By Charlotte C. Geletka, CFP® CRPC®, Managing Partner Silver Penny Financial Planning
Should you have a Mortgage in Retirement?
In the past the working to retired life transition went something like this: work for the same company for 30 years, accrue a nice monthly pension, pay off your 30-year mortgage, sit on front porch in your rocking chair while watching your grandchildren play in the front yard and comfortably coast into old age. Today this is akin to a Norman Rockwell hanging on the wall. It paints a nice, nostalgic picture, but it is from an era of days gone by.
The reality facing todays retirees looks a little more like this: cobble together the 401ks from your past 3 previous employers, add that to your IRA, find the pension from the large corporation you used to work for in the 80s, figure out if you will have enough savings to actually retire, and good luck getting your grandkids off a screen for a long enough to see their faces.
The Baby Boomers have revolutionized retirement in so many ways that it is time that we reevaluate some of the old “rules of thumb” for a successful retirement. I want to specifically discuss the mortgage debate. Do you need to pay off your mortgage before you retire? To have a mortgage or not have a mortgage in retirement, that is the question.
Thirty-five years ago, the average mortgage rate was 12.96%.* That means that on a $350,000 mortgage a borrower would pay $1,025,022 in interest charges over the life of the loan. The prevailing wisdom of the day was to pay off the mortgage as quick as possible to avoid expensive payments added to your retirement balance sheet. Today the average mortgage rate is hovering around 3%. Using the same house purchase price of $350,000, the interest paid over the life of the loan is $179,896. The comparison is shocking. Low interest rates are not just good for first time home buyers, they can also be good for retirees who would prefer to use a bank’s money at a low cost.
If a retiree buys a home for a purchase price of $400,000 and puts $200,000 down from the sale of a previous home, then should the remaining $200,000 be paid in cash or should it be mortgaged? A $200,000, 30-year fixed mortgage at 3% would have a monthly cost of $843 (not including taxes and insurance). The other option would be to use savings of $200,000 and have no mortgage. If this retired individual has hundreds of thousands of dollars lying around in a bank earning .01% then it might be worth considering. However, what if he or she has an entire cash position of around $200,000? The no-mortgage objective could be achieved but using all the cash would take away future opportunities.
If this hypothetical retiree has sufficient income to cover the mortgage then keeping a mortgage provides freedom to use the cash to accomplish other goals like trips to visit family, help care for a loved one, pay for medical expenses, or cover an emergency. If you are lucky enough to have a pension that covers your monthly expenses, then having a mortgage does not necessarily chip away at your savings and allows you to use the bank’s money and keep your cash on hand. On the flip side, if you do not have a monthly pension and your monthly budget is tight then it might be wise to not have a mortgage. If you use your cash to pay for the house so that you can keep the monthly expenses down and in line with your retirement income then the use of your money to buy the house mortgage-free makes sense.
There is not a one size fits all answer and the key is in your financial plan. It may be hard to open your mind when all you may have heard early in your career is “pay off your mortgage, pay off your mortgage.” That mantra served the retirees of the 1980s and 1990s well. However, in todays’ low-interest rate environment consider your overall financial picture and your financial goals and shortfalls. Before your empty your bank account all in the name of no mortgage get solid financial advice. If you are in need of financial advice seek out a Certified Financial Planner™ to help you establish your goals and make a wise financial decision on housing costs.
Charlotte Geletka is a registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker-dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Silver Penny Financial Planning is a marketing name for registered representatives of Lincoln Financial Advisors Corp. Lincoln Financial Advisors Corp. and its representatives do not provide legal or tax advice. You may want to consult a legal or tax advisor regarding any legal or tax information as it relates to your personal circumstances