Mar 29, 2019
This week, we’re talking about the importance of unloading your debt before you transition into retirement.
Yesterday, I talked about the debt snowball and the debt avalanche methods for kissing your debt goodbye, and today I want to answer a question that I get asked all the time:
“Ashley, what about my house? Should I pay off my mortgage, so I don’t have a mortgage in retirement?”
Good question! And not an easy question to answer, but I’ll take a stab at it in about 2 minutes.
Mortgages tend to be big debts. You might still owe $100,000 or more on your house by the time you enter retirement, so it’s no small feat to pay off your house.
Now, many people say that the mortgage interest tax deduction helps them with their taxes. Hogwash, I say! That may be true, but you are still handing over your hard-earned money - principal and interest over to the bank every year and the tax deduction is just a portion of that, so it just isn’t that compelling when you compare it with not having a monthly mortgage payment at all.
So yes, I think it’s wise to pay off your mortgage as close to retirement as possible. It tends to be the largest expense for most American households - making up about a third of our monthly expenses, on average. So if you can free most of that up in retirement by paying off your mortgage, it makes a big difference for your finances.
Here’s what I don’t want you to do though - don’t take a lump sum out of your retirement portfolio to pay off your house. This is a common temptation, but if you do this you’re amputating your retirement portfolio while simultaneously plunging a bunch of money into an illiquid investment - your home.
Instead, calculate how you can pay off your mortgage quicker by making additional payments. Let’s say you have 15 years left on your mortgage and you’re 9 years from retirement. How much would you need to add to your monthly payment to pay off your mortgage the same month that you plan to retire? Ooooo, how good would that feel?
You can figure out this extra payment amount by using what’s called an amortization calculator or an amortization table.
When you actually run the numbers with an amortization, you might be surprised to learn that knocking those 6 years off your mortgage is totally doable, and not as burdensome as you might have expected. And it’s easy to find out with an amortization calculator.
I’ll link to a favorite amortization calculator of mine in the show notes, so you can run the numbers for yourself. You can find link and all the show notes for this episode - episode 166 - in iTunes or Google Play by searching for the “One Minute Retirement Tip with Ashley.”
Mortgage Amotization Calculator >>> https://www.bankrate.com/calculators/home-equity/additional-mortgage-payment-calculator.aspx
That’s it for today. Thanks for listening.
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My name is Ashley Micciche and this is the One Minute Retirement Tip.
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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance, wealth management, rachel cruze, getting out of debt, debt snowball, debt avalanche, amortization, amortization schedule, debt free, debt free living, debt free calculator, debt in retirement, dave ramsey, total money makeover