Should You Pay Off Your Mortgage At Retirement? - YouTube

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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