Mortgage Question: He Says Pay It Off, She Says Why Now?
by , CFP®, President, Charles Schwab Foundation; Senior Vice President, Schwab Community Services, Charles Schwab & Co., Inc.
March 24, 2010
I'm 54 and my husband is 61. We have differing opinions on whether to use some of our savings to pay off our $200,000 mortgage. With an interest rate of 5.75 percent, our monthly payment is $1,167. We have about $750,000 in retirement accounts and roughly $250,000 in a taxable account. My husband feels we're close enough to retirement that it makes sense to reduce our expenses. I feel like we'd be smarter to keep growing our savings, especially since the market seems to be picking up. What do you think?
I've been getting a lot of mortgage-related questions lately as people grapple with the issue of whether it's wiser to reduce a debt or hang on to their lower-earning savings. The answer usually revolves around comparing the after-tax cost of your mortgage with your expectations for what you think you could earn on your savings and deciding which is most advantageous in the long run.
Your situation is a bit more complex. You and your husband not only have differing opinions, you're also at different points in your working life. At your age, it makes sense that you feel you have time to keep your assets growing. At your husband's age, it may make sense to be more conservative. So to me, the question is less about your mortgage and more about your combined long-term goals and plans for retirement.
But let's start by looking at your mortgage.
Put Your Mortgage in Perspective
A mortgage fits into your financial picture differently at different times in your life.
Early on, when you're paying mostly interest (which is tax-deductible), it can be a valuable part of your tax strategy. For example, let's say you're in the 28 percent tax bracket and your mortgage is fully deductible. In this case you'd really only be paying about 3.75 percent in interest. However, as you approach the end of the term, most of the monthly payment goes to principle—so tax deductibility becomes less of an issue.
Also, how big a burden is your mortgage payment in terms of your other debts and financial obligations? If it's not a problem now while you're both still earning, you might just as easily pay your mortgage off over time and keep your assets invested. This is especially true if you think you can earn at least as much as the mortgage is costing you after taxes.
But above and beyond the number crunching of mortgage cost vs. potential earnings, there are the bigger questions of when you want to retire, how much income you'll have, and how important it is to you both to be debt-free.
Determine Your Timeline
While it sounds as if you and your husband have been diligent about saving for retirement, have you had a serious discussion about what retirement looks like to each of you? Will he retire first? Will you continue to work or take early retirement? And if you're still working, will you be primarily responsible for household expenses, including the mortgage?
This is important because retirement can have an emotional as well as an economic impact. The two of you need to understand each other's individual desires as well as your mutual goals to make sure your expectations for the future are in sync.
List Your Retirement Expenses and Income
Even if you decide full retirement is still years off, a little pre-planning now can go a long way. Here are some things to consider:
- Your annual spending needs. (Remember, even if you pay off your mortgage, other costs such as travel or health care may go up. It's safe to assume you'll want basically the same yearly income in retirement that you're living on now.)
- Your retirement income from sources such as Social Security, pensions or real estate. Also carefully analyze the best time to start taking payments; by delaying your start date you can get a bigger check (but obviously for a shorter amount of time).
- How much additional income you'll need from your portfolio. As a conservative guideline, if you want to plan for a 30-year retirement, plan to withdraw no more than 4 percent of your portfolio’s value per year.
Looking at these numbers may actually help you with your mortgage question. For instance, $1,167 a month may not seem like a lot when you're working and earning an income, but can be a big burden when you're living off your assets. Also, if your portfolio isn't large enough to realistically produce the additional income you'll need, your current focus should be on building it rather than reducing it now with a big mortgage payment. Thankfully, you’re still young enough to continue to save.
For some, however, being debt-free in retirement overrides everything else. And that may be the root of your husband's concern. Ultimately, the two of you need to agree on how important this is—and how best to achieve it in a time frame that works for both of you.
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