No Mortgage at Retirement

retirement keyI spend many of my days talking with people about when they will be financially independent and what they have to do in order to make that happen. The answer is dependent on several items; how much you have saved, how much you plan on saving each year, portfolio growth rate, inflation, and whether or not you work part-time are a few of the factors to consider.

The absolute most important factor for people I meet with is whether or not they have mortgage payments to make every month.  It’s no surprise that mortgage-free people can be financially independent much sooner than those with a mortgage payment.

Here’s the math:

In order to have enough money to afford to pay a mortgage with a $1,500 principal and interest payment, you would need a lump sum of $600,000 earning 3%.  Of course, if you had a lump sum available you could potentially pay off the mortgage, but that may leave you uncomfortable with the size of your remaining nest egg.  There could also be significant income tax to pay if you pulled money from an IRA to pay off the debt.

So how do you make this happen?

One idea would be to refinance and match the terms of your mortgage payoff to your retirement goal year.  You may get a lower interest rate than you currently have, but the payment will likely be greater than what you are currently paying in order to pay the note down more quickly.

I decided to look at my mortgage payment as the “fixed income or bond” portion of my portfolio.  So , rather than invest in bonds paying next to no interest, I use that money to pay down my mortgage.  In my mind, this was an easy choice.  Yes, I’m paying off a low fixed loan with no upside, but my rate is guaranteed (2.875% was my 15 year lock rate a couple years ago) and I’ll take that as my rate of return on my boring, but safe money.  That mortgage interest rate I’m paying is higher than many bonds are paying today.  This frees me mentally to keep most of my investment money in stocks knowing that my mortgage payment will be gone when I need it to be.

Lastly, the larger mortgage payment is a forced savings for me every month. Like most people, I have a propensity to spend what is in my checking account. Out of sight, out of mind.  Might this be a good idea for you????

If you have any questions about this please feel free to email me.

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