Retirement plan advisors – While retiring completely debt-free is an optimum goal for better finance, many Americans will enter retirement with a mortgage note draining their nest eggs. According to one of the retirement plan advisors, Jonathan Clements, in his September 20, 2007, Wall Street Journal article “Retiring With A Mortgage? Here’s What to Do,” more than 32% of households in the 65 to 74 age bracket had a mortgage on their primary residence. This is a considerable increase from 1992 when the percentage of mortgage holders among this group was just 19%.
Making Extra Mortgage Payments for Better Finance
The recent recession of COVID-19 pandemic and the loss of value among investment assets means that fewer retirees will have the assets they anticipated would be available to help them retire their mortgages. Part-time work for retirees is harder to find, due to growing unemployment. The double whammy from a depressed housing market also prevents many retirees from selling their homes in an effort to downsize to a smaller home with a lower monthly payment. Despite these challenges, there are still options available to retirees for paying off or downsizing the number of their monthly mortgage notes.
For retirees who find it difficult or undesirable to sell their home in a soft housing market and downsize to a smaller abode, several alternatives are available for tackling the mortgage monster. They could choose to: 1) liquidate other assets to pay off the mortgage immediately, 2) purchase an immediate annuity to generate an income stream to cover the note, or 3) work full or part-time to generate additional income until the note is paid in full. Although everyone’s situation is unique, for those with the wherewithal to do it, paying off the mortgage using other assets can reap the greatest benefits in the shortest amount of time.
Retirees who own substantial investments outside of an IRA, 401(k) plan, or similar qualified plans may wish to consider liquidating a portion of these assets and paying off their mortgage notes with the resulting cash. Although the size of their portfolios will shrink, their spendable income will effectively increase by the amount of the monthly mortgage payment that no longer exists.
Too Much Emphasis on Tax Deductions
According to retirement plan advisors, for those who are concerned about the possible loss of a tax deduction from mortgage interest paid, it is important to put that tax deduction into perspective. Many retirees will have already paid on their mortgages for quite a few years. As a result, more of the monthly mortgage payment is applied to the loan principal, and less to mortgage interest. By the time retirement comes around, they likely are paying less and less in mortgage interest, which means the size of the tax deduction has already decreased considerably. More importantly, eliminating the entire mortgage payment is a greater boost to spendable income than simply offsetting a decreasing portion of that payment with an annual income tax deduction.
Caution When Selling Tax-Deferred Investments
When selecting assets to liquidate with respect to better finance, it is very important to avoid liquidating tax-deferred assets from qualified retirement plans, IRAs, cash value life insurance, or similar tax-advantaged assets. Taking a large lump-sum distribution from one of these accounts can result in a sizeable increase in the current year’s income tax liability, possibly negating some of the savings realized by paying off the mortgage loan. Worse still, liquidating these retirement assets prior to age 59 ½ can also result in both income taxes and hefty IRS penalties for early distribution of retirement funds.
How to Payoff Mortgage Early in Half the Time
Most people can pay off their house in half the time. This gives them the potential for extra income and better finance during retirement.
Many people’s biggest expense is usually their mortgage payment. It’s possible to get rid of one’s house payment (principal and interest) in half the time with only slightly larger monthly payments. This is simply the magic of compound interest and making it work in favor of the homeowner instead of the mortgage lender.
Half the Time
Here is a simple example:
A person with a $250,000 mortgage
6% fixed loan for 30 years means a payment $1,499 a month
If the homeowner pays an extra $400 every month ($1,899), the loan would be paid off in 18 years instead of 30 years.
If this sounds like a lot of money right now, think of it as an investment that is guaranteed to pay off.
If this same homeowner pays an extra $500 a month ($1,999)
The loan would be paid off in 16 years
The total savings would be $252,000, which is more than the original purchase price.
These savings come from the $18,000 per year that the homeowner didn’t have to pay during the final 14 years when he or she owned their home free and clear. A 30-year-old man or woman could live rent-free at age 46 for the rest of his or her life, no matter how high other expenses go (though there would always be property taxes).
The potential savings are easy to calculate to fit anyone’s circumstance using a Mortgage Payoff Calculator.
After paying off the house, the extra cash can be used for the children’s education, for travel, or simply to have a house-payment-free lifestyle.
A homeowner should talk to his or her mortgage company to see if the mortgage has any early payment penalties or other hidden fees. If the mortgage company says there are no penalties or costs, the homeowner should set up automatic extra monthly payments.
There are more benefits once a homeowner (and his or her spouse) is over age 62. There is a potential for extra income for both partners, for life or until both pass away, with a reverse mortgage.
Reverse mortgages have their pitfalls, but if the homeowner consults his or her financial advisor, reverse mortgages can be a blessing. The pitfalls vary from lender to lender, but they can include:
High up-front Fees
A decision to move to a sunnier climate, after signing up for a reverse mortgage, will mean that the homeowner is out those fees.
Any inheritance that is left behind will be reduced because the homeowner has used up some of it in the reverse mortgage payments that he or she has received.
The monthly check that a homeowner would receive from a reverse mortgage will vary depending upon these factors, at the time a reverse mortgage is taken out:
The Value of the Home
The Age of the Husband
The Age of the Wife
Calculations are based on one’s life expectancy, but unlike insurance, the older a person is the more he or she gets.
Following the suggestions above will not only reduce monthly expenses but at age 62, a reverse mortgage would give the homeowner an income similar to an extra retirement check.
It is important that the homeowner checks with one of the reputable retirement plan advisors before making changes to their mortgage.
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