Ask Liz Weston

Get smart with your money

mortgage

Q&A: Here’s a retirement dilemma: Pay off the house first or refinance?

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Dear Liz: My husband and I are retired, with enough income from our pensions and Social Security to cover our modest needs, plus additional money in retirement accounts. We have owned our home for 35 years but refinanced several times and still have 15 years to go on a 20-year mortgage.

With rates so low, we were contemplating refinancing to a 15-year mortgage just for the overall savings on interest, but we started thinking about the fact that, at 67 and 72 years old, it’s unlikely that both of us will survive for another 15 years to pay off this loan. Since that’s the case, we’re now thinking about taking out a 30-year mortgage, with monthly payments $700 or $800 less than what we currently pay.

Our house is worth around 10 times what we owe on it, and if we had to move to assisted living we could rent it out at a profit, even with a mortgage. We also each have a life insurance policy sufficient to pay off the balance on the mortgage should one of us predecease the other.

I know that conventional wisdom says that we should pay off our mortgage as quickly as we can. But an extra $700 or $800 a month would come in handy! Am I missing something? Is this a bad idea?

Answer: Answer: Not necessarily.

Most people would be smart to have their homes paid off by the time they retire, especially if they won’t have enough guaranteed income from pensions and Social Security to cover their basic living expenses. Paying debt in retirement could mean drawing down their retirement savings too quickly, putting them at greater risk of ultimately running short of money.

Once people are in retirement, though, they shouldn’t necessarily rush to pay off a mortgage. Doing so could leave them cash poor.

You are in an especially fortunate position. Your guaranteed income covers your expenses, including your current mortgage, and you have a way to pay off the loan when that income drops at the first death. (The survivor will get the larger of the two Social Security checks. What happens with the pension depends on which option you chose — it may drop or disappear or continue as before.) Even with a mortgage, you have a large amount of equity that can be tapped if necessary.

So refinancing to a longer loan could make a lot of sense. To know for sure, though, you should run the idea past a fee-only, fiduciary financial planner who can review your situation and provide comprehensive advice.

Q&A: They paid off the mortgage rather than save for retirement. Now what?

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Dear Liz: My wife and I aggressively paid down our mortgage and now have it paid off, but we don’t have much saved for retirement. I make about $90,000 a year and will receive a teacher’s pension that will replace between 30% and 60% of that (depending on what option we choose) when I retire in about 10 years. It probably won’t be enough to live on. We will receive no Social Security benefits. We have no other debts, and we would like to make up for lost time as best we can on retirement preparation. What is your best advice for people like us who have diligently paid off their mortgage but have not diligently put money away for retirement?

Answer: The older you get, the harder it is to make up for lost time with retirement savings. You probably can’t do it if retirement is just a few years away.

This is not to make you feel bad, but to serve as a warning for others tempted to prioritize paying off a mortgage over saving for retirement.

If you’re in your 50s, you’d typically need to save nearly half your income to equal what you could have accumulated had you put aside just 10% of your pay starting in your 20s. The miracle of compounding means even small contributions have decades to grow into considerable sums. Without the benefit of time, your contributions can’t grow as much so you have to put aside more.

But you can certainly save aggressively and consider a few alternatives for your later years.

Once you hit 50, you can benefit from the ability to make “catch up” contributions. For example, if you have a workplace retirement plan such as a 403(b), you can contribute as much as $26,000 — the $19,500 regular limit plus a $6,500 additional contribution for those 50 and older.

You and your spouse also can contribute as much as $7,000 each to an IRA; whether those contributions are deductible depends on your income and whether you’re covered by a workplace plan. If you’re covered, your ability to deduct your contribution phases out with a modified adjusted gross income of $105,000 to $125,000 for married couples filing jointly. If your spouse isn’t covered by a workplace plan but you are, her ability to deduct her contribution phases out with a modified adjusted gross income of $198,000 to $208,000. (All figures are for 2021.)

If you can’t deduct the contribution, consider putting the money into a Roth IRA instead because withdrawals from a Roth are tax free in retirement. The ability to contribute to a Roth IRA phases out with modified adjusted gross incomes between $198,000 and $208,000 for married couples filing jointly.

If possible, a part-time job in retirement could be extremely helpful in making ends meet. So could downsizing or tapping your home equity with a reverse mortgage. A fee-only financial planner could help you sort through your options, as well as help you figure out the best way to take your pension when the time comes.

Friday’s need-to-know money news

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Today’s top story: Want a raise in 2021? You may not even need to ask for it. Also in the news: How to be effective with your generosity in 2020, how to prepare for student loan payments to restart in 2021, and what to do if you’re behind on your rent or mortgage.

Want a Raise in 2021? You May Not Even Need to Ask for It
If you got a big tax refund last year, changing your W-4 form at work could put more money in your pocket now.

How to Be Effective With Your Generosity in 2020
Where your money can do the most good.

How to Prepare for Student Loan Payments to Restart in 2021
Time’s almost up.

Behind on your rent or mortgage? Here’s what to do
Important steps to follow.

Q: They paid off the mortgage. Then the credit score fell. Can that be right?

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Dear Liz: My wife and I recently paid off our mortgage. We have no other debt. Soon after, I received a message from Experian that my FICO score, which has been perfect for quite a while, was reduced by 31 points. What justifies such action, and what do I need to do to bring up my score?

Answer: Credit scores were never intended to be a measure of anyone’s financial health. Instead, they were created to help lenders gauge the risk that an applicant would default on a loan or credit card debt.

Having a mix of types of credit, including installment loans (such as a mortgage) and revolving accounts (such as credit cards), generally helps your credit score. Because the mortgage was your only installment loan, that could have led to a larger-than-normal effect on your scores.

If your previous score was “perfect,” or 850 on the FICO scale, then there’s nothing you need to do. Once your scores are over about 760, you’re getting the best rates and terms, and there’s typically no other benefit to shoot for, other than bragging rights.

Wednesday’s need-to-know money news

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Today’s top story: Is my money safe in a bank during the COVID-19 crisis? Also in the news: Helping home buyers keep their distance with e-closings, what kinds of credit card relief are available during the pandemic, and how to save for retirement while on unemployment.

Is My Money Safe in a Bank During the COVID-19 Crisis?
Should you be worried about your accounts?

Mortgage E-closing: Helping Home Buyers Keep Their Distance
Changes during the pandemic.

COVID-19: What Kinds of Credit Card Relief Can You Request?
Several options are being offered.

How to Save for Retirement While on Unemployment
Saving for the future is still important.

Q&A: Don’t keep a mortgage just for the tax deduction

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Dear Liz: Does the new tax law, with its increased standard deduction, change the calculus of maintaining my mortgage? I owe about $250,000 at 3.25% on a 30-year mortgage. I no longer itemize, so I don’t get the benefit of the tax deduction for the interest. My payments are about $1,500 a month, but I could easily pay it off.

Answer: It never made much sense to keep a mortgage just for the tax deduction. The tax savings offset only a portion of the interest you pay. (If you’re in a 33% combined state and federal tax bracket, for example, you’d get at most 33 cents back for every $1 in mortgage interest you paid.)

A more compelling reason to keep a mortgage would be if you were able to get a better return on your money by investing it, or if you didn’t want to have a big chunk of your wealth tied up in a single, illiquid asset.