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QUESTION:
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Pro's and Con's of paying off mortgage | I have tracked my finances, income and expense for at least the last 20 years, and prepare a monthly balance sheet. As I approach retirement (end of year), and review investments, dividends,portfolio growth etc, it seems to me that the sub 1% returns available in MM funds will do nothing towards contributing to a post retirement income stream. I have a $207,000 30 year fixed, with 27 years to go, payment of $1103 (P +I )at 4.75%. I refinanced in 2008.Current cash assets about $220K as this is written, I project $260K by year end with anticipated income and sale of certain assets.
As I see it, I can cut my expenses by 20%+, by paying off my mortgage when I retire, with no impact on retirement income. The after tax asset base generates about $27K per year, and is a mix of dividends, muni interest, corp bonds, and GNMA bond funds. I don't plan on touching Pre tax assets until 70.5, and their asset allocation pretty much mirrors after tax ratio's.
Other factors:
1. I don't plan on moving, have a 10 year old son
2. Did some tax projection on future income, loss of deductions not that significant.
3. Have a pension, and will collect SSA on my son until he 18, so kind of have a plan for college.
What do you think? Is my logic good or based on the emotional appeal of ownership, particularly in the economic times we are in. |  | asked by MMC, 9/12/2010 |
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Categories:
Reducing Retirement Expenses, Financial Planning for Retirement
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| ANSWERS: | | Answered by: SilverSurfer, 09/22/10
Overall Rating:  Be the first to rate it. | There is no way to predict the future with any accuracy, so you'll have to use some judgment.
First compare the after-tax interest and investment returns to help with the answer. If your after-tax interest (may be the same as before-tax if not deductible) is greater than your after-tax return expectations for your total portfolio of investments, pay off the mortgage. If your mortgage permits and you are still on the fence, go half way. Then you'll always think you did the right thing no matter what happens. Either way, after you have made this decision, then rebalance your investments so that the allocation is sensible for your age.
One of the great imponderables in this decision is whether there will be high inflation or even deflation. A low interest mortgage is great for high inflation because it leverages the growth of the house as an investment or really hurts when there is deflation.
I lean towards not considering your house as an investment providing that you appropriately downsize for your retirement.
Another imponderable is whether things will get so bad that you can't afford to pay off the mortgage. These are some of the reasons why we almost always try to pay off a mortgage before retiring.
So, it still finally comes down to a judgment call--or a half-way compromise.
Hope this helps.
* You have a complex situation and may want to review this with a fee only financial advisor. This answer was created with input from one of our advisors.
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