Hi

Should we pay off the home mortgage

No debts other than mortage

Amount left on mortage $110,000, 5.5% ( House value $365,000)

Turnig 65 shortly, and will draw social security,will also do some part time teaching.
Wife still working for a few more years, $60,000 yearly
Money Market Account $140,000 5.3%
Couple of IRA CD's $110,000 5.25%
Stocks $180,000

Thanks
Don

My personal opinion is that any time you can pay off a mortgage and not have to worry about that huge monthly bill, the better off you are. While it's great to get what tax-break you get from the interest (at least in the States), not having to worry about NOT having the money to pay the mortgage when you both retire, is worth much more in the long-run. I'd say, if you have the money available to you to pay it off, go ahead and do it. That way they can't take it away from you for non-payment in the future.

Agreed - debt is debt - get rid when you can.

If you have $100k in savings earning 5% and $100k mortgage costing 5%, your net asset growth is - 0%!

Simplistically, anyway.

I would have to say if you can pay it off I would most definently do that. Especially if you and your wife are going to retire soon. I know I would love to pay mine off as soon as I can.

Don, This is just an opinion and discussion of possible scenerios, based upon the partial and incomplete information you have provided. It does not take into account your personal needs, or level of investment knowledge. You should always seek the advice of a competent advisor, accountant, or legal advisor when making decisions of this nature. You should never rely upon the advice of an unknown, or unproven source. It is necessary to verify the appropriateness of the advice to your particular circumstance. Your future financial health is at stake and every effort should be made to protect your assets. Money invested (even amounts over $100,000 in a bank-FDIC insured) may lose value.
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Paying off your home is certainly one possible scenario. As Brian has pointed out, you may trade one asset for another and not only are you debt free (which by the way, you already are), but you have a nest egg of around $320K as well. Based upon your current style of investing, paying off the house could be your best course of action. You will be giving up the tax write off, which, depending on your payment amount and how long you have been in the loan, may reduce your effective rate. Your net effective rate on the mortgage could be as low as 2%, it is not a straight 5 => 5 interest swap unless you are in the last year or two of the mortgage. Once the mortgage is paid off and you have no payments, you can devote the next couple of years to socking away as much additional money as possible.

But is it enough? Is it a wise use of your assets? Are you doing the things that are needed right now?

Only you can answer those questions based upon your goals , dreams, needs, and wants.

Let me caution you on a couple of things right away. First, your IRA cd's are a timebomb for you. You are already 65 and must have them emptied by age 70.5 or face mandatory distribution (big penalties and interest). The tax scenerio is not pretty. You need to divide up the total value and take distributions over the next 5 years to minimize your taxes (you did not mention ROTH, so I'm assuming they are not). This may not be quite so worrysome if your wife is younger than you, and some of the cd's are hers. Either way, you do not want to take lump sum distributions! Begining at age 59.5, it is time to start rolling them into something you can have better control over. You may want to roll your cd assets into an EIA (equity indexed annuity). With the proper fund, you can have guarantees of 5% growth, plus upside market potential. You can also set a schedule for withdrawals that you cannot outlive. (Talk to an investment or insurance professional.)

Consider the house being paid off. Lets say you and your wife stopped working today (someday she will). You are looking at living off the interest of $320,000 + SSI. Drawing off the interest only, you might get $17,000-$20,000 plus SSI with your current numbers (5.3% range + stock returns). You also have taxes to pay on that 17-20K, so it will be a bit less. With the SSI added, you may have $40K or less to live on annually...but you will feel OK because the mortgage payment is gone. My guess is your lifestyle has been a bit nicer since you and your wife sound like $100K+ annual earners. That is why she is still working and you are picking up a bit of work here and there. Now if we include a minimal inflation rate of just 3%, in 15 years your $40K has now erroded in value to about $25,000 of buying power, and that is if SSI survives! Probably not where you thought you would be late in your retirement. You can/will add to that amount by drawing down your principle, and now it becomes a race to see if time, or the bank account, run out first. If that is not enough, you can always sell the house and scale down, again probably not what you want to do late in life when you want the comfort of a familiar home.

Meanwhile, you have an asset of $365,000 (growing in equity at a rate of 5-10% regardless of balance owed), earning you absolutly no interest return. Lazy, idle dollars. Some would think this to be a safe investment... but the cash value may not be available when you actually need it. This same money could actually be working for you when you are too old to work for yourself. When structured correctly, an interest only mortgage, or minimum payment mortgage, is far better than a Reverse Mortgage. You have access to a greater amount of the cash value, and you have fully regained the tax writeoff. The invested dollars (borrowed at an effective after tax rate of 2-5%), may return 8-10% or more. Not only can this margin pay the house payment in perpetuity, it can also add a substantial amount of dollars to a retired couple's income. (See: Missed Fortune 101, Doug Andrew)

This is not true. At age 70 1/2 you must start taking a required minimum distribution (RMD), you are under no obligation to "empty" anything. In fact, the IRS recently liberalized the table used, so you can stretch the distribution over a longer period of time than ever before.


Unless you've got a crystal ball nobody else has, you really shouldn't be saying this. Real estate can go up and down like anything else. In the US it has stagnated or actually decreased in value on occassions. And given the crazy run-up over the past few years in a whole bunch of markets (DC, So Cal, NY City, metro Boston, Denver and Phoenix) we're as likely going to enter a flat period as anything else. My personal view is that real estate will hold its value but not rise like it has in the past, but who can say for sure? In the early '80s people in Houston were sticking their front keys in the door locks and driving away.

Not necessarily. First, you can take out a home equity line only up to $100,000, AND second, it may kick you or kick you further into the alternative minimum tax. Also, just so you know, a home equity loan is anything that's not either used to purchase or improve your home, so anything you'd suggest to them would fall into that category as best I can tell.

How do you get a risk free return of of 8% to 10%? I say that b/c you're not just screwing with an investment here, but with somebody's home. To say nothing of it being the home of somebody who's peak earning years have passed.

GMORK- Thanks for the critical review. As you said, this is not something to screw around with. That is why I started out with:
"...based upon the partial and incomplete information you have provided. It does not take into account your personal needs, or level of investment knowledge. You should always seek the advice of a competent advisor, accountant, or legal advisor when making decisions of this nature. You should never rely upon the advice of an unknown, or unproven source. It is necessary to verify the appropriateness of the advice to your particular circumstance. Your future financial health is at stake and every effort should be made to protect your assets. Money invested (even amounts over $100,000 in a bank-FDIC insured) may lose value."

I think we agreed on the IRA distribution...just used different words. No, you are not required to empty the IRA but you face penalties if you don't. (must have them emptied by age 70.5 or face mandatory distribution) vs. (At age 70 1/2 you must start taking a required minimum distribution)

No crystal ball was used to determine that homes have historically gone up in value. Based on a study at Yale, a home selling for less than 75K in 1987, today sells for around 220K. Even adjusting for inflation, that same home has gone up in value nearly 100K. My Grandmother bought a home in the 1930's for $1200 and sold it 50 years later for something around 80K. Even though I agree the market may be experiencing a bubble currently, the trend seems firm over time, even if it is only a product of inflation.

Quote:
You have access to a greater amount of the cash value, and you have fully regained the tax writeoff.
"Not necessarily. First, you can take out a home equity line only up to $100,000, AND second, it may kick you or kick you further into the alternative minimum tax. Also, just so you know, a home equity loan is anything that's not either used to purchase or improve your home, so anything you'd suggest to them would fall into that category as best I can tell. "

This was taken out of context...I was making a comparison to a reverse mortgage which is being heavily advertised to seniors these days. Your comments are about a different situation.

Finally you mention a risk free investment. I don't believe there is such a thing. You gave an example earlier of families walking away from homes in Houston. I'll bet they wish the cash was in the bank instead of locked up in a home they could not sell after making payments for years. A home is not considered a liquid asset. There are no guarantees in any financial matters, or in life, so we use our best data, our advisors look at our situation, and we roll the dice. That again is why it is important to seek out a professional who will consider all the options with you.

Thanks for demanding a discussion with integrity.

The key here is to speak with a competent professional. And, in this case, you need to speak with a "Retirement Income Planning" specialist. Talking to your stock broker or any advisor who helped you accumulate your funds won't do, because 1.) they don't have the time needed to fully analyze this, 2.) it's not their specialty, and 3.) they don't have an appropriate strategy.

With that being said, there are some key points to consider.

The home is a poor place to store money in retirement. Once you retire, if your income goes down you may find it difficult to get any type of home equity loan/line or refinance, when you need it the most! Some banks may help but impose limits on the amount. This leaves Reverse Mortgages as one of he only solutions, and even then it's limited to the amount and there are significant fees involved.

Paying off the home can cause an estate problem as well. An asset with no debt on it is exposed to long-term care spenddown, lawsuits, and any sort of other forced asset liquidation. Meanwhile, a home with a loan on it, and even a home-equity line of credit, is protected, and may even allow you to get more money out.

While real estate has historically appreciated ahead of inflation, there are no guarantees that this may occur. Retirement is the longest vacation of your life, and you need to make sure your money is going to last (take the age you expect you'll live to, and then add 10 years and you may be in the ballpark). Because real estate has no guarantees of performance, you may be succumbing yourself to more risk than you are comfortable taking.

Also, taking the money out of another investment in order to pay off the home is robbing Peter to pay Paul. While you save a little bit of interest (not 5.5%, more like 1-2% since mortgages are front-loaded), you are losing the lost opportunity of having that money invested in another investment earning significantly higher returns. Just doesn't make any sense.

Lastly, and more importantly, your home is going to appreciate in value regardless of whether are not you have a loan on it. The question is, do you want your money outside the home growing at a return that could be higher, or do you want your money stuffed in a mattress (which is essentially what you are doing).

This isn't about making a financial advisor more money by refinancing to pull cash out and investing in investments. This is about economics, most of which financial advisors are not trained in. Financial planners are trained in mathematics, not economics. There is a reason why businesses prefer long-term leases when they have enough cash to buy their property outright. It's because it has more economic benefits.

There is no right/wrong answer with this. What has to be done is someone has to sit down with you and work out the numbers for all scenarios. But generally, I would rather have the good debt of a mortgage with the flexilibility of having cash in a broadly-diversified portfolio than have my home paid off and no cash. If my portfolio earns 9% per year, and the cost of money (mortgage loan) is 5.5%, I have the possibility to have additional gain above and beyond the appreciation on my property. This will give me a *chance* at keeping up with inflation.

But if you lock up all the money in your home, you will lose to inflation. Keep in mind, inflation for seniors is almost twice the normal inflation rate due to healthcare needs. If you have cash in the bank, you can raise deductibles on insurances in order to save monthly premium. You can go with a high-deductible Medicare Supplement plan that cost $500/year. There is just much more flexibility, and provides a plan that has a greater chance of keeping pace with inflation and lasting as long as you'll need it to.

Last point. If you wait until you "need" the money from your home, you might end up having to sell it in a down market. This could cost you a significant chunk of your appreciation. And, unfortunately, you don't have the time to make up for lost returns.

Oh, and btw, on the RMD issue, it was confusing the way Dru said it but you both are right. Except one thing. There are no penalties involved with RMD unless you screw it up. A competent advisor should never screw this up (50% penalty, ouch!).

RMD is not as big of a deal as people make it out to be, as long as you get good advice. The % of money the IRS is going to force you to take out is not significant, and you have the flexibility to take this amount out of any of your retirement plans, even ones you are still contributing to. This isn't as scary as some advisors make it out to be.

The bigger issue with retirement plans in retirement is taxes. RMD will force you to take income that you may not need, which could increase your taxes, especially in later years. Also, there is a good chance that people today putting money into 401k's/IRA's will be in a higher tax bracket when they take that money out in retirement. How else do you think our government plans on paying our ridiculous national debt issue, let alone fixing Medicare which is an 8 times greater problem.

You should not make investment decisions based on taxes, but you should know the tax consequences when factoring in your decision. This is why CPA's tend to give poor investment advice, and why financial advisors do not become CPA's. But taxes need to be considered.

A friend just brought up another good point. Retirement plans are tax-deferred, not tax-free. There is no tax savings to speak of.

Retirement plans create debt in the form of taxes. You (or your family) will have to pay it. So whether you pay now or pay later, you'll have to pay. But there is cerainty with paying today, which has its benefits, over the uncertainty of paying later.

This is why the tax-free nature of the Roth 401k and Roth IRA make them superior to all other retirement plans.