Will your retirement be put off because you still have mortgage payments to make?
For millions of Baby Boomers, they cannot afford to stop working until their mortgage is paid off or they decide to downsize.
I 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% after tax rate of return. Of course, if you have a lump sum of cash sitting around you could potentially pay off your mortgage, but that may leave you uncomfortable with the size of your remaining nest egg. Most people have the majority of their retirement savings in a 401k or IRA meaning that taking from that would cause a HUGE income tax liability.
One big new reason to get rid of your mortgage debt is that most Americans will be taking the Standard Deduction rather the itemizing their deductions. This means you will not be using your mortgage interest as a tax deduction any more. This makes the mortgage that much less attractive.
So how do you make this happen?
- One idea would be to refinance your mortgage. And match the terms of your mortgage payoff to your retirement goal year. With some lenders you have more options than just 15 or 30 year. You can pick the number of years. 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.
- A second way to pay down your mortgage more quickly would be to make biweekly payments.
- Lastly, if you don’t want to give your lender your money, consider creating a side fund and invest money in a taxable account for the purpose of paying off your mortgage. For example, invest $1,000/month in a portfolio of taxable investments and if you averaged 65 return (no guarantee) in five years you would have $68, 500 and in ten years it could be worth $165,500. You could use this money to pay off your remaining mortgage with this lump sum.
I look at my 15 year mortgage payment as the “fixed income or bond” portion of my portfolio. So , rather than invest in bonds paying 2-3% 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 interest rate 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. The 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, making a 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. Brad@fortunefinancialgroup.com