Should You Pay Off Your Mortgage in Retirement?
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- Опубликовано: 16 июн 2024
- Should you pay off your mortgage in retirement? While we assume that debt-free is better, that may not always be the case.
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Timestamps
0:00 - Should You Pay Off Your Mortgage in Retirement?
0:59 - What is a Monte Carlo analysis?
1:33 - Mandy, our hypothetical retiree
2:55 - Option 1: keep the mortgage in retirement
3:35 - Option 2: pay off the mortgage at retirement
4:17 - Should Mandy keep her mortgage in retirement?
5:07 - Comparison with the 4% Rule
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-- About Patrick King CFP® --
Patrick King is a fee-only financial advisor in Atlanta and the Founder of Prana Wealth. Over his career, Patrick has helped CEOs, all-star athletes, Grammy-winning artists, and many others build their wealth, retire sooner, and create a legacy. Patrick enjoys yoga, mountain biking, golf, travel photography, and Clemson football.
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We just retired this month, and I can say we are 100% happy we worked hard to pay off our mortgage early. Starting retirement completely debt-free is an amazing feeling!
Awesome! Congrats, @cruisepuppy ! 🙌
For me, it's not about the rate, it's about the risk! I paid mine off before I retired!
Peace of mind is worth a lot! I'm personally debt free, but some people feel differently about risk.
@@PranaWealth --- no one wants to take on unnecessary risks. Mortgage free is the first necessary step to a happy and worry free retirement.
100% of the houses that get foreclosed on have a mortgage on them.
I really appreciate your approach to analysis, with the recognition that the answer is not only 'it depends', but actually 'based on these assumptions, we can provide these estimates'. I also quite enjoy your testing common sense answers with model examples.
I love these videos and the discussions surrounding them!
Thank you, Daren! Looks like we've got some lively discussions going on! 🙌
I love watching your videos!!!
Thank you so much, Rachael! 🙏 You just made my day!
Happy New Year!!!!!
Thank you, Pamela! Happy New Year! 🎉🥂
Early 60's here, fast approaching our FRAs. Refinanced our house at the same terms in this case study a few months ago. Not planning to pay off our mortgage loan early even though we have the cash to do so. It's invested instead. Very happy with this situation.
Great choice!
Cliff -- at some point, you have to do the math, right? Sounds like you have a great plan in place. Paying off the mortgage may feel right, but the numbers may show something different. We're in a truly unique situation with interest rates and the possibility of inflation that create this non-intuitive mortgage play.
@@PranaWealth agreed! With a 2.75% fixed rate loan, it's like borrowing money to invest for extra income. My touchstone was that I could buy VZ common stock and hold it forever, not likely losing principal over 30 years but also reaping a dividend of 4.5% that is likely to grow nominally. On that basis, paying off the mortgage seemed like the worst of two options. I'm not invested in VZ, btw, and did much better this past year, but it is something I have to actively keep an eye on to make sure we come out well ahead each year. 🙂
Why say instead? A paid off home is an investment as well, in real estate, certain to grow over time, best of all, an outstanding inflation hedge.
@@cliffluxion7019 Borrowing money against your home to invest is the classic disaster move. In 2009, both home values and the stock market declined. March 2009 is notorious for suicides of 50 something males.
Another GREAT video. Well-paced so I can grasp the concepts and examples. I'm meeting with my accountant today to discuss taxes in retirement, and I will have a mortgage in retirement (if I don't sell, which is the plan). But even with selling, do I put the profit into my retirement accounts and take another smaller, manageable loan? Or do I put the profit from selling on a smaller place, and pay the remainder of the smaller house off, with some retirement funds (welcome to NY). LOL!!!
In my opinion 31% chance of running out of money is completely unacceptable. I can’t imagine that being anyone’s plan for retirement.
@@kimpritchard4322 If you want, I can let you talk to my parents about how fun it is to downsize your lifestyle as you age and to worry about your shrinking nest egg. Your example of downsizing your home is something you should dive into with them. They will let you know how awesome it is to leave the home where you built all of your family memories. And don’t worry, as you age you will no longer enjoy doing things like eating at restaurants or spoiling the grandchildren. 😂
@@kimpritchard4322 Is “hostility” when someone doesn’t agree with everything you say? Here is some more hostility for you then. I do think that people are entitled to the retirement that they worked so hard for their entire lives. I think we can agree though that the responsible thing to do in the case featured in the video might be to adjust spending right from the very start so that there isn’t a one third chance of running out of cash later. If that lower amount is too low then maybe it’s not time to retire yet? As far as your Dad leaving the family for a new gold digging wife I’m sorry to hear that. My parents don’t have a lot to leave but my wife’s family does and fortunately it’s all in an irrevocable trust. My wife and I are putting together the same thing for our kids.
@@kimpritchard4322 Agreed!!! Unless Your Stepdaughter is just the sweetest girl in the whole wide world, and Helps you around the house, and is totally devoted to your care, I would ditch the Cell phone bill ASAP!!!
But yes, Internet, these days is essential!!! Cable is NOT!!! I think most of those monthly payment choices can be curated.
Downsizing housing is a bigger dilemma because it depends on what your lifestyle is? For some their home is an essential part of their lifestyle: main hub for Family and friends gathering? If you like having lots of people around, and need room for all those people, then downsizing may be quite difficult. If you have the type of anxiety where you need people around you constantly, or the attacks come on, then having a big house is a must!!! Everyone has different needs as they get older, and I Never envisioned when I was younger what my life would be now. When i retire, I will need certain amenities for peace of mind!!
@@kimpritchard4322 I agree with most of what you say. But I think a key point is we would like to 'know' as soon as we can, whether or not we're spending too much. One doesn't want to just wake up one morning and realize the IRA is empty and you're not limited to just social security or charity.
The sooner one can recognize they're heading for financial trouble, the sooner they can make adjustments. And the sooner one makes adjustments, the less drastic those adjustments need to be.
I'm in the same position as Mandy with regards to the refi. However, I've never been upside down on this latest house and with the rate I currently have, I plan to turn this house into a source of income by adding it to my rentals. This curious fear of mortgage payments in retirement makes sense if you have high interest payments but not so much when they are considerably less than market returns. In my opinion, retirement is about cash-flow.
Jeff -- good point. If you can cash flow your properties, that makes it a lot easier. Paying off the mortgage is the right move for a lot of folks, but it's not one of those situations where you can say that something is "always" right. Thanks for the comment! 🙏
It would seem to be a simple matter of after tax deduction interest rate on the mortgage compared to likely after tax returns Monte Carlo. However, security confidence in keeping fixed expenses low is a factor.
I paid off my mortgage as soon as I can and invested more in my retirement accounts. When I'm ready to retire, I had to downsize everything, sold my main home with cash on hand without paying any taxes. I still don't have to use my retirement accounts until now. Cheers!
That's awesome! Well done. Congrats!!! 🙌
Great video. I still have a mortgage, but did not refinance (although every time I go into the bank, they try to get me to do so) it because I did not want to continue to keeping the bank any longer Ugh!!. I retired 2 years ago, and if I double my payments, I can pay the last small amount off in 14 months, which will bring my mortgage down from a 30 yr note to a 20 yr one.
Since I retired I have more money now than I ever did, which is something that I never read about and/or heard anyone speak of. It has been a real shocker to me, but a nice one.
I also crunched the numbers; and realized that since I have a pension and SS I would be able to cover my daily expenses with no problem, which includes health ins.
Ms. L. Churchill
That's awesome, Ms. L! Thanks for sharing this. It seems like quite a few people see a huge reduction in their spend after retiring. Glad you can continue to chip away at that mortgage and pay it off early! 🙌
Interesting content. I'm hoping to retire a little early, and I have been maniacally crunching numbers and running simulations. The thing that complicates the mortgage decision in my case is taxes. My cost of living will be quite low, and I'm fortunate to have a good chunk of retirement money in after-tax and Roth accounts. The amount I need to pull from my tax-deferred account is low enough that I will pay no or very little in taxes. . .unless I have a mortgage. In that case, I need to pull out more taxable money which not only results in more taxes directly but might also affect the percentage of SSI that is taxed once I start taking that. Is that worse than taking a huge hit to those priceless after-tax funds by buying a house outright? It's all a frighteningly delicate balance.
At a 2.75% mortgage rate, I’d personally keep the mortgage and leave the money invested. It sounds like your tax rate is low anyway. This year the S&P returned over 23%. Last year, 19%.
In 2021, in the 12% tax bracket, with a $300K mortgage balance and a $1225 P&I payment, you’d have saved $1,764 in taxes and $8,250 in interest by paying off your house and not having to withdraw funds from a 401K/IRA ($10,014 total). At the same time, you’d have lost the opportunity to earn a 23% capital gain on your $300K ($69,000). The net effect would be a loss of roughly $59,000 after subtracting the $10K in interest and income taxes you’d pay on the mortgage payments. Even if you use the 30-year average S&P returns of 10.5%, that’s still a $20K loss.
Bumping up to the 22% tax bracket only adds about $1,500 of taxes that could be saved in the scenario above. Not enough to move the needle in either scenario.
Conversely, if we end up with a “lost decade” of flat or negative market returns right after you retire, you’d have wished you paid off the house and saved the tax money! However, the probability of that occurring vs the market beating your mortgage rate + tax burden is MUCH lower.
Run your own numbers and see what you come up with. Personally, I’ll never pay off any of my mortgages. I’ll refinance back to a 30-year note every 5 years or so as long as doing so makes sense with current interest rates and allows me to lower my monthly payment and increase my monthly cash flow. That extra cash flow will be used to either increase my cash reserves, re-invest to grow wealth, or increase spending/giving in retirement.
I agree with what Thomas said.
If you look at the IRS tax rate schedule for single/couple and shoot for remaining in the 12% tax bracket (or lower) for as long as you can. Not touching traditional IRA/401K money can cause you to get into a higher tax bracket when RMDs start at 72 (assuming you don't fall into the earlier category of 70 1/2). Yes you will be taxed on that money but you can take it and put it into an investment account and possibly avoid future taxes. If you invest the money and it goes up or get dividends depending on your tax bracket and how long you hold the investment you may pay 0 taxes on it. Once RMDs start depending on how much you need to withdraw (goes up every year) it may put you into a higher tax bracket.
Know your living expenses, know your income (sounds like you are already doing these) and know your tax bracket remembering there are deductions in filing for taxes that drop the amount you actually have to pay in taxes.
Glad you found this helpful, @toowishful ! It's hard to make a one-size-fits-all video for everyone, but I thought that this would be a great thought exercise. Even with lower probabilities, paying off the mortgage may still be the right call for some people. It is absolutely a delicate balance!
If you plan to retire BEFORE you turn 65 and qualify for Medicare, you'll want to keep your AGI below 400% of the federal poverty line in order to qualify for ACA subsidized health care. By paying off your mortgage, this is much easier.
Rick -- if you can reduce your AGI like that, it'll make a huge difference in ACA premiums.
Interesting. Sounds like having that extra 180k cushion significantly improved her odds, even though it was being (slowly) pulled off on a monthly basis.
Kevin - I think having the $188k go out all at once is the difference there. If she payed extra toward her mortgage over the next 10 years, things would be different, I think. Thanks for watching! 🙏
Great video, we purposely did not fully pay for our retirement home. Instead, we financed at a very low rate and took the capital and dumped into our investment portfolio. Year for year our invested capital is well exceeding our mortgage liability (making money every year). In addition, we get to claim the mortgage interest on our taxes so a win, win. This approach was very much against traditional wisdom of paying off all your debts going into retirement, instead I ‘ran the numbers’ and it showed the monetary benefit of holding onto mortgage debt and letting those funds go to work the market. (An opportunity cost analysis coupled with a tax benefit assessment). Thanks again for reminding us that traditional simply rules are not always correct.
Same approach here. 1.9% mortgage with some interest tax relief (In Netherlands). Capital working much more efficiently in the market (to date)
that works great until you get a market downturn.
These happen once in a big way every 100 years (think 1929), once every four years (normal downturn, but still not fun), once every 20 years (yeah, we are due) and once every 10 years. It depends! But expect to lose some of those wonderful gains pretty soon. I'd rather they couldn't take my house because I couldn't afford the mortgage. They still could get it for lack of tax payments (excessive here!), but that would take longer. Then again, you could be right. I'm paying mine off because 30% on the dollar for "tax savings" just isn't my cup of tea. I want to secure my home as much as possible.
@@e-spy my retirement plans for down times in the market, since as you and history note we will have them. I use the bucket approach to have near term; mid term funds available for those periods. Again, it's like running the numbers, use historical performance to include down duration to help to mitigate market downturns. Certainly, if capital tight and buckets can’t be established then I would rethink mortage approach. And yes it’s the market so nothing is guaranteed but historical performance combined with some Monte Carlo runs gives a good indication. I’m comfortable with my bucket approach and carrying mortgage but recognize others may not be. I would add thugh that my above approach was based on a rather robust assessment to incorporate downturns you have mentioned.
Another good way to think about a mortgage in retirement is to make sure that your housing ratio (housing payments relative to your gross retirement income) still makes sense. The limit that mortgage companies are looking for is usually 28%. Keeping it below that level is probably a good idea for a mortgage in retirement as well.
I did similar, but held back a fair amount in after-tax money market. Having cash for out-of-the-ordinary purchases, and for income if/when the market turns gives me a lot of flexibility. Like when the market drops, I just stop automatic withdrawals from IRA and use a bit of money-market funds. Of course some day I may have to replenish that, but I plan on doing that when RMD's kick in.
I paid my mortgage off when I retired. Made a big difference with the cash flow. My opinion is pay off the mortgage if possible.
PC -- that's the right answer for a lot of folks. However, depending on your situation, retiring with a mortgage is completely do-able. I've seen it done plenty of times.
Paid it off. Less of a headache and more peace of mind knowing you are more free!
What are your thoughts on reverse mortgages?
Unless I missed it, you didn’t adjust the 4% rule at retirement to take the paid off mortgage into account. The bottom line, the paid off mortgage reduces her expenses and therefore won’t need to take the full 4% of the same savings amount. Maybe she would only need to take 3-3.5% which would increase her probability of success.
If we don’t pay off our mortgage, our financial planner said we had over a 90% chance of being fine and that still isn’t enough for me! I’m working hard to get the mortgage paid off and still retire before 60. I think we will spend pretty close to the same in retirement than we do now, less the money we currently give to our college daughter (so close to being done!), and our mortgage. I live in a retirement town and so many of my neighbors have mortgages and are around 80. I think their quality of life would be so much better without it. I personally would be afraid to retire with one. The older I get, the more risk averse I am. :)
Sheila -- it's hard to look at those probabilities and feel like you'll be okay! If you're in the 90%+ area, you are doing really well, even if you do carry that mortgage into retirement. I think you'll likely be okay either way. Sounds like you're doing your best -- and that's all we can do. You are going to be just fine!
I’m 54 and planning to retire from current job at 55 in about 6 months. I have a 15 year at 2.75% due to pay off normally when I’m about 60. I could easily pay off the mortgage but I think I come out ahead with keeping the money invested (maybe not these last 2 weeks LOL). I’m sure once it gets below a certain amount I’ll just pay it off to be done with it. It’s already
Hilary -- I still can't believe these sub-3% rates. At some point, we'll have another market correction (there will always be ebbs and flows, right?). So, that's something to consider going forward. I don't think there's a right or wrong answer for everybody these days. Thanks for the great comment! 🙏
I have a small co-op in New York. My mortgage and maintenance cost are less than 2,000 a month. I have no problem with retiring with the mortgage. When I retire I'll sell the apartment and after I pay off the mortgage still have about 100,000 to put towards a house somewhere in a tax-friendly state like Pennsylvania or even South Dakota perhaps?
Sean, moving at retirement is a great way to lower your overall expenses, especially if you're living in a big city. Thanks for the comment and good luck! 🙌
Pick up a part time job or do consulting after full time retirement and put all of that money towards the mortgage principal. Once paid off, can stop working all together. Take the mortgage off the table for the retirement savings funds.
Joe -- great point! There are plenty of things we can all do to change our situation. I like the part time job option -- there are plenty of opportunities out there right now.
It's an interesting subject to explore. Being debt free allows you to slow spending in a economic downturn. What I don't see people talk about is the amount of interest left in the loan. It's one of the things that drives me nuts about Dave Ramsey. I get that he's trying to create an aversion to debt, but sometimes I believe he advocates giving away the security and options that cash offers for very little financial reward.
@GusMahn -- good call. I really like Dave Ramsey (and share his aversion for debt in general), but it's not always a slam-dunk call. Leverage can be good if used properly.
My situation is different I'm already retired and taking my social security. I make a little bit of money on the side. My wife is several years younger than me and she is still working. Seeing now that inflation is very high and that there is a very real chance that markets could keep going down for the foreseeable future I think it makes sense for me to pay off my house. Yes it would cut deeply into my nest egg but at this point I don't think I can depend on the S&P to return good enough rights over the short term.
Short answer. If you're a primary resident, yes. If the house investment with some cash flow, no.
Having rental income doesn't hurt!
Retiring in a month. Paid off mortgage couple of years ago. In my case having 100K less in the bank was a small price to pay compared to the comfort of knowing the house is mine and as long as I can cover the property taxes, utilities, and maintenance (which I would have had to pay anyway) I will have a roof over my head. Could I have invested the $100k and covered the mortgage - likely yes but changes in the investment returns is a variable I no longer have to worry about related to mortgage payments. As you said, you have to do the math and then consider the intangibles.
@babarock2000 -- there's no right or wrong answer for everyone. It sure is worth a lot to be able to sleep well at night! Congrats on your retirement! 🙌
I moved at 60 years of age in July 2020 from a house to a 3 story apartment that has full security, under ground parking, elevators and resort amenities and it’s just 84 residential units- paid in cash and glad I have no mortgage payment. I vote for no mortgage
It appears Mandy has been living beyond her means. I'll be 50 next month and I've completely paid off 3 homes.
401k looks great on paper but is taxed when you need it. If she has a mortgage, she will need more income and increase her taxes. She will still be supporting the gov't in retirement.
Too many people focus on pretax numbers instead of the reality of the situation.
Nice! That's awesome, Annie! Sounds like you're way ahead of the game! 🙏
I'm 65 and retired. Bought my last house a year ago in a suburb of Phoenix, Del Webb community (very low property taxes, very awesome amenities). I put down 5% and financed the balance at 2.5% - 30 yrs. Just sold my cold weather home and the equity from the sale is a little more than 66% of the mortgage balance on the Phoenix home. I can invest that for the next 30 yrs and hope for more than a 2.5% return or I can pay down my mortgage balance in Phoenix by 66%. Even without the 2 scenarios below, I think the upsides to investing the equity is better than paying down the mortgage. First Scenario - I have concerns about the future of our country. If the next presidential election results in what I feel is one of instability and autocracy then I may be heading to Portugal for the remainder of my life. If that instability has the effect of a revolution or just depressing the real estate market making my home unsaleable or "underwater" based on selling price and closing costs, I want to be able to pack my bags quickly and just walk away from the chaos of a failing nation . Second Scenario: I have some concerns about water and the 20+ year drought Phoenix has been in. Apparently, the city of Phoenix or the state of AZ has promised when their under ground water/aquafers reach the level of only 100 years remaining supply, all new development will be stopped. If the calculations are off and water starts to be more expensive than gas, real estate will take a dive in value and become unsaleable while water costs increase. Leaving for Portugal may be the best option again giving the bank my beautiful house. I've never walked away from a debt but in these two scenarios, I don't think I'd have any guilt or regrets since both would be from my government failing me. We are living in strange times but I really do appreciate all of your videos and clear advise. Any comments are welcome on my situation and concerns. PS - At the risk of inflation losses but reducing risks from a big market adjustment I just moved out of the market and am in 100% cash position, Treasury insured. Will sit this out until the correction or the next Prez election and then put together the next strategy.
Tim -- I think you have some valid concerns. We certainly are living in interesting times. If you've read "The Fourth Turning", their predictions are a bit eye-opening. 😳 They seem confident that times get better on the other side of all this chaos we're living in now, but it won't be comfortable. Trying to figure all this out is way above my pay-grade! I don't think any politicians are going to be our answer, though.
As far as the market goes, there's no telling what the next 5 - 10 year stretch will bring us. Anyone who tells you they know what's going to happen is lying (to you or themselves).
I have some clients who retired to Portugal and it sounds like they love it! Lots of folks talk about retiring abroad here, but not a lot mention Portugal.
@@PranaWealth Thanks for the reply. As always, your rational, factual, well reasoned comments are appreciated.
Anytime, Tim!
At about 1:40 you lay out Est. Spending in Retirement. You use a number that's 80% of the pre-retirement estimated spending. One thing I always wonder about this math - is 80% the correct number? I say this because in pre-retirement, the example was saving 15%, and therefore living on 85%. You then knock off another 20%. In my mind, she'll be trying to live on 65% of her pre-retirement income, and that seems low. I know I've screwed the math up somehow but I wonder.
I’m lost- I don’t understand how keeping the mortgage makes sense due to the low interest rate.
With interest rates so low, it's relatively easy to find investments that give greater return than the cost of the mortgage. But at the same time, paying off the mortgage isn't always about achieving the greatest financial return. For example, if my mortgage is $1,500/month, paying off the mortgage reduces the amount of money I need to generate in a year by $18,000. If my investments do well, paying off the mortgage means I don't do as well financially as I might have. But if my investments do NOT do well, that's $18,000 per year I don't have to come up with. My up side is not as good, but my down side is not as bad. On the down side I might have to scale back my ambitions a little, but it would be less stressful than keeping the mortgage when my investments don't do as well.
@@genxx2724 Absolutely! There are also other factors I didn't mention for brevity. For example, what does it cost me to pay off my $1,500/month mortgage? What potential average return would I be sacrificing if I DID pay off my mortgage? What would it cost to refinance? All of these are factors, and depending on their value, the best trade-off might be better satisfied by some variant of your suggestion to "split the baby". This doesn't have to be an "all or nothing" situation; there are other options. Thanks for pointing that out. BTW, that's one place I think advisors like Prana Wealth might be especially useful.
@@genxx2724 Is refinancing really a waste of money? It depends. What is your current interest rate? What rate would you receive if you did refinance? What are the refinance costs? How long do you expect to keep your mortgage? These can all be easily modeled mathematically to show you the final cost, over time, even adjusted for expected inflation and taxes if you wish, for both keeping your current mortgage vs. refinancing. You can do the math and compare the results, or you can get a financial advisor to help you with that.
The math says sometimes refinancing is financially expedient, sometimes it is not. As an example, assume I can get a new $300,000 mortgage in my area, at this moment, for an interest rate of 3%. Also assume my current mortgage is 4% and closing costs on a $300,000 mortgage are around $12,000. Is refinancing expedient? By refinancing I can save about $3,000 per year, but I also have to make up for the $12,000 in closing costs. If I plan to keep my mortgage more than 4 years, it might be. If I plan to pay it off (or move) in less than 4 years, it probably isn't.
Now before anyone complains that I used simple interest instead of compound interest, interest rates that are different from the current market, I didn't specify the length of either the current or refinanced mortgage, etc., the point is the real math is doable, so do the math and compare the results. If you have the mathematical or financial chops to do it yourself, that's great! If you have to lean on a financial advisor, also great! Just do it and see where the numbers take you. But it all depends on the terms you have, what you can get, your plans for the future, and the goals you desire to achieve. There is not one answer that fits every situation.
Which strategy, paying off a mortgage or not, gives you the best FINANCIAL return? Usually the one you proposed, which is that you NOT pay off the mortgage. There are many investments that bring in a greater return than the cost of a 3% mortgage. But maximizing your financial return is not the only possible goal here, and "all or nothing" is not the only possible strategy. I thought you were right in pointing that out.
All I'm saying is the strategy that provides the best result will depend on the goals and situation of the individual. Also, financial advisors can help you with finding a strategy that will help you achieve your goals.
Great comments here. Looks like @GenX X deleted a few comments? One thing to remember, these interest rates and market returns won't last forever.
@@PranaWealth Yes, I agree. "Difficult to see. Always in motion is the future.” :) A little Monte Carlo analysis can help with that. It isn't a crystal ball, but it does give us an idea of what outcomes are most likely. (I'm guessing it's a well used tool in your tool box, too.)
I definitely want to pay off my mortgage before retirement.
We faced this situation a few years ago and decided to pay off the mortgage.
Having that peace of mind is worth something! I don't think there's a right or wrong answer here, just information to base a decision. Congrats on paying off the house! 🙏
There were many horror stories a few decades back regarding Reverse mortgages. Could you cover this topic in a forthcoming video. I'm considering it at some point in the future (assuming no disasters as discussed in another one of my comments). I'm 65 now and single and can at any time payoff the percentage of my mortgage needed to qualify for the reverse mortgage. This "gamble" by both the home owner and the reverse-mortgage holder is based on actuary tables. I have long living parents and relatives so barring any accidents (I still ride a motorcycle) or cancer, I will probably be on the winning side of this gamble...which also drives my decision to not take S.S. payments until 70. I have no children and I also have no one in the family that will need any financial help in their future so my financial planning does not include any strategies to die with as much money as I can accumulate. Do good genetics and no plan for leaving an inheritance make me an ideal candidate for the reverse mortgage? I have a home that can accommodate a live in care taker to extend the amount of time I can stay in my home as I age into dementia. My home is in a Del Webb active adult community that offers every club, service, activity, entertainment and sporting activities anyone could ever want. Thus I can not anticipate growing out of the house or the community and wanting to sell or relocate. If my disaster scenarios don't come to fruition in the "near future" I am thinking about the reverse mortgage but still have an instinctual aversion to it based on the horror stories from the past.
Tim -- great call. I'll add reverse mortgages to the queue for future videos. It's hard to tell if one is right for you, not knowing your full situation. (Of course, I can't give "advice" here, either. I don't want to run afoul of regulators!) I do think they've made an effort to clean up the reverse mortgage industry because they had such a bad name for so long.
I do think it would make sense for you to hire a fee-only financial planner to run these calculations for you. It's hard to plan for long-term and nursing home care. The "I want my last check to bounce" plan is a hard one to draw up! 🤣
@@PranaWealth Thanks for the reply and intention to consider a future episode on Reverse Mortgages. I do agree the "last check written to bounce" financial plan is not wise. My plan would probably include at least 10 and maybe a 15 year buffer on my predictions of the date of the last check written. I'm not against leaving an estate after my death, I just don't need to due to my situation. There are plenty of charities I support that will get whatever is left over.
This approach is so counterintuitive that a lot of people will have trouble accepting it. Everyone's risk tolerance is different. I would rather use investment income to pay off my mortgage. That way I still have the income when I'm done. It's kinda like the market is paying for my house. We could have a downturn, true. But that's what the emergency fund is for.
Marianna -- just to clarify, I don't think there's one right way over the other. Both should be considered in context of everything else someone who is retiring might have going on. Knowledge is one thing, but wisdom is another!
So why didn’t she continue to pay the mortgage at the pace of the old mortgage? Or why doesn’t she just work an extra year and pay everything off (or close to everything)? Then, she wouldn’t have to worry about the payoff scenarios.
Great question, JB! I just laid out a hypothetical scenario here. A LOT of folks refinanced over the last couple of years and I've seen this scenario a few times since then. I thought it would be interesting to look at the data. Thanks for the great comment! 🙏
I would never pay off the mortgage early at that rate of interest. God forbid if Mandy become very ill at 65. When she applies for assistance her mortgage payment will work for her on the calculations. If she PAID OFF the mortgage she would have a ROCK HARD asset that could be liquidated and hence ineligible for any assistance. If she flat out dies her heirs will make a cold hard decision. They could use her remaining cash then to payout the mortgage. Or if the house is more valuable than the remaining mortgage they could move in and reap the benefits Mandy never saw. The nightmare scenario if the house SUNK in value she or the heirs can walk away!!! Many then would have cash to rent an apartment. Heirs would take money and run and let the bank reclaim the house.
My mortgage rate and payment are so low, I'll likely never pay it off. 2.25%, 30 years. In the 7 years since we've built our house they value has increased $375K. By the time we retire and decide to move, we'll likely profit -$500K. If we decide to buy a smaller property, I won't put one penny down. We don't have the normal wish others confront, so that removes any chance off paying it off being a good idea.
Rob -- it sounds like you have a plan! It's really a strange situation given that these low-rate mortgages will be locked in, even if we continue to see inflation. Gotta run the numbers! Thanks for chiming in! 🙏
Patrick, I was surprised with the starting point for Mortgage Mandy, although I suspect it is fairly typical. (In the scenario, at the time of retirement, Mandy had a $250,000 mortgage on a $350,000 home. I would think that should be the ratio in the middle of her professional career not at retirement.) In Mandy's scenario, she is basically investing on margin with the funding coming from her mortgage. While the typical risk of buying on margin and using the investments as collateral is reduced, the concept is similar. From a financial perspective, investing at 7% and paying 2.75% results in a net profit, it is a slippery slope. Should the next retiree take out a home improvement loan and invest in stocks???
Another approach to pre-retirement planning may be to encourage people to plan their retirement preparations to include reducing all appropriate costs before or at the time of retirement including paying off the mortgage, getting the kids out of the house and so on.
As your math demonstrates, my recommendation may be too conservative and not leave sufficient invested funds to cover the future cost of retirement.
Thank you for posting this video that raises retirement questions from a perspective I, as a CPA, had not previously considered.
@Andrew -- thanks for the great comment! 🙏 I changed up a lot of my assumptions for this video based upon some of the reactions from my prior one about "middle-class" retirement. In that one, I used median Census data as a starting point, which painted a pretty bleak picture! For Mandy, I upped things a bit to give a different perspective -- it's not based in reality.
Mandy's options presented here are the extremes. I've seen that paying off the mortgage in one big chunk at retirement does tend to have the effect of reducing their Monte Carlo percentages. In reality, I'd encourage her to pay additional principal in the years leading up to retirement and reassess.
Of course, these numbers use normal distributions and don't factor in current market conditions. If there's a big market pullback for Mandy, the numbers could change drastically.
Thanks again for commenting! It's nice to have a CPA's take on this stuff!
@@PranaWealth Patrick, I appreciate your non-judgmental approach. I get so riled up when I watch a Dave Ramsey video when he sticks to the extreme approach (pay off all debt, cut up the credit cards, sell the new car and buy a $1,000 car). I also appreciate your simple numerical examples. I can imagine many of your audience are able to see your example and adjust the math to match their circumstances.
Thank you, Andrew! I think few people can pull off that kind of extreme approach anyway.
did i miss something? yes, she has $12,247 less expenses per year for 20 years, but you didn't reinvest the additional payments over 10 years or are assuming she makes a lump sum payoff at year 10. The opportunity lost over 10 years between the additional payments to pay off over investing that is simple math. 2.75% -7%. As someone else mentioned, also the tax deduction on mortgage interest. Also, did the monte carlo take into account the house equity and appreciation, since I only saw portfolio size needed? In this scenario the monte carlo seems to not capture some important things. I refi in February 2021 at 30yr fixed at 2.375%, and even if you do a boring conservative annual return of 6%, that still out paces the mortgage rate alone.
I worked overseas for 20 years prior to my retirement. I returned to the US and bought a house in cash. It the only way to go, if you can do it.
@owleyes -- you know what you're doing! 🙌
I’m a caregiver and work at a independent housing community. I’m seeing their rent going up and these people are paying $2500.00 and $3000.00 a month. Some are scrambling to find places cheaper. They’re living longer and assets are running really low. Really difficult for everyone right now in AZ. No family for a lot of these people. Any suggestions on what to do? Most places show no mercy.
Cheryl -- that's heartbreaking to hear. I know that inflation is pushing a lot of these costs higher. Unfortunately, I don't know what the answer is here. I think we're going to continue to see more of this -- demographics will give us more retirees and inflation will push our costs up. I wish I had a better answer for you. 🙁
I don't believe the 4% rule. Another factor is selling the house for something smaller or in a cheaper COL area. There is MANY MANY factors to be take into consideration. 2.75% is an awesome interest rate.
Kelly -- it's a blunt tool, but a tool nonetheless. I certainly go into more detail with my clients. Thanks for the great comment! 🙏
A mortgage is bondage. A ball and chain. Paid off my mortgage and feel utterly free! Free yourself from a greedy banking system.
Good point! Having that peace of mind is worth something.
Holding a mortgage does contain risk that the monte carlo doesn't address. No mathematical analysis will prioritize paying off the mortgage with the low interest rates we have now days. What you need to do is to address the risk of holding a mortgage. It is kind of like when to take SS. If you take it early and invest it, you will have more money. But, if you wait, you'll have a better survivor's benefit for your family. Risk, what if you don't invest wisely? What if something happens and you can't make the mortgage payment?
Ralph -- the Monte Carlo analysis has its shortfalls just like the 4% rule. Weighing these risks against one another and using all the tools in the toolbox is (ideally) part of the process of retirement planning. Great point you bring up! Thanks for watching and thanks for the great comment! 🙏
Mandy should crank up her retirement savings over the next 10 years in preparation for retirement.
Always a great idea!
I think there's a flaw in your calculations. You said that Mandy's net monthly income AFTER mortgage, taxes and investing is $7696. Where is that money going? Your inherent assumption is that it is all being spent but on what? Seems to me like she could use a significant percentage of that money to pay down the mortgage faster without it affecting anything else.
I just don’t see how it really matters. You should aim for a high equity but zero mortgage just isn’t necessary.
what if she pays it off all her debt starting today and invest the monthly amount and lives debt free in retirement can you run that
The mortgage question can be answered far more easily with only one assumption: investment average rate of return. If the mortgage interest rate is less than Investment Return, then keep paying the mortgage.
Monte Carlo isn't needed. Nor does it matter how much you have saved, the value of your home, how long the mortgage is, how much you spend in retirement, how long you live, the inflation rate, or near-term economic conditions.
With your assumption of 7% returns, you keep paying the mortgage because 7 is greater than the 2.75% mortgage rate, by a wide margin. If it were close, there are some other minor calculations, but given the uncertainty of the future inflation rate and investment returns, those numbers are normally inconsequential.
Great way to think about it, @HarshColby . Although remember, the mortgage interest rate isn't always the same as its APR. Good comment. 🙏
I would really like to know "Mandy's" tax accountant. Looks like she only pays 17% payroll tax on a 150,000 dollar income (minus tax deferred savings benefit).
Ha! I did run a pro-forma tax return for "Mortgage Mandy" to get a ballpark number, assuming she was a fellow Georgian. If she lived in Florida, it may have been less. If she's in New Jersey, she'd probably be paying a lot more!
At age 62 Mandy can payoff the mortgage (this will eliminate her mortgage payment and increase her cash flow)
And then turn around and take out a reverse mortgage line of credit ( approximately 50% of the home value )
This line of credit will replace most of the funds she used to payoff the mortgage.
Mission accomplished no mortgage payment plus a growing line of credit that she can tap into when needed and its tax free and does not go into the PROVISIONAL income calculation.
Sergio -- this is a creative way to pay it down. I'd try to encourage her to pay more toward her principal during the 10 years before retirement. While the reverse mortgages have gotten better, I'd still be wary of taking one out so early in retirement.
I am planning to keep my mortgage in retirement. 260k mortgage, 2M retirement portfolio and $8k monthly income requirements in retirement.
If the numbers work out, then roll with it! Sounds like you're going to have plenty to do what you need to do. Good luck and thanks for the comment! 🙏
It would jump me in to a much higher tax bracket if I took enough out of 401K to pay off my mortgage in one year. I'm not understanding how I lose by continuing to pay the mortgage. I'm paying 3 3/8% interest for their money while my money continues growing at a rate that will average somewhere from 5-10% over the same decades. As long as inflation remains above 3 3/8% the dollars I pay back are worth less than the dollars I borrowed. Although I should be happy with this I am uncomfortable. With so many mortgages out there that are half or less than inflation (unsustainable situation) what in our economy is going to break and what will that do to my home value and portfolio performance?
@Goodaches read -- also, don't forget that taking that much out of your 401(k) could affect your Medicare premiums since they're means-tested. It's a 2-year look back on your taxes.
Hard to know the future, so if you're concerned about a market pullback, I think having a reasonable housing ratio (
Why are taxes subtracted to arrive at income needed for retirement? Don’t we need to have $ to pay taxes in retirement too?
Elaine -- great question! I'm trying to get a baseline after-tax expense number that matches up with the Census and BLS data. I wanted to get an apples-to-apples comparison. A lack of nuance around taxes is also one of the shortfalls of the 4% rule.
The best and wisest thing any one can do is to pay off the mortgage as soon as possible, no matter who says what.
Kay -- that's the right move for a lot of folks. However, I've seen and helped plenty of people retire with a mortgage and make it work.
I disagree. It’s not the Best and wisest thing to do for all. It’s personal Finance for a reason, it’s personal. I make 24-35% ROI on my investments in a brokerage account. I could write a check and payoff my mortgage but I would lose my investment advantages. Even millionaires have mortgages. Make your money work for you.
@@jasonfbaker --- a 24 to 35 return on investments is a rarity. You must be a genius or have insider information. One bad year could wipe you out. A mortgage free home gives peace of mind.
@@KayyHong no, it’s only peace of mind to the lazy. my mind would not be at ease with a paid off mortgage knowing I am wasting money. I want my money making money, so I use the extra money to invest in additional real estate. Interests have been ultra low so having a mortgage is an easy liability to manage.
She can always sell the house when she runs out of money, downsize or rent. She may be out of money but has the house as an asset.
Great point, Stanley. Either that or a reverse mortgage. That's not the ideal scenario, but it's something to have in your back pocket. I think most folks would really dial back their spending, however. Of course, all of these scenarios don't account for changes in people's behavior. Hard to model reality in a 7 minute video!
Great point you bring up! Thanks for watching and thanks for the great comment! 🙏
What you’re not putting into the equation is the value of the asset you’re financing. In this case, over the last couple of years, the value of real estate has far outperformed any other commodity. If you’re financing it @ 2.75%, I’ll take that all day long.
Great point, Mark! She'll always have the opportunity to use her home equity if she ever needed it.
My plan is not to pay off my mortgage. I just refi'd to 2 7/8% (missed 2 3/4% by 2 weeks 😅) and rolled the closing costs into the amount. Cheap money going forward and we have to live somewhere. My taxes and insurance are more than my principle and interest but renting an apartment will cost more than my combined PITI; I could eliminate my PI but that would only cut my living expenses by about $5K a year. Assuming that the house isn't paid off at an earlier time and you have time to save, IMO investing the money makes sense vs paying off the house if you are close to retirement and not close to paying it off.
@@genxx2724 yeah unfortunately whether you rent or own living expenses go up. Our taxes have increased in 21 years from under $5k to close to $10K. I know landlords are getting some crazy amounts... one bedroom apartments are like $1700 a month, forget about a 4 bedroom home!
@@vinnyg2619 Where are you? I’m in California, where property tax is limited to 1 percent. Unfortunately, cities and counties are allowed to get initiatives funded by bonds and fees on the ballot, so voters who like the misleading sound of a measure, generally with the word “children” or “education” in the title, pass it and the fees get tacked into the property tax bill. So It’s one percent PLUS Measure A, Bond C, etc. I think this should be illegal.
@@genxx2724 I'm in Jersey. I believe roughly 1/2 of the taxes are for the school system, we support schools in lower income areas. Property taxes are for local townships and counties. We moved into Jersey about 35 years ago - couldn't afford NYC houses! I consider us lucky with ONLY 😀 paying $10K in taxes, some parts of Jersey are 3 to 5 times as much. NYC people hear the amounts we pay but at least where I live there is no local income tax vs what people in NYC pay. Also, depending on where you go in Jersey the houses aren't as expensive as NYC.
From what I have read once we hit 65 and make below a certain amount they can freeze property taxes at that level. It probably won't apply to my wife and I but I'm not there yet so I haven't looked into it.
@@vinnyg2619 Ugh. Horrible! Mine is comparable and I bet my home is smaller. Schools are a bottomless money pit. Spending more money doesn’t change outcomes.
@@genxx2724 Just my opinion but I think it started when the administration started to tell teachers to teach for standardized tests vs teaching for the kids to learn. That and the teacher's union getting in the way. I think a good teacher is worth a lot more than they get paid. I don't discount unions as I think they can provide a backbone for workers. My sons had wonderful teachers and crappy teachers and the crappy ones were still employed. Having nothing to teach and not teaching equals poorly educated students.
And last but not least, it's the home environment, teachers are not babysitters but they are sometimes looked as such. If the parents don't care the kids won't and even the greatest teacher will get nowhere with the kid.
Again, this is just my opinion. BTW, I am not in the education field just a father of 2 who are now adults.
You did not mention benefits of tax deductions - doesn’t that add to reasons not to pay off mortgage?
Barbara -- great point! It depends on the deduction situation. In the pro-forma taxes that I ran for "Mortgage Mandy" in this case, the standard deduction was greater than itemizing. If you have enough mortgage interest, then it would make a difference. But the standard deduction is large enough that it could go either way for a lot of folks. Great point, though! I should have noted this in the video! 🙏
I think most financial planners will tell you that the "benefits" of the tax deduction is negligible.
I really do believe we need to overhaul our entire tax system. It's a mess.
These things always make me laugh. Mandy is spending like a drunken sailor (no offense to drunken sailors) while she's only socking away 15% which may make her retirement a bit of a squeaker, especially if she's used to spending $92K/year. Incidentally, I'm in the paying off your mortgage camp as it allows you to do some fun things with your cash flow and income taxes. Imagine what she can do if she offloads the $45k/year for her mortgage and income taxes in early retirement not to mention leaning up her spending.
Single taxpayer Mandy is in for a rough time tax wise with the majority of her funds in her 401k and the maximum social security benefit which will be 85% taxable with RMDs at age 72 shoving her into the next bracket and ensuring she pays more for medicare premiums and losing the 0% LTCG/QD rate of the 12% bracket.
As your wealth grows both inside and outside of retirement accounts it becomes a little trickier to remain in the sweet spot of tax free but it's still doable. Being mortgage free is just another step closer to that goal.
Sounds good, Tom!
if SS was taken into account her probability would be much higher. i am in the same boat and using other software i am at 97% and will have less than half of Mandy. my mortgage rate is 1.9%, so no hurry here :-)
John -- that's crazy! 1.9%?! I remember Mom and Dad thinking they got a deal with a 12% mortgage back in the day. Who could have seen this coming?
@@PranaWealth I know right, Navy Federal, we just closed last week on the streamline refi
Retiring from public service made me realise that I had no means of passive income and in 15 years I had only moved around in circles financially I needed to make investments immediately desperate retirement and that led me to this looking for ways out. I feel very accomplished every time I remember my journey and how I have been able to grow my portfolio to over 500% in less than 6 months with the help of my investment advisor. Mind-blowing experience really
@EA Dad -- that's awesome! Congrats on taking command of your situation! 🙌
I do not rely on passive income. My retirement income is enough. It helps having no debts.
When you talk about the cost of "paying off a mortgage", you don't seem to include the actual cost of the money, including income taxes. If I was to pull, say, $190k out of my retirement savings to pay off my mortgage, I would be paying quite a bit in income and capital gains taxes, so I might really have to withdraw an additional $40k or more. This comes at a time when I will most likely be spending more money. We could sell our house and move to somewhere cheaper, but that isn't very inviting at this time - we like where we live.
pay off ALL your debts before you retire. if you are in your 50s and still have a mortgage, then get rid of it ASAP, in fact no matter what age you are, pay it off early. the financial freedom and peace of mind is worth far more than trying to do math to squeeze the highest number out of your 401k
Work 3 more years, pay off the mortgage, and increase you social security by 24%
Delaying (if you don't need the cash) tends to give you the highest payout if you live beyond the breakeven point. Great comment, Tracy! 🙏
I didnt refinance. I am paying more now in principle than interest on my loan. Instead, I am paying an extra $500 per month. I should have it paid off my retirement.
Laura -- that certainly works. I think the changes in probabilities in this example is due to the big check that Mandy needs to write at retirement. There's no right answer here -- there's a difference between knowledge and wisdom, for sure.
Why are we figuring a $150k income I don't know anyone that makes more than $75k. This doesn't help the average person
Hate that this didn't help you, Ronnie. My last video may help a little more. Just trying to throw out some interesting retirement examples with each video.
ruclips.net/video/dl_wmLbJG0w/видео.html
If her spending in retirement isn't all required spending, pay off the mortgage.
First of all Mandy should not have gone to a 30 year mortgage probably a 20 year fixed like I did this year. I think you should be able to invest 15% in your retirement and attack your mortgage when your in your 50's that way its paid off or close to paid off when you retire.DEBT IS BAD!!!!!!
David -- I'd have looked at a 15-year fixed as well, with interest rates being this low. However, it's always worth doing the math. Taking that big chunk out at retirement turned out to not be the ideal move. That being said, I would have tried to pay it down gradually over those 10 years.
Thanks for watching and thanks for commenting! 🙏
@@PranaWealth Is there some compelling reason to legally change a 30 yr. mort. to a 15 yr.? Can't you just (using some discipline) go ahead & treat your 30 yr. mort. like a 15 yr.? And then you'd have the breathing room of lowering your payments if your financial situation changed. Am I missing something here?
@@dresser6135 No, I don't think you are missing anything. You would get a slightly lower interest rate changing to 15 yr assuming no closing costs but then lose that huge flexibility of "reducing" your payment as you point out if they instead kept the 30 yr and adjust the principal payment to finish the mortgage in 15 yrs. In any worse case scenario, one can always take on a roommate for a little while to ride out the bad time and just one person's rent for a room in the basement will practically pay one's P&I each month on these low interest mortgages.
Paying down more principal on a 30 works just as well if you want the option to skip it occasionally and preserve that cash flow. The 15's typically have a bit lower rate, but these days, it's not that big of a spread. It all depends on the person. Great comments! 🙏
"Housing payments decrease in real terms over time". Are you saying a mortgage payment of zero is somehow worse than this? I don't understand why financial planners recommend keeping mortgage risk on a fixed income in retirement. The math you present shows a 7% "success difference" in the pre-fabricated analysis you've done...but says nothing about debt risk and more importantly, debt risk directly linked to housing security in retirement. It's not just math.
@Craig G -- you're absolutely right. While the mortgage would decrease in real terms, zero is a much better number! While this is just an example analysis, I'm certainly not recommending that this is the answer for everyone (or even the majority of retirees). There's a difference between knowledge and wisdom, right?
In reality, I'd probably help Mandy make a plan to pay down additional principal between now and retirement and reassess each year. There's no right answer for everyone. Great comment! 🙏
No I would NOT be thrilled with an only 62% chance of successful retirement!!!
And I would NEVER pay off a mortgage with 20 years to go!! especially if I was 65!!!
As a man, particularly a man in my family, I'm not 100% sure that I would make it to 65.
Indeed I would be the first on my Father's side to do so going back a few generations. I am very hopeful to make it to 65 and beyond, but I'm also hedging my bets.
Of Course, Murphy's Law dictates that I would be the first on My father's side of the Family to live to 90 and have No money!!! 😂😂.........Because that's just how life fucks us!!! ..........
But just in case, I do save quite a bit for retirement because as a good friend of mine once pointed out: It's a bitch when you have too much life at the end of Your money!!! especially if One must go back to work in one's 70s or 80s.......the prospects are quite dim!!! So even if we die early we must save like we're going to live well into our 80s at least.
Because we cannot count on government safety nets!!!
Utter lunacy not paying off mortgage in retirement.
I’m 44 and have plans to pay off the mortgage next year. After that, l will have ZERO debts and can achieve savings rate of 100% of my salary for the rest of my career. I also own another 2 homes mortgage free.
I’m also in a country that has the National Health service so unlike you Americans, l don’t have to worry about healthcare.
Not worrying about healthcare must be nice! I have seen many people keep a mortgage in retirement and be just fine. It's all dependent upon the situation.