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Should Retirees Pay Off Their Mortgages? It Depends.
Sometimes, it’ s better for them to keep the debt. By Ben Mattlin
TRADITIONALLY, CLIENTS WERE TOLD TO TRY TO pay off their mortgages before their retirement started. But today’ s advisors take a more nuanced approach.“ It depends,” they tend to say.
What it depends on, however, varies. There are many factors, some measurable and others so deeply personal that they might even be uncomfortable to discuss.
Wade Pfau, a Dallas-based retirement specialist and author of The Retirement Planning Guidebook, describes a mortgage as a kind of“ negative bond.” Holders are in a sense getting a riskfree percentage of the value of their biggest asset, their home. So the mortgage rate becomes“ the return hurdle to beat,” he says.
You can put it another way: Clients who have enough money to pay off their mortgage might want to first consider what else they could do with those funds. What if, instead, they put that money into a guaranteed return product, such as a bond?
If the yield on that bond were higher than the mortgage interest rate, it may be wiser to invest in that sure thing rather than pay off the mortgage, Pfau says. After all, many older homeowners likely managed to obtain mortgages at very low rates over the last decade.
Say the mortgage is a low fixed rate, such as 3 %. That would be an easy hurdle to get over with money invested elsewhere. If those funds— that is, the remaining mortgage balance and interest— were invested at a higher rate, that return could outweigh what the client would net from paying off the mortgage.
“ Using a large sum of liquid assets to pay off a mortgage can reduce flexibility and growth potential,” he says.
Inflation
Advisors say that clients should also keep inflation in mind. Payments to an old, fixed-rate mortgage could probably be seen as a bargain for today’ s dollar, which doesn’ t have as much buying power as it did when the rate was set. In a sense, because of inflation, a fixed-rate mortgage becomes cheaper over time.
“ Most expenses go up over time, but fixed-rate mortgage payments stay the same for the entirety of the loan,” says Regan Smith of Focus Partners Wealth in Walnut Creek, Calif.“ A fixed-rate mortgage can be an inflation hedge.”
Another consideration is the potential tax deductions that may come from servicing a mortgage rather than paying it off. The interest component of mortgage payments, which decreases over time, is tax-deductible for those who itemize deductions( barring any legislative changes, which might
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