More Retirees Have Mortgage Loans
While retiring completely debt free is an optimum goal, many Americans will enter retirement with a mortgage note draining their nest eggs. According to 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
The current recession and the recent loss of value among investment assets in 2008 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 amount 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
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, 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.
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