The dream of a debt-free retirement, while compelling, isn’t the norm. Many pre-retirees plan to carry some debt, notably, their mortgage, into their golden years. The Harvard Joint Center for Housing Studies’ 2019 survey found that 46% of homeowners ages 65-79 had a mortgage—a steep increase from 24% back in 1990.
While not uncommon, mortgage debt in retirement is an important financial consideration, and as such, requires a reliable plan to help you balance your other financial responsibilities.
At Step by Step, we build mortgage debt in our approach to retirement income planning. This line item is always accounted for in the planning process, whether the funds are used for your mortgage or repositioned for long-term care, health needs, or other retirement expenses.
Today, we’re exploring the elements that retirees should think about when it comes to their mortgage.
Account for changing cash flow needs throughout retirement.
Your spending needs will likely fluctuate throughout your golden years. Many retirees end up spending more in their first few years of retirement checking off big-ticket items like a trip, move, or large purchase. If you have a mortgage payment, whether from your old house or after a new purchase, it’s important to know how that payment will impact your spending plan.
The Bureau of Labor Statistics discovered U.S households headed by someone 65 or older spend $50,220 on average with $17,472 going toward housing alone, nearing 35% of their total spending.
With your cash flow changing in retirement, it’s prudent to understand how your mortgage fits into your plan. Many retirees aim to replace about 80% or more of their pre-retirement income to support their retirement lifestyle and you want to make sure your mortgage payment doesn’t eat up too much of your budget.
- How does your mortgage impact the other areas of your spending plan?
- Is the payment comfortable for you given your new sources of income?
- Do you have to keep working or take on a part-time job to make the payments?
- Are there elements of your lifestyle that you have to compromise to make your mortgage payment?
- Are you still saving for future needs i.e retirement goals, health, legacy, etc?
This conversation is less about whether or not you should pay off your mortgage before you retire, and more about how to plan for your future expenses in retirement.
A mortgage could mean you spend less.
Carrying your mortgage to retirement doesn’t inherently put you in a tight financial position. Depending on where you live, the size of your house, and general amenities, a mortgage could contribute to spending less in retirement.
Couples who move to a nice community with sky-high homeowners association (HOA) fees, hefty property taxes, and expensive amenities will likely be spending far more than another couple who downsized to a modest neighborhood with no HOA and moderate property taxes.
Each couple’s situation is different and each part of your retirement budget will require trade-offs depending on your desired lifestyle. A couple who travels might not spend the same on housing, but their airline budget will be far higher than another couple who lives closer to family and wants a big house for family gatherings.
Remember, your retirement money should go toward supporting your ideal lifestyle and enhancing your life together.
Examine the tax benefits and drawbacks
You can write off mortgage interest payments up to $750,000, but you must itemize to receive this deduction. With the 2017 Tax Cuts and Jobs Act increasing the standard deduction, many families had a difficult time itemizing over the last several years.
In 2020, the standard deduction for those married filing jointly is $24,800, so if your interest payments, charitable donations, and other deductions surpass this number, retaining your mortgage could make good tax sense.
But on the flip side, paying off your mortgage before retirement could come with some undue tax considerations.
To pay off a mortgage, many retirees would need to dip into their cash reserves like an IRA or 401(k), which would trigger a higher tax bill as distributions are considered income. That also could have an impact on your long-term investment strategy and even withdrawal strategy throughout retirement.
For some people, this move might make a lot of sense, especially if your mortgage balance is slim, but for those with a sizable balance, pulling funds from your retirement accounts to foot the bill will likely negatively impact your lifestyle.
These types of tricky decisions make it important to work with a fiduciary advisor who always makes recommendations that are in your best interest. We are a fiduciary always at Step by Step and love helping clients chart the best course for their lives. Consult your financial advisor to consider all your options and help you make the most informed decision for you.
Lean on your goals and desired lifestyle.
Yours and your spouse’s dream for retirement might be different than your friends or even your other family members, and that is okay. Your plan should be unique to your needs as a couple, and when it comes to housing you have several options like aging in place, buying a new home, renting, moving in with a child, etc. All of these options will come with different expenses, some requiring a mortgage and others not.
When you’re thinking about how your mortgage could impact your retirement, lean on your financial goals for support. For you, financial freedom and flexibility might be the most important elements, which might mean paying off your mortgage. Another person may decide to stay in the house they raised their family and keep it for themselves and extended family. This might mean they keep their mortgage.
No matter what you decide to do, our team at Step by Step is prepared to help you create a spending plan that works for you. Given the prevalence of mortgages in retirement, we build in that payment to your income plan, so you can rest assured that we will help you construct a plan that takes your needs into account.
Ready to see how your mortgage fits into your retirement budget? Set up a call with our team today.