Carrying debt into retirement can make your finances as a retiree challenging. In fact, most people work to pay off any debt they’re still holding well before they enter full-time retirement. Usually, people look to pay off the usual suspects first:
- Credit cards
- Auto loans
- Any remaining student debt (for themselves, their children, or grandchildren)
- Small business loans
However, most pre-retirees who are going through this debt pay-off process miss something critical: their mortgage.
A Mortgage Is Still Debt
We’re often sold this concept that a mortgage isn’t technically “bad” debt. Home ownership comes with so many upsides, that we forget that it still comes with a huge amount of debt that weighs on our finances and deters us from meeting other money-related goals before retirement. Your home may provide you a safe and comfortable space to live out the entirety of your retirement.
You may feel like it’s a fantastic piece of your financial portfolio because you’re gaining equity as a homeowner and investing in real estate. You may even be planning to leave your home to your children in your estate plan because it’s worth a significant sum. While all of this might be true, none of it matters if you struggle to pay your mortgage bill each month throughout retirement.
What Does It Mean To Be “House Poor”?
Too many retirees are “house poor”. This means they’ve spent a significant portion of their savings on a home through a down payment, and continue to spend the majority of their monthly income on a mortgage payment, homeowner’s insurance, utilities, maintenance, and property taxes. They have very little left over to put toward retirement savings, or facilitating lifestyle goals during retirement like travel or pursuing a new hobby. At the end of the day, this may not sound all bad. If you love where you live, it’s okay that you spend a little bit of extra money on it each month, right?
In some cases this might be true. But if you’re heading into retirement, this strategy likely won’t work for you. Retirees need to free up as much of their cash flow as possible to create a reliable income throughout their retirement. Your income during retirement typically consists of three parts:
- Social Security
- Pension
- Savings
While you can partly count on a reliable pension, the total amount you’ve saved when you retire, or an estimated Social Security payment each month, these income streams can still be variable. A dip in the market, or a change in Social Security or your unique pension program could mean a notable dip in your monthly retirement income – and it’s not always fully in your control. However, having a home that’s been fully paid off before you enter retirement is a decision you have control over. So, what should you do?
You Have Options
If you still owe money on your home, you have a few options as you move toward retirement. First and foremost, if you love your home and it meets your retirement lifestyle needs, you can look to pay it off before you retire. Many pre-retirees are relatively close to paying down their mortgage, and with a little bit of extra focus and budgeting, paying it off in full is easily achievable.
However, there are some cases where paying off your mortgage in full before you retire isn’t a possibility. This is typically due to one of two reasons:
Your mortgage is too much money to feasibly pay down in a reasonable amount of time.
You don’t have very long before retirement, and you don’t think you can pay down your mortgage in that timeframe (even if it’s relatively close to paid off already).
There are solutions for both of these options. If your mortgage is too big before you retire, it might be time to reevaluate your living space. Even if you love your home, if it’s going to have a long-term negative impact on your financial health throughout retirement, it’s not worth staying in. You could consider selling your high-mortgage home and downsizing to something more manageable.
If you don’t have very long until retirement and are worried you won’t be able to pay your mortgage off in full before you make the transition, you might want to consider delaying retirement. Delaying retirement has several benefits including continuing to grow your retirement savings by taking advantage of employer match programs through your workplace retirement savings plan. By delaying retirement, you might be able to pay off your mortgage, then retire with significantly more cash flow than you would have otherwise.
Deciding how you want to handle your home during retirement can be a financial and emotional challenge. Working with a financial planner can help! Together, we can put together a strategy for your retirement income – including what to do with your existing mortgage. Interested in learning more? Schedule a consultation with us today!
Tony Velasquez runs Wisely Advised, LLC a full-service Registered Investment Advisory Firm offering Financial Planning, Accounting and Investment Advisory services to individuals, families, and businesses.