Should I pay my house off with the money that I have or keep the money in my investment accounts?
I am 69 years old and I make $100,000 a year. I have $1.3 million in cash and investments. I have a 30-year fixed mortgage on my house that I owe $95,000 on. The house is worth $195,000. I am still working but I want to retire. Should I pay my house off with the money that I have or keep the money in my investment accounts?
Great question. We certainly advise our clients to eliminate all debt if possible prior to retiring, but keep a few things in mind here. I don't know your annual expenses, but you'll want to talk with an advisor to see how much you'll need from your investments to cover expenses. At $1.3 million, and assuming a 4% withdrawal rate, your current portfolio should be able to generate $52,000 a year. Then add in Social Security, but remember Medicare will come out of that. If that income isn't enough for you then you probably don't want to dip into your retirement funds to pay off the mortgage, and you may have to consider working an extra year or two (but make sure to turn your Social Security on at age 70).
Look at how eliminating your mortgage would impact your cash flow versus refinancing to a 15 year mortgage. You mention you have a 30 year mortgage, but I'm not sure how much is left on it. The point here is to eliminate that debt as quickly as possible. A financial advisor should be able to show you cash flow analysis entering retirement, and whether the right solution is to pay the mortgage off now, refinance to a shorter term, or maintain your existing payments.
Final thought, if paying off your mortgage would require you to tap into IRA or 401(k) money then I would advise against it. You are over 59 1/2 so you wouldn't be penalized, but it would significantly increase your taxable income. If you have post-tax dollars available, and your cash flow situation looks good, then I would say go ahead and pay it off.
Hope that helps, but let me know if you'd like to see a more in-depth analysis.
Matt Ahrens, CIMA®
The best way to answer this is to compare the monthly P & I payment to the monthly income you could generate with the $95,000. If you keep the $95,000 in your investment portfolio, you could generate approximately $4,750 per year in income and maintain ownership of the $95k. This translates to about $395 of monthly income. I'm basing this on having the $95k in a moderate allocation investment portfolio and taking a 5% annual withdrawal, received in monthly installments.
So, ask yourself this. Is it worth it to you to give away $95,000 and $395 of monthly income throughout your retirement in exchange for no longer having the monthly P & I payment. Without knowing what the P & I payment is, I can't give you an opinion. But I feel you have enough information now to answer the question yourself.
Paying off the house often ends up being more of a 'peace of mind' decision rather than a financial decision. That being said and assuming that you have a low interest home mortgage interest rate, my immediate thoughts are to keep your investments and continue to pay a monthly mortgage.
If you want and there is no prepayment penalty, double up/increase your principal payments to to pay off the mortgage more quickly. Because we are all living (much) longer and we never know what life has in store for us, I believe that continuing to grow our retirement nest egg is critical to not running out of money in retirement. A 'paid off' home is wonderful. But, the value of your home is illiquid.
I appauld you for wanting to pay off your remaining debt before retiring. A growing number in the boomer generation are retiring with substanial mortgage loans and childrens/grandchildrens student loans with little means to pay them off.
Are your projected retirement living expenses low enough that you could cover them from sources of income other than the lost income from reducing your cash and personal investments? -e.g. -income streams from Social Security, pension, 401Ks, IRAs, annuities, inheritance, etc.
Removing money from your personal investment funds will dampen the long term future compounding effect that your $1.3 million has taken decades to reach. You may need those additional funds to cover your living and medical expenses well into your 80's. (life expectancy)
As an alternative, are you healthy enough to continue working part time for a few more years and use that income to pay down/off the mortgage?