When you plan for retirement, factoring in your mortgage payment can be challenging when you are on a fixed income. For most, not having a mortgage is best as not all will receive a tax benefit from it. However, paying off your mortgage is not always that easy by the time you stop working. This is why many financial planners will recommend a Plan B so that you don’t strap yourself financially.
Mortgage Free Retirement
The interest on your mortgage is technically deductible, but you must itemize to get it. Now with the standard deduction being doubled, fewer will do this. Regardless of the tax reform, as one approaches retirement they are more than likely towards the end of their mortgage term whis is mostly principal anyway so there is less of a deduction.
According to the Federal Reserve’s Survey of Consumer Finances, 35% of households led by people ages 65 to 74 still have a mortgage. Twenty three percent of those 75 and older do as well. Although it is ideal to not have a mortgage when retired, rushing to pay it off may also not be ideal either.
Avoid Being House Rich, Cash Poor
While some have enough money in savings and investments to pay off their mortgages, others would have to take too large of a chunk of that which would leave them short on cash for future living costs. These withdrawals can also trigger larger tax bills or place people into higher tax brackets. Some financial planners will recommend spreading the payments over time to keep your taxes down even if you have enough to pay it off completely. Sometimes there can be options to invest this money elsewhere for a larger return rather than paying off your mortgage balance especially where rates are still very low.
Minimize Your Mortgage
For many, paying off your mortgage completely just isn’t an option but you do have other choices.
-Some planners will recommend that you refinance before you retire as it is easier when you are still working. While this won’t eliminate your payment, it can reduce it.
-Those with a large amount of equity in their homes can select to do a reverse mortgage. This doesn’t have to be paid until the owner sells, moves out or dies.
– Another popular option is to downsize into a smaller, less expensive home. This can also provide an option of owning a smaller, more easy to manage property for your golden years.