Another mortgage pay off question

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Golf maniac
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Joined: Wed Dec 27, 2017 2:02 pm
Location: Charlotte NC

Another mortgage pay off question

Post by Golf maniac » Wed Sep 12, 2018 3:05 pm

Situation: DW will be 62 this year and I am 59 this year.
Building a $300k retirement home early next year. Putting $100k down.
Retirement account of $1.2M all traditional, no Roth.
Emergency funds of 12 months in high yield savings account.
Retired, pension covers about 80% of expenses with investments covering remaining. We could live off pension only if needed but we want to enjoy the next 10 to 15 year with travel and activities.
Health insurance taken care of as I am federal retiree.

Current plan: take out 15 or 30 year mortgage (currently renting as we already sold home). Have wife apply for her benefits at 62 for SSI. I will wait until 70 to apply for my benefits so her survivor benefits will be the highest. We don’t really need her SSI but the plan is to use it to pay down the mortgage. Her benefit after tax will be a little under $700 per month. I know this will impact her spousal benefit by a few hundred a month when I file at 70.

Once I file at 70 and she gets spousal our need for investments will be minimal (but will get hit by RMD).

I model our expenses and income annually on an excel spreadsheet. It is pretty simple with a 4% return and 3% inflation. All the modeling shows it is better to have a mortgage and keep as much as possible in investments and not pay down mortgage.

Options: (1) have her take her SSI at 62 and pay down mortgage (about a $40k impact on lifetime SSI benefits according to Maximize my SS). This will allow us to convert traditional to Roth’s each year. (2) withdraw from investments over the next 6 years and pay down mortgage ( 6 years needed to keep withdrawals under current tax rate of 22%). (3) keep the mortgage and don’t pay early, don’t have her apply for her SSI until her full retirement age 66yrs and 4 months and convert traditional retirement funds to Roth each year staying under our current tax bracket. This will maximize her spousal benefit for SSI when I apply.

I am leaning toward 1 to maximize our investments and allow for Roth conversions but still pay down the mortgage. But am interested in what others would do or if there are other factors for me to consider. We will be fine no matter which we choose, but trying to max benefits and investments while getting rid of the mortgage as soon as possible. Thanks!

bloom2708
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Joined: Wed Apr 02, 2014 2:08 pm
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Re: Another mortgage pay off question

Post by bloom2708 » Thu Sep 13, 2018 9:06 am

I'm not a big fan of carrying a mortgage into retirement.

But, I do not see anything in your numbers that indicates you should pay it off with a lump sum.

If you had $500k sitting in taxable with reasonable gains, then I might suggest taking $200k and paying it off.

Your pension covers most of your normal expenses. Healthcare is taken care of (nice). I tend to like option 3. Waiting until full retirement age would be a nice bump. But, #2 could be reasonable as well. Hopefully those with more SS experience will chime in.
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grabiner
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Re: Another mortgage pay off question

Post by grabiner » Thu Sep 13, 2018 8:24 pm

Golf maniac wrote:
Wed Sep 12, 2018 3:05 pm
Current plan: take out 15 or 30 year mortgage (currently renting as we already sold home). Have wife apply for her benefits at 62 for SSI. I will wait until 70 to apply for my benefits so her survivor benefits will be the highest. We don’t really need her SSI but the plan is to use it to pay down the mortgage.
This is probably not a good idea. If she waits to take SS later, she can use the higher benefits to make extra mortgage payments then, for a better return.

Alternatively, you could pay off the mortgage quickly by withdrawing from the retirement account, up to the top of the 22% tax bracket each year. These withdrawals would give you a guaranteed 4% return if you pay down a 4% mortgage. Then, once the mortgage is gone, you will have more money available to do Roth conversions in order to reduce future RMDs.
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