Paying Off Debt Not Always the Best Strategy
Paying off debt is a goal of many people as they approach retirement. Most of our clients and people we meet with want to have their home paid off in retirement. But the idea of having your home or your other debt paid off at retirement isn't something you should consider mandatory. It depends on your situation.
We have a client couple who, when they retire, intends to sell their home in the Midwest and move to Vermont, where they have a plot of land. When we met recently, they had seven years left to pay on their mortgage, and were making additional payments so they could pay it off even faster. They didn't want their home in the Midwest to have a mortgage on it.
I asked them why they were in such a hurry to pay off their $200,000 mortgage when they are going to sell the house in four years. I suggested that they refinance and stop making those large payments to the mortgage company. The idea: put as little as possible into the house and build up some flexibility with more cash available.
With interest rates as low as they are, they could take the difference between payment on the 10-year mortgage that they have now and a 30-year mortgage -- which was substantial, maybe almost $1,500 a month -- and put it in the bank. Or, they could put it in their supplemental account and get a deduction. It made sense to them.
Within literally hours of that conversation, they went out and refinanced their home. They decided not pay it off because it didn't make any sense -- the house’s value will grow independently of how much money they have paid into it.
They learned back in the housing market crash of 2007 and 2008 that the value of the house could actually go down. But their savings account will increase only if they put money in it. While they were putting extra money into the home, it wasn't a deductible expense and it wasn't interest. Taking the money they saved by lowering the mortgage payment and putting it into their retirement accounts made that income all pre-tax.
At the same time they reduced their monthly payment by refinancing, they saved some more income taxes. It was a powerful idea for that couple.
That couple was open to our input. To their credit, they went out and refinanced, which gave them much more flexibility than if they had not done so. If you are of the mindset that paying off your mortgage and other debt is a must for retirement, be sure you talk to a comprehensive financial planner and explore options like the one described above.