Money in the Middle

Sandwich Generation Talking About Money Up, Down and Across Generations

Is Being Mortgage Free in Retirement Right for You?

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Should you carry a mortgage into retirement?  Probably not.  That’s the recommendation from a new report from the Center for Retirement Research at Boston College called  “Should Your Carry a Mortgage Into Retirement.”   And it’s an issue many baby boomers and seniors are grappling with since housing was to finance their retirement.  it really requires a different look at how we think about housing .

 Pay off the mortgage before you retire was generally the rule of thumb for previous generations,  But housing price escalation and the promise ( false, we know now) that housing value would continue to rise kept many people buying up.

 Among households aged 60 to 69 in 2007, 41% had a mortgage.  And, 51% had suffieneict assets to repay their mortgage, according to the report.  But they chose not be “mortgage free.”

 So now that the housing market has changed what the right thing to do.  As with all things financial, it depends on your personal circumstances, but the report says that unless your after-tax return on risk-free assets such as certificates of deposits and Treasury bills exceeds the after-tax interest cost of the mortgage (a rare occurrence)– you’d generally be better off using the assets to pay down the mortgage.

 One of the points made in the paper is the risk retired households take by not paying off the mortgage and investing assets.  “If a household with a mortgage mismanages its investments, or over-estimates the rate at which it can decumulate those investments, it risk losing the house, it’s only remaining asset.”  A pretty dark scenario.

 Baby boomers in particular have a very complex relationship with housing values and financial planning.  Most have grown up with continually escalating home values and most recently have used those homes to underwrite their financial lifestyle.  There’s an interesting post on Boomers and Housing:  A Symbiotic Relationship Unravels that’s worth a read.

 So, if you are nearing retirement, or in retirement, and still holding a mortgage, but could pay it off, it’s worth examining whether continuing to pay that mortgage makes sense.  

 The days of a house serving as a piggybank are gone. It’s time for most of us to start thinking of our house as a home and figure out the best way to build it into our financial and retirement planning.

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Written by Laura Rossman

July 31, 2009 at 3:36 pm

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