By Jason LaBarge
Managing Partner, Premier Planning Group
I am frequently asked whether a mortgage should be paid off before retirement or if it’s OK to have a mortgage into retirement. If you read the headline of this article, you will assume that my answer is to always have a mortgage, but as you might imagine, life isn’t that cut and dry.
Most of my clients come from the generation when their parents told them to be debt-free as soon as possible and to never have a mortgage in retirement. They come from the “greatest generation,” when mortgage-burning parties were common. Obviously, not having any debt in retirement is an advantage and you should strive to be debt-free if possible. But if the question is whether to take money that might be invested in other places like a 401(k) or IRA, or to pay off a mortgage, that is another question.
No one said financial decisions have to be logical. I frequently have clients who tell me they are paying off their mortgage no matter what and there is nothing I can say to change their minds. To those people, I say, “Congratulations! Welcome to the wonderful world of being debt-free!” It is never a bad decision to pay off your mortgage; however, it may not be the best idea if you plan on taking withdrawals from your retirement or other investment accounts to pay off that mortgage. Sometimes, you have to think about it economically and not emotionally. If your interest rate is 4% and you are getting a return on investment of 7%, is it prudent to take the money that is earning 7% and pay off the mortgage you are paying 4% on? You can think of this as a simple leverage play. You are earning a net 3% in that scenario. To take it further, let’s say you have a guaranteed investment paying 7% from an investment, such as an annuity. I would much rather have that money earning 7% then take the money out and pay off a mortgage where I am only paying 4%.
To make these decisions, there are important factors to consider. When planning for retirement, the factors you need to consider are your interest rate, the investment’s rate of return, and your income sources.
If your retirement income is enough for you to live on, including your mortgage payment, and if your income comes from guaranteed sources like a pension, Social Security or guaranteed annuity where you can pay your mortgage as well as the rest of your monthly expenses, then it’s much easier and prudent to keep the money invested instead of withdrawing it and paying off the mortgage. If you’re struggling to pay your monthly bills, it may be in your best interest to pay off your mortgage as soon as you are able and before you retire.
We’ve been hearing a lot about interest rates and the Federal Reserve in the news lately, but most of the chatter has concerned interest rate decreases. It’s unthinkable nowadays that a 30-year fixed mortgage would be 18%, but that was reality for those in 1981. The average 30-year fixed mortgage in 2010 was 4.750%; that’s a significant difference. The approach one takes to deciding whether to pay off a mortgage or continue one into retirement is different for these two situations, right?
The bottom line here is that in today’s environment, with low interest rates, it’s OK to have a mortgage. This is especially true for those who have significant pensions and Social Security payments in retirement where it’s providing enough income to make the monthly mortgage payments. It’s important to note that being debt-free should be the goal for everyone in retirement, but for some, it’s just not a possibility and shouldn’t prevent you from retiring.
For more information about the author, Jason LaBarge, visit his website at www.jasonlabarge.com.
Premier Planning Group is an independent firm with securities offered through Summit Brokerage Services Inc. Member FINRA www.finra.org and SIPC www.sipc.org
Opinions expressed are that of the author and are not endorsed by the named broker dealer or its affiliates. All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy.
The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. Actual investment results may be more or less than those shown. This does not represent any specific product (and/or service).