JoshLewis

Your Mortgage and Your Retirement

For many years conventional wisdom has held that you should aim to pay your mortgage off by the time you retire. This was not a tough sell as the generations approaching retirement had been directly affected by the Great Depression and were in large percentages averse to debt. The first generation of retirees not to live through the depression is now leaving the workforce and their approaches to handling their finances, retirement planning and their mortgages are making this subject more urgent than ever.

According to the 2001 Survey of Consumer Finances conducted by the Federal Reserve, 32% of households headed by someone aged 65-74 were carrying mortgage debt. This figure was up from 26% just three years earlier. Speaking from experience, I have many clients every year in their 50’s who are buying homes with 30 year mortgages for $300,000, $400,000 even $500,000. These folks are in their prime earning years, have amassed significant home equity and feel they have “earned” their dream home. This trend towards “mass affluence” and the “necessary luxuries” is changing the face of retirement. With that in mind, let’s take a look at the options a homeowner is presented in retirement and begin establishing a plan.

Select a mortgage term OR prepay your current mortgage to coincide with your planned retirement.
Plan to carry a mortgage into retirement.
Look to reverse mortgage options.

Option 1 is a time honored tradition. If you plan to retire at 65 you don’t take out a 30 year loan after age 35. Many borrowers are unaware but in addition to 30 and 15 year loans, you can borrower for 10, 20 or even 25 years. If you choose not to lock yourself into the increased monthly payments of a shorter term loan, your mortgage planner can provide you a schedule of increased principal payments to ensure that the payoff of your loan occurs prior to your retirement. A shortcoming of this strategy is that people are now more mobile than ever and few homeowners stay at one residence for 30 years. The length of time you plan to stay in your home must be considered.

Many borrowers are unaware that a mortgage can be tailored to your specific needs. Terms of 10, 20 and 25 years are available as well as the more common 15 and 30 year mortgages. In the late 90’s a client came to me with the desire to have their home paid off in 6 years to coincide with their retirement date. As rates had fallen, we were able to lower their rate over 1% by moving them to a 10 year fixed rate loan. We achieved the 6 year payoff by determining that an extra monthly principal payment of $1100 dollars would ensure the loan was paid off at the end of his expected working days.

An alternative course of action is to plan on carrying your mortgage into retirement. If you have invested well and expect to have a significant income in retirement, especially if it is taxable income like a 401k withdrawal, this can be a good plan as the tax deduction will be helpful. The key here is that many people plan their retirement needs on not having a home loan to pay and as a result may not have enough income in retirement to keep up the payments and their standard of living. If you choose to pursue this route, do so with caution and foresight to ensure that you are truly prepared.

A relatively new option, and one that is growing in popularity is the reverse mortgage. Everyone is familiar with a mortgage where you borrow from the bank and pay it back over time. A reverse mortgage is significantly different in that you do not pay the money back. The debt grows over time as interest accrues and is secured by your home. Upon your death, your heirs can settle the debt, which often means selling the house, or they can relinquish the home to the lender. Your cash proceeds from the mortgage can be accessed in 3 ways: a lump sum payment to you, a monthly annuity income or a line of credit to be accessed as needed. The flexibility these loans offer allows many retirees to live a more comfortable lifestyle without worrying about money.

Many retirees find themselves in a position where they can’t comfortably spend money for fear that their funds will run out. A colleague of mine had a client in that exact situation who had to cancel her annual cruise to Mexico with a group of friends. She was very upset as this event was usually the highlight of her year. After discussing it with her mortgage planner they were able to use the equity in her home to get a reverse mortgage, adding a lump sum of $25,000 to her bank account and a monthly annuity income of $800 for the remainder of her life.

The key message here is to consider your mortgage as part of your overall financial and retirement planning. A home loan is the largest debt most people will ever have and proper management of that debt will greatly increase your standard of living in your retirement years. If you are worried that your current mortgage situation is not properly positioning you to meet your future goals, contact a mortgage planner and get the situation under control.