YOUR MORTGAGE AND YOUR RETIREMENT

Magnolia Blossom Symbol of The South.

I walked out of my front door on a sunny morning and came face to face with a beautiful, fragrant, magnolia blossom. I love magnolia trees and have 15 on my main lot. This makes me different than most of my neighbors who often think of these trees as a nuisance because they shed leaves all year and its harder to keep your lawn neat. I would rather have the glossy green leaves and large white flowers than a neat lawn anytime.

Your Mortgage and Your Retirement. Over the years, my main specialty has been advising clients on how to select the right mortgage product for their particular financial situation. One of the main points to consider about your mortgage and your retirement is whether or not you want to pay off your house before you retire. In my initial financial training, I was taught that funds necessary for retirement should include the amount necessary to pay off your mortgage. Initially, I bought into this issue; however, over the years I have been open to more possibilities. The bottom line is that the answer will depend on a number of factors. Some of these are as follows:

1, Where will you Get The Funds For Repayment? If you have to cash in funds from a 100% taxable retirement plan, be sure you consider the tax implications first. If you are in the 25% tax bracket, you will have to withdraw more than $265,000 to pay off the mortgage. Not a good idea for most folks. Tax implications of retirement plans aren't the only ones you have to worry about. If you are holding stocks in which you have a large capital gain, be sure to determine how much you will net on an after-tax basis before making the move. If you have enough cash sitting around in bank deposits to pay off the mortgage, you will certainly get a higher return from paying off the mortgage than you will get on those deposits. Another possibility for older borrowers is a reverse mortgage. While you don't exactly get rid of the mortgage, the reverse mortgage will allow you to get rid of the payments. I don't know about you, but its the payments that bother me, not the mortgage.

2. What Are Your Liquidity Needs? If most of your retirement income is from relatively stable sources like annuity payments, company or military pensions, and social security ( maybe not as stable in the future as you think), you have less need for liquidity than those who must rely on investment income. Some retirees have excellent income but few assets. I have certainly seen more borrowers in trouble from lack of liquidity than I have from a mortgage that is too high. One way to pay off a small first mortgage is to utilize a home equity line of credit as a liquidity source. You pay off the loan with the funds you already have and replace your liquidity reserve with the home equity loan. If you use this strategy, make sure you only draw on the line for genuine emergencies. All too often, I have seen borrowers who use this strategy only to wind up with a large home equity line because they used the funds to purchase consumer items or pay for home improvements.

3. What Is Your Risk Tolerance. A well known financial talk show host says that, "the paid-for house has replaced the BMW in the driveway as a status symbol." While this is true for many borrowers with low risk tolerance, it is possible that you may be able to get a higher return on your investments than the mortgage rate. If you insist on a high degree of safety, you will not be able to do this; however, if you are willing to take moderate risks, history shows that a diversified investment portfolio will outperform the rate you are paying on your mortgage. There are many who would argue with this statement and give examples of recent performance of the markets to support their argument. I agree, but from a strictly statistical point of view my statement is true.

4. The Main Issue is Cash Flow. I'm sure you expected to hear this from a writer of a blog entitled Cash Flow Garden, but cash flow is still a big issue in this decision. You may reach retirement age with a small loan, a great interest rate and a short time remaining. The problem is that the short term requires high principal payments for a substantial period after you retire. For example, $90,000 at 4% with 10 years remaining requires a payment of $911 per month. In order to make these payments with income from a 5% after-tax investment, you would have to have $218,640 in investment capital. Keeping this mortgage represents a serious drain on your cash flow in the earliest years of your retirement, a time when you have the energy to make good use of your new freedom. If you keep the loan and repay it at the current rate, you will be 75 before it is paid off. Trust me, your ability to enjoy leisure time diminishes as you pass 70. You need the cash flow now and, if you can't find the money to pay it off, you should consider a new loan for a longer repayment period even if the interest rate is higher. For example, if 30-year rates are at 4.75%, a new 90,000 first mortgage would cost you 469 per month giving you an extra $442 a month to increase your retirement enjoyment. Increased tax benefits will increase this cash flow.

There Are Many Other Issues. None of these arguments may make sense to you and I would caution that there are no "one size fits all" recommendations. Hopefully, my comments will encourage you to take some time to study your situation thoroughly before utilizing some rule-of-thumb to make a decision that deserves a thorough analysis. To quote a long-time colleague of mine, Ray Benton, "Rules of thumb apply only to thumbs.