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Retirement

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

October 15, 2018 By Liz Weston

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.

Filed Under: Q&A, Real Estate, Retirement Tagged With: mortgage, q&a, Retirement

Q&A: Pension annuity beats lump sum

October 9, 2018 By Liz Weston

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.

Filed Under: Q&A, Retirement Tagged With: Pension, q&a, Retirement

Q&A: Waiting for Social Security pays off

August 20, 2018 By Liz Weston

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.

Filed Under: Q&A, Retirement, Social Security Tagged With: q&a, Retirement, Social Security

Q&A: Should a soon-to-be retiree use savings to pay off the mortgage?

July 23, 2018 By Liz Weston

Dear Liz: I am 64, single and planning to retire in two years. I have saved enough to pay off my $100,000 mortgage. It will take the bulk of my savings but I have no other debts. I will have a pension and Social Security. I also have a credit score over 800. Should I do this?

Answer: Being debt free in retirement is wonderful, but being stuck short of cash is not. It’s a particularly bad idea to use pretax money from retirement accounts to pay off a mortgage. Not only can the withdrawal trigger a big tax bill, but it may push you into a higher tax bracket for that year and cause other unexpected tax consequences.

Even if your pension and Social Security cover your expenses now, that probably won’t be the case for the rest of your life. For example, Medicare covers about half of the typical retiree’s medical costs, and doesn’t pay at all for most long-term care expenses if you should need those.

You could pay off the mortgage and then arrange a home equity line of credit you could tap for such expenses or for emergencies. Just be aware that lenders can freeze or close lines of credit at their discretion, so it won’t be the same as having cash on hand.

Decisions made about retirement are complex and often irreversible. Consider consulting with a fee-only financial planner about your retirement plans so you better understand your options and the consequences of the choices you’re making.

Filed Under: Q&A, Retirement Tagged With: mortgage, q&a, Retirement

Q&A: The future is bleak for charitable deductions, early retirees’ healthcare costs

July 2, 2018 By Liz Weston

Dear Liz: When I sat down with my accountant in March to do my 2017 taxes, he said next year I will take the standard deduction. Are my contributions to charity still deductible if I take the standard deduction?

Answer: No. Charitable contributions are an itemized deduction. If you don’t itemize your deductions, you won’t get the tax break.

Congress nearly doubled the standard deduction as part of its tax reform. For married couples, the standard deduction is now $24,000, up from $12,700. The state and local tax deduction was capped at $10,000. As a result, the proportion of taxpayers who will itemize their deductions is expected to drop from about 30% to 10% or less.

Filed Under: Q&A, Retirement, Taxes Tagged With: charitable contributions, q&a, Taxes

Q&A: Healthcare costs could nix early retirement

July 2, 2018 By Liz Weston

Dear Liz: Recently you included a letter from a retired person who was amused by the suggestion that early retirees may have to go abroad to find affordable healthcare. I was horrified by that letter and shared your article with several friends. Something is deeply wrong when a nation offers citizens who have contributed to its success so few options regarding decent medical care. It makes me very sad and angry. Thank you for focusing attention on this issue.

Answer: Currently early retirees do have an option before they’re old enough for Medicare, which is to buy insurance from Affordable Care Act exchanges. The future of that coverage is in doubt, though, which is why many financial planners are warning their clients who had planned on early retirement to continue working, if that guarantees them access to health insurance. Moving abroad is another option for the adventurous, but obviously won’t be a good solution for many.

Filed Under: Health Insurance, Q&A, Retirement

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