Mortgage payoff advice for 61 year old boomers

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills

Mortgage payoff advice for 61 year old boomers

Postby Skier65 » Sat Jan 08, 2011 10:55 pm

Hi all,

We have a $180,000 15year loan that we refinanced at 4.5% last summer. We are about to inherit $90,000. We anticipate pensions worth about $85,000 annually in 4years plus social security. Both of us are still working but plan to retire by 65 or 66. Retirement accounts are worth about $400,000.

Question- Should we use the inheritance to help pay down the mortgage or use it to invest plus take some long overdue vacations? We also have car loans at average of 6% interest. We have had some expenses lately so our savings (cash) is down to $5,000.

Looking forward to your comments.

We are 1st time users of this forum.
Skier65
 
Posts: 1
Joined: Sat Jan 08, 2011 7:44 pm

Postby Avgjoe27 » Sat Jan 08, 2011 11:15 pm

Welcome to the board.

I'm fairly new also. You get a bunch of good suggestions.

Here are a few thoughts -

Do you have an emergency fund of 6 - 12 months? If not, consider funding it.

You mentioned auto loan and mortgage, if no other debt, I would consider paying off the auto loan as it is a higher rate and not deductible on your taxes.

Depending on what you have left, I would consider a modest vacation as mental health is important.

At this point, anything left, I would pay down the mortgage.

Good luck.
Avgjoe27
 
Posts: 52
Joined: Mon Aug 02, 2010 8:06 am

Postby letsgobobby » Sat Jan 08, 2011 11:16 pm

welcome to the forum!

you probably can't get a responsible answer with more details about your financial health. The biggest questions in my mind are 1. what are your annual expenses; 2. what is your overall health like and based on this + family history, what is your life expectancy; 3. do you have long-term care insurance; 4. etc.

At the very least you should have a larger 'cash savings' if that represents your emergency fund; and you should consider paying off the auto loans given they are at 6%. Beyond that, I would request more information to give you an informed opinion.
letsgobobby
 
Posts: 6951
Joined: Fri Sep 18, 2009 2:10 am

Postby Cloud » Sat Jan 08, 2011 11:17 pm

IMO a mortgage should absolutely be paid off when one retires. It lowers your income tax because it's "X" amount a year you don't need to withdraw from savings just to pay on the mortgage.
User avatar
Cloud
 
Posts: 605
Joined: Wed Sep 12, 2007 1:43 pm

Postby livesoft » Sat Jan 08, 2011 11:17 pm

It's a personal decision. I'll link two threads that may interest you:

viewtopic.php?t=55370

viewtopic.php?t=66049

After reading them, what do you think?

I'm inclined to not have a mortgage when getting SS benefits because the cash flow required to support it will cause your benefits to be taxed. In your case, your pension will require SS benefits to be taxed, so that's a moot point. Your mortgage rate is very low as well, so I'd pay off the car loans before adding any extra to the mortgage. Then I'd invest the money and revisit the situation in a few years. So my answer right now is "No, don't pay off the mortgage right now."
livesoft
 
Posts: 33351
Joined: Thu Mar 01, 2007 9:00 pm

Postby Gill » Sat Jan 08, 2011 11:24 pm

Cloud wrote:IMO a mortgage should absolutely be paid off when one retires. It lowers your income tax because it's "X" amount a year you don't need to withdraw from savings just to pay on the mortgage.


I don't follow you. Are you assuming the funds are coming from an IRA to pay the mortgage?
Bruce
Gill
 
Posts: 947
Joined: Sun Mar 04, 2007 9:38 pm
Location: Florida

Postby Cloud » Sat Jan 08, 2011 11:55 pm

Yes... I was.
User avatar
Cloud
 
Posts: 605
Joined: Wed Sep 12, 2007 1:43 pm

Postby Watty » Sun Jan 09, 2011 2:52 am

There are lots of pros and cons, but if you can't see a clear choice to pay it off on not, then there is another option which would be to wait a year or two do decide, there may be a clearer choice by then.


Greg
User avatar
Watty
 
Posts: 4625
Joined: Wed Oct 10, 2007 4:55 pm

Postby scubadiver » Sun Jan 09, 2011 8:19 am

I would do the following:

1) Increase emergency fund to 8 months expenses

2) If you have not already, fully fund IRA (preferably Roth IRA if eligible) for 2010 and 2011 for both you and spouse.

3) Pay off car loans

4) If you still have $$ left at this point, sure take a vacation.

5) If you still have $$ money burning a whole in your pocket, pay down mortgage.

There's really no right or wrong answers here, this is just what I would do if I were in your situation. :)
User avatar
scubadiver
 
Posts: 740
Joined: Sun May 04, 2008 10:48 pm

Postby zzcooper123 » Sun Jan 09, 2011 8:24 am

Will you be itemizing deductions in retirement? What will be your anticipated AGI in retirement? Do you have accumulated Capital Losses?
Remember it is the same dollar sitting in a interest bearing account vs. postulated home equity.
User avatar
zzcooper123
 
Posts: 460
Joined: Sat Oct 13, 2007 6:55 pm

Postby alec » Sun Jan 09, 2011 8:42 am

scubadiver wrote:There's really no right or wrong answers here, this is just what I would do if I were in your situation. :)


Agreed. How overdue is the vacation? It it's really, really overdue, I'd take it. IMO, mental/physical health is much more valuable than paying down mortgage. It'd be pretty tough to blow $90K on a single vacation, so I'd do vacation, EM fund, and car loan.
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair
User avatar
alec
 
Posts: 2232
Joined: Fri Mar 02, 2007 3:15 pm

on the other hand

Postby midareff » Sun Jan 09, 2011 10:50 am

I guess there are many alternatives for paying down/off a mortgage or not. In my case I have about 250K left outstanding at 5 3/4 %. Then I look at portfolio returns for the last two years and wonder why I should take money that returned three times that to pay off 5 3/4 %. Just doesn't make sense to me right now, especially since the interest is a tax write off.

Just my situation, yours may be very different.
User avatar
midareff
 
Posts: 2343
Joined: Mon Nov 29, 2010 11:43 am
Location: Biscayne Bay, South Florida

Postby BlueEars » Sun Jan 09, 2011 12:38 pm

Some ideas:

1) Fully fund your Roth IRA's with some of the inheritance if you don't have Roth IRA's now.

2) Pay off the 6% loan.

3) Look at your taxes and determine how much help the mortgage interest deduction means to you when you take pensions + SS. If you have TurboTax you can do a rough cut of this easily. If you use a tax person ask them to rough up a few scenarios. You want to get compare marginal tax rates.

Welcome to the forum!
User avatar
BlueEars
 
Posts: 3149
Joined: Sat Mar 10, 2007 1:15 am
Location: West Coast

Postby Abbey » Sun Jan 09, 2011 2:28 pm

FYI: Fully funding the Roth means $24,000. $6000 each for you and spouse for 2010 and again for 2011.
Abbey
Abbey
 
Posts: 33
Joined: Wed Feb 24, 2010 5:18 am
Location: Texas

Postby epilnk » Sun Jan 09, 2011 3:10 pm

scubadiver wrote:I would do the following:

1) Increase emergency fund to 8 months expenses

2) If you have not already, fully fund IRA (preferably Roth IRA if eligible) for 2010 and 2011 for both you and spouse.

3) Pay off car loans

4) If you still have $$ left at this point, sure take a vacation.

5) If you still have $$ money burning a whole in your pocket, pay down mortgage.

There's really no right or wrong answers here, this is just what I would do if I were in your situation. :)

+1
epilnk
 
Posts: 2542
Joined: Wed Apr 18, 2007 8:05 pm

Postby BigFoot48 » Sun Jan 09, 2011 4:28 pm

I love not having a mortgage, and especially the ability to withdraw less from my IRA reducing my tax burden, but enough about me.

If I were you I would schedule additional principle payments using your windfall and earnings so that your mortgage will be paid off in five years.
Retired | Two-time Top-10 Diehard S&P500 Picker; Nine-Time Loser
User avatar
BigFoot48
 
Posts: 2074
Joined: Tue Feb 20, 2007 11:47 am
Location: Arizona

Postby shoetrip » Mon Jan 10, 2011 11:08 am

Take up to $20k and go on the vacation(s). . .seriously.

You are 61 and you don't have too many years left where u can simply pick up and travel at will without all types of special needs and aids.

My worst vacation was more memorable, pleasurable and gratifying than the day I became debt free.
shoetrip
 
Posts: 394
Joined: Wed Nov 03, 2010 2:27 pm

Postby Ron » Mon Jan 10, 2011 12:49 pm

shoetrip wrote:You are 61 and you don't have too many years left where u can simply pick up and travel at will without all types of special needs and aids.

Yeah - right :lol: :lol: :lol:

We've met many folk’s decades older than our current age while on tour, who are still trekking the world. You can face the challenge of not being physically able to travel, at any age.

I'll agree, if you have the desire to travel, do so, now. Don't wait till some "magic age" (such as retirement) to do it.

- Ron (age 63 :roll: )
User avatar
Ron
 
Posts: 5213
Joined: Fri Feb 23, 2007 8:46 pm
Location: CCTV Building - Beijing CBD

Re: Mortgage payoff advice for 61 year old boomers

Postby ohiost90 » Mon Jan 10, 2011 1:11 pm

Skier65 wrote:Hi all,

We anticipate pensions worth about $85,000 annually in 4years plus social security.


What percentage of your retirement income will this represent?

If 100+ then you could afford a vacation or two.

I would surely pay off the cars. Funding '10 and '11 IRAs(either roths or traditional depending on your circumstances) would seem like a good idea as well.
ohiost90
 
Posts: 626
Joined: Wed Apr 11, 2007 4:24 pm

Postby yobria » Mon Jan 10, 2011 1:25 pm

Cloud wrote:IMO a mortgage should absolutely be paid off when one retires. It lowers your income tax because it's "X" amount a year you don't need to withdraw from savings just to pay on the mortgage.


Agreed. You probably lose the tax write-off due to lower income, and its one less expense for which you must generate taxable income.

Nick
yobria
 
Posts: 5978
Joined: Tue Feb 20, 2007 12:58 am
Location: SF CA USA

Mortgage Payoff

Postby scpo » Mon Jan 10, 2011 4:24 pm

You want to go into retirement free and clear. I paid extra money on mortgage until I retired than payed it off.
I don't care what I've read on these boards about investing monies instead of paying off the mortgage. I say garbage it's a great feeling with no payment. :D You could pay it off now than use that monthly payent to pay down other debt.
scpo
 
Posts: 215
Joined: Sat Nov 24, 2007 9:45 pm

Postby Ron » Mon Jan 10, 2011 4:39 pm

yobria wrote:Agreed. You probably lose the tax write-off due to lower income, and its one less expense for which you must generate taxable income.

You bring up a point that I didn't understand till I actually retired, and need to manage my own taxes (rather than my former employers, via a payroll deduction).

Now, every expense is looked at as "x + 15%". What I have to pay, plus what I must pay in taxes to get any item, since the majority of my retirement funds (either in SPIA's, IRA's or future SS income) is in "untaxed" funds. It's a bit different than when you're working and usually determine if you can afford that car payment, based solely on net income.

The other thing about having a note/mortgage (at any age) is that I could never quite understand the desire to pay $2 in interest to get back possibly $1 in taxes. We're at the point of not having any level of deductions that take us above the standard, when we file our federal taxes, and have no problem not having to spend money just to get a portion returned to me.

- Ron
User avatar
Ron
 
Posts: 5213
Joined: Fri Feb 23, 2007 8:46 pm
Location: CCTV Building - Beijing CBD

Postby yobria » Mon Jan 10, 2011 6:54 pm

Ron wrote:
yobria wrote:Agreed. You probably lose the tax write-off due to lower income, and its one less expense for which you must generate taxable income.

You bring up a point that I didn't understand till I actually retired, and need to manage my own taxes (rather than my former employers, via a payroll deduction).

Now, every expense is looked at as "x + 15%". What I have to pay, plus what I must pay in taxes to get any item, since the majority of my retirement funds (either in SPIA's, IRA's or future SS income) is in "untaxed" funds. It's a bit different than when you're working and usually determine if you can afford that car payment, based solely on net income.

The other thing about having a note/mortgage (at any age) is that I could never quite understand the desire to pay $2 in interest to get back possibly $1 in taxes. We're at the point of not having any level of deductions that take us above the standard, when we file our federal taxes, and have no problem not having to spend money just to get a portion returned to me.

- Ron


Yes, but aint it great not to be forced to generate taxable income 40 hours/week, 50 weeks/year?

It's fun to think of all the tricks you can use to lowering your taxable income, and of course having more time in retirement gives you more options (growing/cooking your own food, moving somewhere cheaper, etc).

However, fact is you're going to have to spend to have a good quality of life in retirement. I'm certainly not going to let taxes affect my travel, entertainment, athletic, etc. activities. So I just plan to eat the taxes and enjoy.

Nick
yobria
 
Posts: 5978
Joined: Tue Feb 20, 2007 12:58 am
Location: SF CA USA

Postby nokkieny » Mon Jan 10, 2011 7:05 pm

You might not be able to take full advantage of the interest deduction, but if you are retiring in 5 years than you will get the bulk of that deduction in the front loaded interest you are paying while you are still working. Also, you are not going to be able to finance any debt for anywhere close to 4.5%, so unless you plan not to pay another cent of interest for the rest of you life, why not keep that 4.5% rate locked in and use that extra cash to make sure you don't have to pay any higher rates.

I personally believe that inflation in the coming years will devalue the debt and interest rate to a point where you could very easily earn greater than 4.5% in a fairly safe form of investment.
nokkieny
 
Posts: 194
Joined: Sun Jan 09, 2011 10:35 pm

Re: on the other hand

Postby grabiner » Mon Jan 10, 2011 8:56 pm

midareff wrote:I guess there are many alternatives for paying down/off a mortgage or not. In my case I have about 250K left outstanding at 5 3/4 %. Then I look at portfolio returns for the last two years and wonder why I should take money that returned three times that to pay off 5 3/4 %.


However, look at your portfolio return for the year before, and you wish that you had put that money into something safe like a mortgage payoff rather than the stock market.

The right comparison is between a bond investment and an extra mortgage payment, as both give you a guaranteed return. If you have any bonds in your portfolio, you have chosen to get something with a guaranteed return that is lower than the risky expectaion of the stock market. And since you can earn 4.24% risk-free in Treasury bonds (Long-Term Treasury Admiral shares) and may earn only 4.14% risk-free by paying down your mortgage in a 28% bracket, it's probably better to max out your 401(k) before paying down the mortgage. The comparison to taxable investing isn't as clear; Admiral shares of Long-Term Tax-Exempt yield 4.13%, and there is some credit risk.
David Grabiner
User avatar
grabiner
Advisory Board
 
Posts: 13035
Joined: Wed Feb 21, 2007 12:58 am
Location: Columbia, MD


Return to Personal Finance (Not Investing)

Who is online

Users browsing this forum: Bing [Bot], Busting Myths, camptalcott, dcruick1930, Epsilon Delta, FAST Enterprise [Crawler], Geologist, irishbear99, JasonF, madbrain, sdsailing, Steelersfan, Yahoo [Bot] and 83 guests