Should you pay off your mortgage when you get to retirement? That's a great question,
and it's rarely a bad idea to pay off debt. But it can be kind of tricky so
we're going to go over that and maybe cover some of the dominant themes that you want to consider.
By the end of this video, you'll have a solid understanding of the advantages and disadvantages,
and we're going to go over a specific example with some numbers including some some tax numbers.
Just to give you a quick preview, this isn't going to be an extravagant example of a huge debt.
It's a pretty common debt amount but it can make somebody jump from the 12 percent federal income
tax bracket to the 24 percent federal income tax brackets, so that can affect your decision
so the advantages of paying off the debt are probably pretty obvious to you.
You have no more monthly payment and that is often one of your biggest expenses in retirement
(health care might be another one but when you can get rid of that mortgage payment it makes life
a lot easier). So you also stop paying interest, and you might be paying at a relatively low rate,
but still that's going to drain some of your resources and cost money so if you can quit
paying interest that's often a good thing. And then, of course you can reduce market risk,
so you might say that you have a lot of money in a retirement account, and at retirement, you're
concerned about all of the ups and downs in the markets. But if you can put that money into your
home mortgage you can, again, stop paying interest which is kind of like getting a guaranteed return.
So if you're paying interest at three or four percent that's similar to a guaranteed loss,
but if you can stop paying that interest you effectively get a guaranteed return of that much.
These are the reasons that a lot of people like to pay that off, and let's get into an example here
let's assume you owe $150,000 on your home you've got that much in an IRA or a
maybe it's your TSP or 403(b) any of those retirement accounts. We'll say you and a spouse
get a total of 36,000 of income. Now, if you are a single person this isn't going to change
the equation much at all, so we'll assume that you have the average Social Security income for
an individual of about $18,000 per year, so it doesn't matter (single or coupled). Then we're
going to say you're also taking withdrawals from a pre-tax account of $36,000 per year so that gives
you a total spending money of about $72,000 per year before taxes and if we look at that situation
you'd be roughly in the 12 percent federal income tax bracket. You might be wondering why is that so
low? If we look at the amount you're going to pay in federal income taxes it's roughly $2,700 and
we need to remember that you're going to get a standard deduction so in this case we have the
couple's standard deduction and that not all of your Social Security income is taxable so if you
primarily have Social Security income and maybe a relatively low income based on on withdrawals
from your retirement accounts you're probably not going to pay a huge amount in taxes. And that's
the situation here but if you do pay off the loan it looks something like this we've got your 36 000
of social security income another 36 000 of IRA withdrawals and then this big huge chunk for
the $150,000 withdrawal. As you can see, that substantially increases your income now with
a smaller loan you know maybe you have eight thousand bucks left or something and you say i
just want to get rid of it so that it's out of my hair and i don't need to worry about it you know
that's going to make much less of a difference but if you do have this big loan like that it's going
to make a big difference so in this case we're looking at total income taxes federal that you
would pay we have not included state taxes here of about 34 000 so that's going to be an increase of
about thirty one thousand five hundred dollars for that year so that's a big difference and what that
means is that when you go to pay off the mortgage you're not just gonna pull out the hundred fifty
thousand that's your loan balance you're also going to have to pull out 35 000 or so on top of
that so that you can cover those taxes so this can make a substantial dent in your retirement savings
plus you're going to be writing a big check to the irs or doing a big online uh transfer
now the question comes up of course you will pay taxes on that money eventually as you withdraw it
but if you're pulling it out slowly if you're just dribbling it out you know a couple thousand at a
year or a couple thousand a month it's gonna probably be at a lower rate so that can mean
that you would pay uh substantially less over your lifetime and you can keep that money in
the in the tax deferred account to compound so we've got some other issues that might come up
you might be paying higher medicare premiums in a future year and often that'll be just for a year
in a situation like this but you might have to pay more each month for your medicare premiums
you might also increase the amount of social security income that's taxable to you and that
is included in that example we just looked at by the way your your social security uh income is
more taxable which increases the total federal income tax you pay then if you're under age 59
and a half you might be paying penalty taxes and we need to remember that when you're in
the latest years of your loan you might not be paying that much interest on your loan balance
anyway because as you pay down a loan balance with most standard amortizing loans you're paying a
lot of the interest upfront in the early years of the loan but as you get towards those later years
you have paid most of the interest charges so most of each monthly payment on your mortgage
goes towards paying down the loan balance so it might not be costing you
quite as much as you think and a couple of other potential pitfalls might be number one access to
those funds so when you put it into the home it can be very difficult to get that money back you
could potentially borrow against your home equity using a second mortgage of some sort or a reverse
mortgage in retirement but getting those types of loans can be expensive it might require income
if you're going to do a home equity loan so it can take time and just make it difficult to
get that money there's also an issue of creditor protection so your money is typically quite safe
in retirement accounts your home is also typically quite safe but there could be situations where
your home is at risk like if you're not paying you know taxes in particular uh property taxes
so you know you just have those questions that you want to at least raise and think about and
then you just have less money available to draw on because you have spent most of your
retirement savings on paying down that debt so if cash flow is going to be a potential issue
you want to look very closely at that decision before you you move all that money into your home
a lot of people when they approach this question they just talk about the rate so what about the
rate so as you are paying interest at a relatively low rate the question always comes up well could
you do better on your investments and when you're in retirement you might be more conservative
so you're not necessarily going to be investing aggressively you know whether or not that's
going to be an issue it's just hard to say because we can't predict the future
but you want to at least ask what is the rate of interest i'm paying and again are your monthly
payments going towards mostly interest or mostly principal and is it possible to do a little bit
better in the markets and of course you could lose money if you keep that money invested
so you need to acknowledge that as well once again it's rarely a bad idea to pay off debt
because you do get that guaranteed reduction in cost you um you know aren't going to have
that money in the markets but it's not always the best approach so i hope that this has been
a helpful discussion and gives you some ideas if you want to do a detailed analysis of your
loan and does it make sense to pay that off please let me know would be happy to
do something like that for you you have a you have an idea of the high level themes here but
the only way to know for sure is to kind of look at your details and then make some assumptions
about the future so hope that's helpful and have a great day please subscribe to this channel it
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