into retirement, a mortgage on my second home with a balance of about $378,000. The monthly payment is about $3,200 with about $1,000 of that going to pay down the principal of the loan. The mortgage is an adjustable rate mortgage (ARM) currently at 5.375 percent, but it will go up a point each year starting next year.

Since I’ll need to withdraw $50,000 to $60,000 a year from my private pension fund to live on, and it’ll be a few years before I get social security, should I payoff the mortgage later this year? I’m not sure how the taxes on the withdrawal will impact me down the road.

A: Before you retire, you may wish to refinance your ARM into a 15-year mortgage. If you choose a 15-year mortgage at 5.5 percent, which is the going rate, your monthly payment will drop slightly, to about $3,100 per month. That’s just slightly above what you’re paying now.

While that monthly payment is somewhat hefty, you’ve got the assets to make the payment each month, and you’ve fixed your interest rate problem by capping the interest rate at a really low 5.5 percent.

The problem with tapping your assets to pay off this loan is the staggering amount you’ll spend on taxes to do it. If you need $378,000, you’ll wind up withdrawing nearly twice that in order to pay state and federal income tax on the money (you’ll be in the highest tax bracket, so you’ll pay 35 percent plus state tax on the withdrawal).

Withdrawing that cash now means it has a lot less time to grow over the course of your retirement. While withdrawing an extra $36,000 per year isn’t cheap, I think most financial planners will tell you that allowing as much of your $1.7 million to sit untouched, growing tax-free until you need it, is the way to ensure you have enough cash for retirement.

Once you start receiving Social Security at age 62, you can use those funds to pay down your 15-year mortgage more quickly. If you put an extra $15,000 toward your mortgage each year starting this year, you’ll pay it off in 10 years instead of 15.

Finally, you might benefit from the advice of a financial planner. He or she can sit down with you and work the numbers with you. You have several issues that will need to be discussed, including the impact of the interest deduction on your income taxes by keeping the loan, the costs in terms of income taxes paid by you for withdrawing the money from the pension plan, and your planning for your retirement. You can get a referral to a fee-only financial planner, who will charge you hourly, at the Financial Planning Association’s website, www.fpanet.org.

Published: May 25, 2007