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Eddie_George

The New Retirement: Why You Don’T Have To Pay Off Your Mortgage

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Low interest rates have changed the game for retirees—but not always in a bad way.

Consider your mortgage. With rates having fallen so far, there may no longer be a pressing need to own your house outright before you call it quits at the office.

This may be of little comfort to millions of savers trying to eke by each month on income from bank deposits paying below 1%. But today’a low rates are a boon to those saddled with a mortgage payment at a time in life when carrying large debts has long been ill-advised.

In 1989, just 26.4% of all households were retired with a mortgage, according to data from the Federal Reserve’s Survey of Consumer Finances. That jumped to 46.5% by 2007, before receding a bit during the recession.

These stats trouble traditionalists, who view owing money on a house in retirement as heresy. After all, paying off a mortgage brings peace of mind, because you know your living expenses have been cut and that your home equity offers a sturdy safety net.

(MORE: New Retirement Priorities: Forget Being Rich, All We Want Is Peace of Mind)

Yet clinging to a mortgage in retirement has benefits too, especially with the average 30-year fixed-rate mortgage running at just 3.5%. You might be better off keeping the mortgage and investing the money elsewhere, which amounts to borrowing at a tax-deductible 3.5% in order to start a business, invest in stocks, or purchase an income property. Over time, such investments should provide superior returns.

This new calculus assumes that you have the means to pay off your mortgage in the first place. Many folks have been downsized into retirement prematurely and may still hold a mortgage because they can’t do anything about it. But for those with a choice, the basic rule of thumb: If you expect to earn more after tax on your investments than you pay after tax on your mortgage, keep the mortgage. However, if you are a conservative investor and keep your money in bank CDs and Treasury bonds, it is probably better to pay off the housing debt.

Some factors to consider:

Taxes If your source of cash to pay off a mortgage is a 401(k) plan or other tax-advantaged account, keep the mortgage. Taking a large distribution will trigger a tax hit and possibly push you into a higher tax bracket. It might also bump you up to a level where you’ll owe more tax on your Social Security benefits.

Tenure If you are going to sell the house in the next few years anyway, you’ll pay off the mortgage at that time. Keep the mortgage now for added financial flexibility.

Liability Retirement accounts generally enjoy greater protections than a home from bankruptcies and lawsuits. If you suspect trouble, keep the mortgage in order to keep your retirement savings out of harm’s way.

Cash flow If you expect to tap your home equity for living expenses, keep the mortgage. It’s cheaper than paying off your housing debt and turning around to take out a home equity line or reverse mortgage.

Monthly payments You need to be prepared for unforeseen issues like health problems, but also to keep paying for things like property tax and neighborhood association fees. You may also want to start giving money to family. Pay off the mortgage to avoid strain on your monthly budget and to allow you to spend the additional cash flow in a way that makes you happy.

(Viewpoint: ‘Chained’ CPI for Social Security Calculations Robs Retirees)

Read more: http://business.time.com/2013/05/28/the-new-retirement-why-you-dont-have-to-pay-off-your-mortgage/#ixzz2Ui2bBPKK

This is the USA where long-term fixed mortgages (e.g. 30 years) are the norm, but is this still sound advice for Americans?

Edited by Eddie_George

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Probably not too bad an idea if you have the money and and know what you are doing. If you are just about hanging on financially and waiting for your even more superannuated parents to peg it so you can get your hands on their fabulous legacy then I would say no.

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Provided you can fix the rate (and in the US, 25 year fixed rate is considered "normal") and you can take advantage of tax allowances (in the US mortgage interest is eligible for tax relief), then it's not a terrible idea.

However, the gains are not as great as you might think - "long" rates tend to be higher than "short" rates, which is why so many banks went tits-up; they borrowed short at low cost, and lent long at a higher rate, only to find that they couldn't refinance. While you could get a 25 or 30 year fixed rate mortgage at retail, most retail investments will tend not to invest in such duration assets (as they tend to be very volatile), so are competing against the slightly cheaper short term financing rates.

If you are willing to take the risk and use an ongoing mortgage to leverage up and buy stocks, then there is scope for big profits - but as you approach retirement age, but this is very much a high risk strategy.

Edited by ChumpusRex

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Provided you can fix the rate (and in the US, 25 year fixed rate is considered "normal") and you can take advantage of tax allowances (in the US mortgage interest is eligible for tax relief), then it's not a terrible idea.

However, the gains are not as great as you might think - "long" rates tend to be higher than "short" rates, which is why so many banks went tits-up; they borrowed short at low cost, and lent long at a higher rate, only to find that they couldn't refinance. While you could get a 25 or 30 year fixed rate mortgage at retail, most retail investments will tend not to invest in such duration assets (as they tend to be very volatile), so are competing against the slightly cheaper short term financing rates.

If you are willing to take the risk and use an ongoing mortgage to leverage up and buy stocks, then there is scope for big profits - but as you approach retirement age, but this is very much a high risk strategy.

You say there is scope for big profits buying stocks/shares, so you suggest that people should borrow to do this?.........MEW to play the stock market, sounds like what people were doing one hundred years ago.......someone approaching retirement age does want less risky investments, but less risky investments now mean giving money away or money losing value fast......so I would say if you are completely debt free when you retire with a small secure pension that covers costs why risk it all on something you might have rather than something you know you will have........gambling/speculating money is excess surplus money you can play with over and above requirements, money you can afford to lose.....think the worse then everything on top is a bonus. ;)

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Read more: http://business.time.com/2013/05/28/the-new-retirement-why-you-dont-have-to-pay-off-your-mortgage/#ixzz2Ui2bBPKK

This is the USA where long-term fixed mortgages (e.g. 30 years) are the norm, but is this still sound advice for Americans?

This Dan Kadlec guy is an idiot and in a position (TIME MAGAZINE) to ruin peoples lives if they follow his advice.

Remember folk blindly following equally smarmy and slimy Martin Lewis into Iceland, only to see 100% of their investment evaporate?

Trading on margin is fine when you have the facility of time to recover or vast wealth tucked away.

What happens when goalposts change such as rates or terms, or equity goes negative?

Grey geese shirking their financial obligations to play stock market is ruinous at the least, terminal in reality.

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.....Having a small mortgage IO is not a bad idea knowing you have the money to cover if need be....ie having a net worth.......as none of us can know for certain what the future holds be in financial, emotional, or how healthy we will be, keeping the doors open to have some access to a secured, low charge, low interest, insurance in case of need is always a good idea........a balance between having some debt and a mixture of self selected assets, long and short term depending on own individual circumstances age and future aspirations. ;)

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Remember folk blindly following equally smarmy and slimy Martin Lewis into Iceland, only to see 100% of their investment evaporate?

I don't think its fair to say that at all.

The Icelandic banks were at the time covered by the FSA guarantee up to a limit of (iirc) £50k. Martin was always one to remind savers of this limit, and some of us heeded his caution.

The problem was that those that didn't, including Councils, charities etc. which lead to a 100% no holds barred bail out of savers by the UK Gov. If the Gov had let those with more than the limit go to the wall, it would have been a solid, unforgettable financial lesson for those savers, and one which imho should have been allowed to happen.

Savers didn't invest in the Icelandic banks, they saved in UK regulated arms of those banks.

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  • 241 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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