Ours was paid off long before retirement, and we have no interest in having a mortgage in the future. Personal preference.
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Oh there are lots of valid reasons - to be flip about it, you could say paying off the mortgage is like sleeping in your bond tent instead of building one in your portfolio.
As a simplistic example, say one’s mortgage payments are $50k a year and the rest of their expenses are $50k a year. They can reduce their annual draw from $100k a year to $50k a year by eliminating the mortgage. They can pay the mortgage off instead of increasing their equity/bond ratio.
Then, if they’re hit with a bad sequence of returns in the first 5-10 years after retirement, their lower required annual draw may be the difference in riding out the remainder of their retirement with their investments intact, or not. It’s far easier for a portfolio to recover when smaller bites are taken out of it, particularly if one retires and is hit with a drop.
Plus the lower annual draw may mean that their healthcare premiums are substantially lower (as their MAGI is lower), and their lower withdrawals may drop them down to paying 0% in taxes as well.
Now, if someone did have one of those golden ticket, sub-inflation rate mortgages, I’d absolutely keep that - that’s free money.
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When you hit your RMD age, you may not have the choice of how much to withdraw. Mortgage interest is deductible. Having large amount of tied up in real estate is asset that’s hard to tap into, much harder than stock and bonds. But you need to work out your own math.
We moved after we retired. Having a paid off mortgage meant that we could pay cash for the new house and not deal with qualifying, etc. it was really easy.
I know some people who have mortgages are perfectly comfortable with that. I prefer no debt. And yes I do understand that I still pay property taxes and insurance!
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30 year fixed rate mortgages rates tend to be ~2% higher than 10 year treasury rate, so paying off a mortgage tends to be a superior alternative to purchasing bonds, ignoring tax effects. For example, for a new purchase it might be a choice between a guaranteed 4.5%/year return with bonds vs a guaranteed 6.5%/year return by paying down mortgage (ignoring tax effects). As people approach retirement, they tend to shift towards a more conservative portfolio, with a higher % fixed income, so paying down mortgage seems increasingly attractive.
However, the past 4-5 years is unique in that federal funds rate increased from ~0% to ~4%, with 30-year mortgage rates increasing from 2.x% to 6.x%. For buyers who locked in a 2.x% mortgage the choice becomes get a guaranteed 4.5%/year return by purchasing new bonds vs a guaranteed 2.5%/year return paying down old mortgage (ignoring tax effects). The conclusion is very different.
I agree that having a fixed rate mortgage can protect against inflation. There are also more direct inflation protection products, such as TIPS, which are guaranteed to pay a rate above inflation. Current TIPS yield is 2-3% above inflation, depending on duration.
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Who invests 100% in bonds? But bonds are a lot more liquid than real estate.
Who mentioned investing 100% in bonds?
We didn’t pay off our mortgage with the thought of retirement. Our mortgage period ran its course. We did have a financial person offer us a low interest loan if we would bring money under his companies advisement. We could have used the cash to pay off some loans on some rental properties we owned. It didn’t make sense for us as the rental loans are deductible expenses.
It may or may not be depending on the near risk free return you can get on your money. Is it higher than the interest rate you are paying ? If yes, then of course having the mortgage is better. But maybe not psychologically.
Maybe I am misinterpreting your analysis because you were using treasury to state your case.
To me to have such a big chunk of money sitting there doing nothing other than hoping for real estate appreciation just doesn’t make sense to me, but it is what makes people comfortable.
Many. Not me. But many wealthy and older. If your income can outstrip expense plus inflation, it’s not bad strategy. As wealth has grown, so has muni demand.
‘M overweight individual bonds (not funds) but not 100%. But if I was making $300k in bond income a year and my expenses were $150k, it’d be a boring but lovely position to be in.
The post said, “As people approach retirement, they tend to shift towards a more conservative portfolio, with a higher % fixed income” – higher % fixed income, not 100% of portfolio is bonds.
The money isn’t doing nothing. Paying down debt reduces your debt interest expenses . You can use the extra cash from reduced interest expenses to do whatever you want. If you put $100k towards paying down a 6.5% mortgage, then your interest expenses are reduced by 6.5% * $100k = $6,500 per year. If you instead put that $100k in a fixed income product that yields 4.5%/year, then your investment interest is increased by $100k * 4.5% = $4,500 per year. Which is the better alternative between these 2 options (ignoring tax effects) – reducing interest expenses by $6,500/year or increasing investment interest by $4,500/year?
Or as a more extreme example, suppose the debt was a 30% interest credit card instead of a 6.5% interest mortgage. I expect you’d want to pay that off ASAP. Rational investors have some debt interest threshold for which the guaranteed return (via reduced interest expenses) from paying down the debt becomes preferable to the variable return from alternative investments, such as putting money on stock market equities. As one approaches retirement and switches to a more conservative portfolio, that threshold tends to get increasingly lower.
Of course not everyone is interested in having a fixed income guaranteed return component of portfolio (component, not 100% fixed income). If you are a younger person who is focused in future growth, then both a guaranteed 4.5% and 6.5% return may seem like bad options compared to alternatives, such as putting money in stock market. Such an investor might have a 100% equity portfolio, or even >100% via leverage.
Our mortgage payment is low and our interest rate is 3%. We could pay it off, it’s only a few more years. But our investments are making a lot more than 3%, the advice has been to not pay it off.
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Especially if those investments are getting assured returns. It not assured, the answer may be different depending on your risk tolerance.
I took out a 30 year 2.625% mortgage in I think 2020 or 2021. Happy to pay that out into my 90s. In general, my income from investments will exceed 2.625% by a lot. (Of course, the return has to be after tax but there is also a deduction for the mortgage interest.) This of course depends upon my risk tolerance which is high because I have an income and certainly would have the assets to cover the mortgage in a down year if for some reason I had stopped working. (And the mortgage is for 1/6 to 1/8 the value of the house).
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Upon simple analysis, yes that is typically the recommendation. However Finance 101 suggests that the proper comparison is not your total pool of “investments,” which includes those with higher risk, but with like instruments.
Paying off your mortgage is a risk-free guaranteed 3% return. So the like instruments for comparison would be TIPS or shorter-term bonds (since you only have a few years left), and not your equity or RE portfolio.
Another way to look at it, is to question whether you’d margin your home to play the market?
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I do not have an accountant or a financial planner, and can confirm that Roth conversions are super easy to perform and report on tax filing. Since this is a college site, I will add that they are easier to report than 529 disbursements.
Helping my son file his taxes when he did his first Backdoor Roth straddling two tax years…more complicated. He has made sure to complete the non-deductible IRA contribution and Roth conversion in the same calendar year since then.
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Perfect timing - I just think I confirmed it makes absolutely no sense for us to do Roth conversions. Tired of thinking about it anyway so we’ll go this route.
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yes, the actual process is simple adn can be accomplished wiht one phone call.
However, the tax (income) planning is important. Go over an IRMAA threshold by $1 and get hit with a penalty for 12 months. Or, too much conversions could reduce/eliminate the "no Tax on Social Security’ deduction. Other folks might prefer to keep income low to qualify for ACA subsidies. A lot to consider.
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I hope I did not say anything to dissuade you from pursuing Roth conversions.
I found the process incredibly easy—a click or two at Fidelity to process and an automatic upload to TurboTax at filing time.
You do need to consider the impact of the increased taxable income on your overall tax filing–any credits or offsets that may be reduced by the increased income: ACA credits, IRMAA surcharges, higher threshold for itemized deductions, etc.
Two issues to consider (at a minimum) – 1) Is your tax rate today lower than you think your tax rate will be once you start taking RMDs and 2) Is the tax rate you will pay on a Roth conversion lower than your beneficiaries will pay when taking RMD’s over ten years?
Many reasons to convert or not convert, but the mechanics of converting is not one of them.
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