Should I pay down my mortgage with assets from 401(k), stocks and savings?
I will be 65 years old next year. I have a mortgage balance of $157,000 at an interest rate of 5.25% with 22 years left to pay. I have $70,000 in a savings account, $50,000 in stocks, and $55,000 in my 401(k). Should I use part of my assets to pay down my mortgage? If so, how much?
Keep your cash, stocks and 401k. Refinance your house. Rates are around 4% - for a 20 to 25 year mortgage, that should lower your payment.
By doing so, you lower your fixed payment for 20+ years, which will make these assets along with Social Security go further for you.
No, do not pay off the mortgage with savings and retirement funds. That would be putting all of your eggs into one basket that is subject to a variety of individual risks and with a very high transaction costs to get to your money. Consider refinancing to a lower rate or if cash flow is a problem check into a reverse mortgage.
No, you shouldn't. If you do, you will be taking money from liquid assets you own and transferring it to an illiquid asset you own. If all of your net worth were held in your house, it would no longer be easy to tap it. If the need arises, you can't spend your home equity. You'd have to borrow again, or do without.
If you have listed all of your savings above, and if you have no government pension (or old-style corporate defined-benefit pension that will pay a guaranteed monthly amount) you don't have enough to retire. As a rule of thumb I recommend that a retiree have invested savings of 20 times their annual living needs, net of Social Security. For example, if all of your living expenses (not just basic food and shelter, mind you, but everything including travel, entertainment, gifts and something for emergencies like a new car or a new roof) total $5,000 per month and your Social Security will be $2,500 per month, then you need savings of about $600,000 in order to be confident of not running out of money when you are old. You say you have $175,000. That means you should take no more than $730 per month from savings, for the rest of your life. Since that may not cover your lifestyle, I advise that you continue working (and saving) until you reach a point of comfort. Good luck.
No, I wouldn't advise you to simply withdraw all money and pay off your mortgage. Withdrawing some money and paying off part of it could be an option depending on other considerations. If you're married and how long you may continue working are highest on the list but here are some other things you might weigh before making a final decision. There are alot of factors that actually could and should go into this decision.
Among them are:
1. Option of refinancing. 5.25% is not normally bad but at today's rates you could likely secure a lower interest rate. Given that your total savings, liquid assets are less than $250,000, we might want to hold onto those for retirement and potential healthcare costs. Refinancing down to a 20 year note could get you rates lower by ~1.5% without having to empty your coffers.
2. Expected returns in the portfolio and expected risk to achieve those returns. The 5.25% is a guaranteed cost- you will pay it. If you are making 7% on your investments, some people might say to not pay off the mortgage and keep the 1.75% difference but that depends on if the 7% is guaranteed- probably not, but is probably rather variable which means the sure thing might be better.
3. Tax status of funding. Simply put, where you draw the principal payment from depends on your tax situation. For higher income years (or if you have a significant pension, inheritance, etc) it might be advisable to pay down your mortgage using the savings and stock account, but not the 401(k) so you do not bump your tax rate. If however, this is a low year of income and you foresee higher years in the future (i.e. social security beginning, pension begins, spouse begins getting SS or pension payments, etc) then maybe accessing the 401(k) could be the ideal solution this year.
4. Have you considered a reverse mortgage? That could be a way of eliminating the payment while still being able to continue living there. There are some conditions like you must continue living there, you're still responsible for repairs, etc. but it can be a very good option.
The best decision in your case would probably involve combining some of these ideas here. For example: maybe you take the stock account and liquidate to make a lump sum payment and then do a HECM reverse mortgage to establish a credit line with increasing value for future retirement income. Without specific information I wouldn't say absolutely that's what to do- but now you have some of the things that you need to consider.
The answer here is likely no. As with most things in life, "patience is a virtue" and you probably already know this, but you're looking for the satisfying feeling of retiring that debt before you retire. And really, who can blame you!
But the practical consideration here is the mundane fact that you could find yourself in a financial bottleneck at some point down the road. At that time, you won't want to kick yourself for having retired the only "good debt" that will be made available to you for the rest of your life. Assuming you are itimizing on your tax return, you are recapturnig some of that interest expense. Also assuming you are investing your cash on hand wisely, there is every possibility that you can make that money work harder for you. And last of all, as you will likely see in all the answers you recieve, you want to hold off taking distributions from your retirement accounts until it truly makes sense to do so... Imagine breaking that 401k only to have to PAY for every dollar of that distribution, and THEN removing the last tiny tax break the IRS provides to us.
As tempting as it is, the name of the game at this stage in life is efficiency. Patience is a virtue!
John McNertney, CFP®