Tuesday, August 18, 2009

The Retirement Dilemna: Mortgage or Not?

The real estate roller coaster has caused a bit of a dilemma for many individuals approaching retirement. Namely - should I pay off the mortgage before retiring?

Tough question. Let's look @ some recent government statistics before tackling this one

  • 18% of Americans age 65-74 had mortgages in 1992.

  • 32% of Americans age 65-74 had mortgages in 2004.

  • 43 % of Americans age 65-74 had mortgages in 2007.

  • Average housing debt in 1992 = $24,000.

  • Average housing debt in 2007 = $69,000.

This is very disheartening. Not only are more Americans taking on debt at older ages, they are borrowing more money as well. As a Financial Advisor, I value the concept, "less debt = less stress."

As you approach retirement, you should strive to reduce monthly expenses. Some retirees may increase their lifestyle(s) through years good planning and disciplined spending. Others will try to do more with less. Curbing expenses is a great place to start. Eliminating your mortgage is probably the single biggest expense in a household.

Some of this discomfort is the result of a turbulent housing market. Individuals who purchased new homes in recent years not only paid higher prices, but borrowed more money as the statistics indicate. These home owners may now find their properties under water (mortgage is higher than the appraised value).

If you had a sizable down payment at the time of your purchase, refinancing may be an option. Rates are currently very low and a fixed rate is a great consideration should it allow you to lower your monthly obligation. However, banks are once again very careful in lending money and the days of easy loans are gone.

Paying off mortgage balances with non-qualified money is a good idea. If you are sitting on CD's, savings account and/or money market accounts, utilizing these funds to pay off existing mortgages makes sense. It is only when clients ask to use retirement assets do I wince. Using retirement funds creates a tax liability and will reduce your income stream in retirement. This may seem like a good idea, but the economics of such a move don't make financial sense.

Tightening your budget or adding extra income to the mix is a better alternative for paying down your mortgage. "Some individuals will simply have to work longer to get themselves in a better financial position to retire, " says Financial Advisor/Accountant Glover Davis of Bronx, NY. "Being realistic about your financial situation is very important."

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