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I’m Retired. Should I Pay Off My Mortgage?

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It’s 5 pm on Tuesday. Ramsey show When sitting in a traffic jam. Dave Ramsey is advancing on the best ways to pay off debt and why debt-free is essential. Two things for you are in your favor: (1) You have the money to do just that. (2) Since I will retire at the end of the month, my rush hour commuting time will be several weeks longer.

The next day, when you start investigating mortgage repayments, you’ll come across the founder of Ric Edelman, one of the country’s largest personal finance companies. His advice is the exact opposite of Ramsey’s. He argues that big mortgages need to be extended as long as possible.

I think this leaves you a little confused. The truth is that personal finance is exactly that: personal. The correct answer for you cannot be obtained from someone talking to a million people and giving one answer.

If you have the money needed to pay off your mortgage and you are retired or almost retired, this article will give you three yourself to get closer to the right answer for you. Allows you to put it in one of the groups.

1. I have money in cash because the market is scary

Should You Pay Off Your Mortgage? yes. In this case, you should pay it off.

why? There are terms used in this profession: arbitrage. When applied in this context, you make a negative arbitrage. The bank pays 0.25% to the savings account (if you’re lucky) and charges 3.75% for the mortgage. So you lose 3.5% every year to stick to that loan. Of course, this is oversimplified, but you understand the idea.

What are the drawbacks? First and foremost, you are losing liquidity.When you repay a mortgage, you are essentially putting money in a piggy bank that you can’t get back unless you sell the house or you sell the house Tap Equity.. The second is the consideration for taxes. Mortgage repayments may mean below the standard deduction standard because there is no interest on the mortgage to be amortized. This may increase the effective tax rate, but it will not be that great.Finally, but especially relevant today is to hold a loan Inflation hedge.. Housing costs can grow much more slowly than CPI-W, as fixed-rate loans have flat principal and interest payments.

2. You have money in a brokerage / taxable account

Should You Pay Off Your Mortgage? Probably not.

why? Same idea as above, but the opposite. You are now (historically) positive in arbitrage. From 1991 to 2020 S & P 500 returned an average of 10.72%, Every year. All investment trials, classes, and disclosures indicate that past performance does not indicate future results. However, in that example, we lose 7.22% (10.72% -3.5%) annually. There are also tax considerations if the investment you hold has unrealized gains. Depending on your taxable income and the size of your profits, you may pay more than 15% of your profits to the Treasury before you repay the loan.

What are the drawbacks? Stocks can always swing in the opposite direction. Historically, inventories rise in about three-quarters of the time. You must be at 75% of that in order for you to make money by earning more than the interest rate on the loan. Imagine a scenario where you were planning to earn 10% on a securities account and pay 3.5% interest, as it is now. Instead, I lost 20% on my securities account and paid 3.5% interest. It would have been better to repay the loan before dropping it. Unfortunately, no one has a crystal ball. In my opinion, the market usually rises and you usually have to bet on the possibility that it will rise above the current mortgage rates.

3. You have money in your retirement account

Should You Pay Off Your Mortgage? No. In this case, you should not repay.

why? I always get this question, but no one has asked me after actually monetizing my severance account to repay my mortgage. My guess is that the accompanying tax bill confirmed that it was a bad decision. Scenario 2 is an investment decision that most often involves tax consideration. This answer is primarily tax based. When withdrawing funds from a pre-tax retirement account, those amounts are included in taxable income and are taxed at the normal income tax rate. Therefore, with a large withdrawal, the bracket will jump and significantly less money will be credited to your bank account before you can repay the loan.

What are the drawbacks? price. Living without debt when you retire is comfortable. Keeping housing costs low gives you more flexibility in your discretionary spending. But in this case, is it worth the cost?

Neither Dave Ramsey nor Rick Edelman are wrong. They only give different reasons for their advice. Ramsey mainly uses behavioral reasoning. In essence, he believes that people aren’t going to spend their discretionary income beyond their 30-year mortgage payments to invest, but rather buy what they don’t need. Edelman’s reasoning is purely mathematical. He doesn’t hypothesize what people do with excess income, but points out that if you can make more money in your investment account than you pay with mortgage interest, you’ll be at the top. ..

The challenge for all these Talking Heads is not knowing who they are talking to. Everyone has a script of money. If your parents survived depression and dug into you a lesson about the evils of borrowing money, you probably don’t care about the math behind my reasoning.

Here’s the good news: I haven’t found anyone who regrets not having a mortgage in retirement yet.

Wealth Manager, Campbell Wealth Management

Evan Beach is a Certified Financial Planner ™ Expert and Certified Wealth Management Advisor. His knowledge focuses on the problems that arise when he retires and how to plan them. Beach teaches retirement planning courses at several local universities and teaches continuing education courses to certified accountants. He is quoted and published on Yahoo Finance, CNBC, Credit.com, Fox Business, Bloomberg, US News and World Report and more.

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