Should I use my 401(k) to pay off my mortgage after I retire if I am still raising three children?
Should I use my 401(k) to pay off my mortgage after I retire at age 66? I plan on continuing to work at my second job, collect Social Security, and my pension. My mortgage is my biggest expense and I am less concerned about medical coverage. I am still raising three children and feel it would be a mental relief when addressing my monthly bills if my mortgage was paid off.
Reducing or eliminating your mortgage upon retirement is an excellent goal. However, you must consider the taxes owed on a large lump sum withdrawal from a 401K. This is especially true if you have earnings from second job, a taxable pension, and likely taxable social security income.
How old are your children? Did the social security administration alert you to family benefits available to children under the age of 18? If you begin your social security retirement benefits, child dependants under 18 can also recieve 50% of your primary insurance amount. If there are 3 kids under 18, these benefits can add up! This could also hopefully defray some of your mortgage costs.
Another note is we are approaching year end - you may consider withdrawing some 401K monies now and some after the 1st of the year to spread out the taxes. If you are not retiring until next year, you could institute this strategy then, pay off some, then wait until 2020 to pay off more or the remainder.
I'm going to suggest that you have hit upon the age old conundrum of a financially sound decision versus an emotional decision. Because your mortgage interest rate is likely lower than your investment return rate of the 401(k), then what you are suggesting is not a good financial decision. For example, if your mortgage is costing you 4% and your account earns an average of 7%, you have the 3% advantage. That means your investment earnings are paying the mortgage interest, with 3% additional for you. You are effectively using other peoples' money to your advantage. That is a good thing.
Because you want some relief with monthly bills, let me suggest an alternative. When you retire, consult with a financial advisor and do a rollover of the 401(k) to an IRA with expert active management. Then let the IRA pay your mortgage each month. That way, the mortgage is not part of your other monthly cash flow. Also, you will have the IRA funds invested and working for you, rather than having been withdrawn and gone. You will be using the same money for the mortgage as you had suggested, but instead of paying it all at once, you will continue to pay it little by little. You will also avoid having to pay a huge tax bill on any sizeable withdrawal, and only pay taxes on withdrawals for the monthly payments. You don't say how large the mortgage is, or how much is in the 401(k), but this works for any amounts. You can actually have this all set up on auto pay and enjoy the mental relief you are seeking.