I am 67 years old, single and retired at 66. After taxes, I get $3,100 a month from a pension. After taxes and my Medicare Part B payment, I get $2,100 a month from Social Security. I have about $100,000 in mutual funds/savings accounts and $500,000 in my 401(k) account.
I can live comfortably on the $5,200 a month I receive from my pension and Social Security, barring something catastrophic. My pension and SS cover my basic needs and expenses, so I don’t plan on tapping my 401(k) account until I’m 72 and committed. Not much left for some “fun” though as I have two grown children, one grandchild with one on the way, extra money tends to go her way.
My question. I own a home worth about $275,000 and I pay an $800 monthly mortgage. I still have $57,000 on the mortgage. I have a seven-year mortgage at 2.65% that I refinanced in 2020, so five years to go. Should I pay off my house with my savings or keep paying a mortgage until I eventually have to move to a house with no stairs?
Thanks for any advice you can have.
See: My wife and I are in our 50s with $300,000 in a 401(k) and $700,000 in a pension. When we retire, will we have enough to live a “simple life”?
This is an age old question and I’m glad you asked it. Many other retirees are asking the same questions as you and may be in a similar financial situation where they are able to pay the bills and save money in their retirement accounts.
The answer often depends on your personal situation and how you feel about debt. If you can handle owing that money on your mortgage, then it’s not bad to have. Your interest rate is fantastic, you can make the monthly payment out of just your pension and Social Security without resorting to your 401(k), and you’ve already paid off so much of your house—all wins. Not everyone is comfortable with having debt in retirement, even if it suits their cash flows, and these are the people who really need to weigh their options.
Ultimately, you really don’t want to drain your retirement accounts on a mortgage you can pay.
Another way of looking at it – compare your fixed interest rate to what you can earn from your portfolio. For example, you have $500,000 in a 401(k), and depending on how it’s invested, it’s likely to have a return that’s greater than your mortgage rates, advisers said.
However, check how much your investments actually are. Some retirees are too conservative in investing because they feel they need to de-risk their portfolios to get that money for retirement — while they might not want as much risk as a 25-year-old just turning 40 401(k) begins In order to see retirement, you want your wealth to last the rest of your life, which means there must be some risk. Talk to your advisor, and if you don’t have one, contact your 401(k) administrator to help you understand what’s going on in your account.
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Also keep in mind that you would have to pay taxes on your 401(k) payoff to pay off your mortgage, so you’re deducting more than $57,000. The more you withdraw, the less your account has to process to grow over time.
“If she’s able to cover the mortgage and other expenses with cash flow from pension and Social Security income, she should avoid that big taxable distribution,” said Byrke Sestok, a certified financial planner with Rightirement.
Since you’re not yet 72, you might also want to consider some conversions to a Roth IRA, Sestok said. Shifting some money from a taxable to a tax-exempt account over time can save you thousands of dollars in future tax liabilities. You would pay the tax on the current distribution, so you should stay within a threshold that keeps you from moving into a higher tax bracket – a financial advisor or professional accountant could help you understand that.
As I said earlier, there is an emotional component to this question that should not be ignored. While it makes financial sense to keep your mortgage and continue paying as-is, you need to feel comfortable, said Paul Winter, board-certified financial planner and founder of Five Seasons Financial Planning. If you can’t sleep at night because you’re thinking about that mortgage hanging over you, that’s no good either. “The optimal financial decision for an individual is not always the right decision for the individual,” said Susan Mitcheltree, board-certified financial planner and partner and communications director at Berman McAleer. “We’re human, so we need to balance both finances and our emotions to determine the best course of action.”
See also: I’m 60, a school bus driver and bartender, have $165,000 saved for retirement, and have a giver mentality – “Is there hope for me?”
Still, you’re in a good position — and it’s important to remember it.
“If she’s comfortable (financially and emotionally) making the mortgage payment with her income, there’s not much economic benefit in paying her off early,” said Matt Stephens, a board-certified financial planner and founder of AdvicePoint. “It’s a very low interest rate and most of her payments will go on the principal anyway since she’s at the end of the loan.”
You don’t know what the future will bring either. You may need to tap into your 401(k) for another, more pressing reason, and again you want that money to be there for you as you age.
And as for cash flow, are you wondering what you would do with that extra $800 you’re currently using to pay your mortgage every month? Would this “found” money be used for additional expenses or would you invest it?
“I urge clients to be very careful with money that is no longer needed for mortgage payments,” said Jesse Sell, board-certified financial planner and managing director of Prevail Financial Partners. “In situations like the one you describe, this can easily lead to increased lifestyle spending.”
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https://www.marketwatch.com/story/im-67-and-retired-with-57-000-left-on-my-mortgage-and-600-000-saved-for-retirement-should-i-pay-off-my-home-now-11648824229?rss=1&siteid=rss I’m 67 years old, retired, with $57,000 left on my mortgage and $600,000 saved for retirement – should I pay off my house now?