Pay off house???????


R

Randy

I am getting ready to retire and want to know would it be better to go
ahead and pay off my house with part of my 401k or 457 or just keep
paying the payments?
 
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M

Marlowe

There is a certain amount of gratification with owning a house free and
clear. With that thought aside, consider the following. As an example, if
you pull out say $100,000 to pay off a 4.5% mortgage you have two things
against you. First that rate is quite low especially and if you are taking
a mortgage tax deduction, plus with inflation you are paying back with
cheaper dollars all this makes the mortgage very low. Secondly, the draw
from your deferred investments are taxable by the fed and maybe the state
government not good either (unless you are in a low tax bracket) in
retirement. So bottom line questions you have to ask yourself 1) what is
your current interest rate after your mortgage tax deduction and adjusted
for inflation and 2) what will be your tax rate, fed and state, after you
retire? Weigh that all against owning your house free and clear.
 
A

Andy

Randy said:
I am getting ready to retire and want to know would it be better to go
ahead and pay off my house with part of my 401k or 457 or just keep
paying the payments?
I don't think its really possible to say without analyzing your
financial and tax situation, as pointed out by another poster. Take
the time to sit down with a spreadsheet and figure out which option
leaves you with the most money 15 years from now after taking into
consideration income taxes on your retirement withdrawels, the loss of
the mortgage interest deduction, etc. It will take some effort, but in
the end you will have the satisfaction of knowing that you made a
decision based on facts and analysis and not vague impressions or
offhand advice from people on the internet.

Andy
 
B

bo peep

I'm in a similar situation, and I don't intend to do either! When I
turn 62 I plan to get a reverse mortgage. This will allow me to live in
my house for the rest of my life without making any further payments.
Plus, they will pay me to do this!

This is only suitable for someone who has no need to leave the house as
part of the estate, of course.

John Cowart
 
R

Ron Peterson

Randy said:
I am getting ready to retire and want to know would it be better to go
ahead and pay off my house with part of my 401k or 457 or just keep
paying the payments?
I think that you are better off waiting unless your returns in your
retirement accounts are much less than your mortgage rate. You will
have to pay income tax on withdrawals from those accounts, so it may be
better to delay.
 
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E

Espey

It all depends on what interest rate you're paying on your mortgage
versus what kind of return you're getting from your 401(k). Why pay off
a mortgage with money that's increasing at say 8-10% when the mortgage
interest is only 5 or 6%? The return on your 401k is tax deferred and
the interest you're paying on your mortgage is tax deductable.... I
wouldn't use retirement $$ to pay off a mortgage BUT if you had extra
non-qualified money to pay it off, I would consider it more.

Good luck!
 
H

HW \Skip\ Weldon

I am getting ready to retire and want to know would it be better to go
ahead and pay off my house with part of my 401k or 457 or just keep
paying the payments?
Actually there is a third choice: Sell your present home and buy one
that you can afford (without a mortgage.)

We don't know enough about your situation to recommend one choice
over another, but here are two reasons why a more affordable house is
a legitimate alternative:

1. Most people in their early-60s have several decades of living ahead
- unknown expenses, unknown inflation, etc. Spending chunks of our
retirement money now when we have no clue about what the future will
cost gives me pause.

2. Living in a home now that we cannot afford (without debt) also
costs more in other ways... higher property taxes, higher insurance
costs, greater upkeep/maintenance costs and, if the home is bigger,
higher energy costs. If cash flow is tight now, just imagine how
inflation will affect you. And then add in new medical costs as we
age and begin to fall apart <grin>....


-HW "Skip" Weldon
Columbia, SC
 
D

Dave Dodson

Espey said:
It all depends on what interest rate you're paying on your mortgage
versus what kind of return you're getting from your 401(k). Why pay off
a mortgage with money that's increasing at say 8-10% when the mortgage
interest is only 5 or 6%?
There are several reasons you might pay off the mortgage instead of
investing in stocks. The first is that it lowers the volatility of your
portfolio. When you are taking distributions from your investments,
volatility is not your friend.

The second is that the greater your income (to a point), the greater
the amount of Social Security is taxed. Thus, if you keep the mortgage,
you will have to take larger distributions to make the mortgage
payments, and those larger distributions will increase your taxes,
requiring you to take still larger distributions. Furthermore, if your
mortgage interest plus other itemizable deductions are less than the
standard deduction, you get no tax break for them. I worked out an
example of how this works in the previous thread, which I referenced in
an earlier posting in this thread. The bottom line was approximately
that paying off the mortgage increases both your standard of living and
the probability of survival of your retirement investment portfolio.

Dave
 
D

David Efflandt

I am getting ready to retire and want to know would it be better to go
ahead and pay off my house with part of my 401k or 457 or just keep
paying the payments?
As mentioned, drawing a lump sum could throw you into a higher tax
bracket, taxing more of that money than drawing it out gradually.
However, it may be possible to draw out enough to pay extra principal
without exceeding your marginal tax bracket. But that depends whether
gain of the money left in the retirement accounts (figuring tax on
withdrawl) would compound more than deductable interest paid on the loan.

I am planning a different tack, gradually converting some IRA money to
Roth IRA and paying the tax on that money now, instead of after it grows.
Then any amount can be drawn any time from the Roth tax free (including
gains after age 59.5) for pleasures or emergencies. I also DRiP stock in
my bank, which at capital gains rates should return over twice my
deductable home loan interest. So if I want to pay off my home when I
retire, the Roth and/or stock should cover it.

I suspect that with inflation, what I draw from my 401k from 13 to 30+
years into the future, would put me in the same tax bracket I am in now
(if not higher, depending upon which party is in power).
 
J

jIM

I remember a similar thread on prepaying mortgage only to amount which
maxed out the marginal tax bracket.

I checked thread mentioned earlier, that was not it.

strategy was suggested to be to calculate marginal tax bracket based on
living expenses, then withdraw additional amounts up to maximum in
marginal tax bracket, use this amount to pay down mortgage, then repeat
each year.

I also thin k skip's advice of downsizing the house is another way to
tackle problem. Condo assiciations will fix your roof and repair your
driveway. These are expenses which could eat at a retirment savings.
 
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D

Douglas Johnson

HW \"Skip\" Weldon said:
Actually there is a third choice: Sell your present home and buy one
that you can afford (without a mortgage.)
2. Living in a home now that we cannot afford (without debt) also
costs more in other ways... higher property taxes, higher insurance
costs, greater upkeep/maintenance costs and, if the home is bigger,
higher energy costs. If cash flow is tight now, just imagine how
inflation will affect you. And then add in new medical costs as we
age and begin to fall apart <grin>....
A house, even a paid-for house, can be an expensive critter. Downsizing or
moving to a less expensive area can be a big help to retirees.

Consider that operating a house costs 5-6% of the current market value of the
house. This includes property taxes, insurance, utilities, maintenance, etc.
There is considerable variation depending on location, property taxes... But as
a rule of thumb, it's not bad. Let's use 6% for fun (I'm in Texas. No income
tax, but nasty property taxes).

If I own a $300,000 house, but could live comfortably in a $200,000 house, I'm
feeding an extra $100,000 of house at a cost of $6,000 a year. If I use a 4%
withdrawal rate for my portfolio, I need $150,000 in earning assets to get that
$6,000.

If I trade for the cheaper house, I will gain $100,000 from the sale of the
house, which I add to my portfolio. $4,000 withdrawal from this plus the $6,000
I don't have to spend on the house will net me an additional $10,000 income for
groceries, medical expenses, spoiling grandchildren, or whatever.

Feel free to play with the numbers, they will vary based on the assumptions you
want to make. But they don't change all that much. 4% operating expense and a
5% withdrawal rate still nets $9000 a year for downsizing.

-- Doug
 
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R

Ron Peterson

Douglas said:
A house, even a paid-for house, can be an expensive critter. Downsizing or
moving to a less expensive area can be a big help to retirees.
Good advice, but if the goal is to move to a slightly cheaper house,
the selling and moving costs may eat up any savings. In addition,
repairs that have been put off, will need to be done on the current
house, and their will be costs for customing the new house to one's
tastes.
 

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