Should you pay off mortgage before you retire?

Most people would be better off not having mortgages in retirement. Relatively few will get any tax benefit from this debt, and the payments can get more difficult to manage on fixed incomes.

But retiring a mortgage before you retire isn’t always possible. Financial planners recommend creating a Plan B to ensure you don’t wind up house rich and cash poor.

In my latest for the Associated Press, why a mortgage-free retirement is usually best.

Q&A: When to keep a mortgage into retirement years and reasons you might want to pay it off

Dear Liz: My husband and I have no debt other than the mortgage on our home. My husband will retire in three years while I will continue to work. (I will have to pay for healthcare at that time, as I currently receive my benefits through his employer.) My husband insists that we pay our mortgage off before he retires. The mortgage balance is $59,000 now. We are able to do this, however, I am concerned that we will have no tax deduction whatsoever if we do. Who is correct?

Answer: You may have received some tax benefit in the past for your mortgage. After last year’s tax reform, it’s unlikely you’ll get any tax break going forward.

You have to be able to itemize your deductions to write off your mortgage interest. Now that Congress has nearly doubled the standard deduction, few taxpayers will have enough deductions to make itemizing worthwhile.

Even before tax reform, though, many homeowners got little or no tax benefit from their mortgages. They didn’t pay enough mortgage interest to make itemizing worthwhile, or their itemized deductions barely exceeded the standard deduction. The homeowners who got the biggest benefit were the ones with the largest mortgages. Even people with big mortgages tend to pay less interest over time as they pay down their loans.

Keeping a mortgage just for the tax break is kind of shortsighted, in any case, since you’re only getting back a fraction of what you pay out. For example, if you were in the 25% tax bracket, each dollar you paid in interest reduced your taxes by just 25 cents.

The best arguments for keeping a mortgage have to do with liquidity and investment returns. You shouldn’t pay off a mortgage if it means most of your money is tied up in your home, and if you don’t have enough other assets to cover emergencies and to generate future income. Also, some wealthier people opt to keep a mortgage because the loan is cheap, and they can make better returns on their money elsewhere.

Most people are better off without debts in retirement, though, so if you can pay off your home loan without compromising the rest of your financial life, you probably should.

Q&A: Pension annuity beats lump sum

Dear Liz: I am 63, recently retired and have a choice. I can take a lump sum from my pension at age 65 or a monthly annuity. I am strongly leaning toward the lump sum. I know the pitfalls (I won’t be an aggressive investor, I don’t gamble, I won’t loan to family or friends, etc). My reasoning is that if my spouse and I both die before our early 80s, “they win.”

I do have relatives who live a long time, however. I am financially very careful and believe interest rates in five years will be several points higher and I can invest the lump sum conservatively and get a 5% to 7% return, and that will work for me.

Finally, I could take the monthly annuity now with no survivor benefit and at the same time buy term life insurance to cover my wife if I go. Am I missing anything significant in my favoring the lump sum?

Answer: Yes. Quite a bit.

Calculating break-even points can be an interesting math exercise, but you’re making assumptions about inflation rates and market returns, as well as life expectancies, that you can’t actually know in advance. A better approach might be to consider what could possibly go wrong. The answer: a lot.

Technically, you might do better investing the money than collecting the annuity, but there are so many ways you could wind up losing. You could pick the wrong investments, or the markets could turn south for an extended period. You could be defrauded or become the victim of an unethical advisor.

(Sure, you’ve got all your marbles now, but who says you’ll keep them? Even the smartest people can get fleeced, and any cognitive decline over the years could make you a sitting duck.)

The fact that you have longevity in your family is another big factor in favor of taking the annuity, because you can’t outlive the money. That should be a concern, in any case, because according to the Society of Actuaries there’s a 72% chance that one member of a couple will live to age 85 and a 45% chance that one will live to age 90.

If your spouse is a woman and not several years older than you, she’s likely to outlive you. Does she want to inherit the responsibility of managing this money?
Speaking of your spouse, get an independent, fee-only advisor’s opinion before you consider waiving the survivor’s benefit on any annuity.

A term life insurance policy may not last as long as you need it to, and will be expensive at your age. It will be vastly more expensive if you try to renew it down the road.
If you don’t or can’t renew it, your spouse could face a drastic drop in income at your death as one of your two Social Security checks goes away and the pension income stops. Surely, your partner deserves better than that.

Friday’s need-to-know money news

Today’s top story: Don’t let magical thinking jinx retirement. Also in the news: How to live with your first credit card’s low limit, legal complaint puts student debt relief companies in the crosshairs, and a decade after the housing crisis, foreclosures still haunt homeowners.

Don’t Let Magical Thinking Jinx Retirement Planning
Money won’t suddenly begin growing on trees.

How to Live With Your First Credit Card’s Low Limit
No, your limit isn’t missing a zero.

Legal Complaint Puts Student ‘Debt Relief’ Companies in Crosshairs, and Borrowers Can Help Make the Case
Borrowers have a way to fight back.

A decade after the housing crisis, foreclosures still haunt homeowners
Long lasting repercussions.

Tuesday’s need-to-know money news

Today’s top story: How an engineer digs out of $100,000 in loans. Also in the news: What to do if Hurricane Florence hits your home and/or mortgage, 3 low-stress ways to invest for retirement, and the pros and cons of identity monitoring.

Debt Diary: How an Engineer Digs Out of $100,000 in Loans
Accounting for every single expense.

What to Do If Hurricane Florence Hits Your Home, Mortgage
Recovering from disaster.

3 Low-Stress Ways to Invest for Retirement
How to get started.

The Pros and Cons of Identity Monitoring Services
Are they worth the expense?

Friday’s need-to-know money news

Today’s top story: Don’t believe the hype about Millennials and money. Also in the news: 3 low-stress ways to invest for retirement, 4 quick financial wins in under an hour, and 10 unexpected debt traps – and how to avoid them.

Don’t Believe the Hype About Millennials and Money
Forget the avocado toast cliche.

3 Low-Stress Ways to Invest for Retirement
It doesn’t have to be stressful.

Got an Hour? Chalk Up 4 Quick Financial Wins
60 minutes well spent.

10 Unexpected Debt Traps – and How to Avoid Them
Don’t get caught in these traps.

Thursday’s need-to-know money news

Today’s top story: How women who retire with their husbands ofter lose out. Also in the news: Why the cashless trend doesn’t have all shoppers sold, what rising DTI limits mean for your next mortgage, and how to protect your frequent flyer miles from hackers.

How Women Who Retire With Their Husbands Often Lose Out
Losing years of income.

Why the Cashless Trend Doesn’t Have All Shoppers Sold
Cash still matters.

What Rising DTI Limits Mean for Your Next Mortgage
Your debt-to-income ratio is key to mortgage approval.

Protect Your Frequent Flyer Miles from Hackers
Miles have become a hot commodity.

How women who retire with their husbands often lose out

Women who retire when their husbands do may be giving up more wealth than they realize.

Married women overall are still in their peak earning years in their 50s and early 60s, while married men’s earnings are on the decline, says economist Nicole Maestas, an associate professor of health care policy at Harvard Medical School and the author of a recent study about couples’ income and retirement patterns.

As a result, married women typically sacrifice more Social Security wealth than married men when they retire early, says Maestas, who analyzed the University of Michigan’s Health and Retirement Survey of more than 20,000 people 50 and older.

In my latest for the Associated Press, why women should consider staying employed longer than their husbands.

Q&A: Waiting for Social Security pays off

Dear Liz: My husband (who will retire in January) just turned 67, but still wants to wait to collect Social Security until he turns 70 to maximize his benefit.

Should he apply for Social Security now, and immediately suspend benefits? Or, should he simply wait until he turns 70 years old to apply? Is there a difference?

Answer: There’s no need for your husband to file for benefits now. He will accrue delayed retirement credits for each month he delays filing, and those credits will add 8% a year to his benefit. Not only will that result in a larger check for him, but that could mean a larger survivor’s check for you should you outlive him.

Your house isn’t a piggy bank

Your home equity could keep you afloat in retirement or bail you out in an emergency — but not if you spend it first.

U.S. homeowners are sitting on nearly $6 trillion of home value they could tap as of May 2018, according to data provider Black Knight. Lenders are eager to help many do just that through home equity loans, home equity lines of credit and cash-out refinancing.

The rates are often lower than other kinds of borrowing, and the interest may still be deductible, despite last year’s tax reform changes. But you can lose your home to foreclosure if you can’t pay back the loan, which is why financial planners generally frown on using equity for luxuries, investing or consolidating credit card debt.

Many planners point to the foreclosure crisis that started a decade ago as an example of what can go wrong when people binge on home equity debt.

In my latest for the Associated Press, why it’s dangerous to treat your house like a piggy bank.