HomeFinanceI’m 66. My mortgage is $250K and the rate is 3.4%. Would...
I’m 66. My mortgage is $250K and the rate is 3.4%. Would it be foolish to pay it off from my $770K investments?
“I don’t plan on taking Social Security until 70 and I will have one other small pension.” (Photo subject is a model.) – Getty Images/iStockphoto
I’m 66 but I didn’t buy a house until later in life at 52. I refinanced a year later to 3.37% (30-year fixed) and have $250,000 left on the loan of $330,000. The house is worth $750,000. I have no other debt. I’m still working, collecting one pension already and have not touched retirement savings of $770,000 (IRA, 401(k) and Roth).
I don’t plan on taking Social Security until 70 and I will have one other small pension. I live in the Northeast and it’s not a cheap area. At this interest rate, does it make sense for me to try to pay off the mortgage? I unfortunately never made extra payments, but I can start now. It would free my mind, but would it be foolish at this point?
Sitting on the Picket Fence
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If you left that $250,000 in the stock market today instead of paying your mortgage off, you would make roughly $967,000 in 20 years with a 7% annual return. – MarketWatch illustration
Your stock-market returns are higher than your mortgage rate. From a financial perspective, you are better off keeping the money invested. However, you have three choices (sorry to complicate things): (1.) pay off the mortgage, (2.) don’t pay off your mortgage or 3) pay off some of your mortgage to reduce your expenses.
This is a decision taken for peace of mind as much as for financial reasons, so you must decide what is most important to you. Your home’s value may fluctuate, but the bigger risk lies in the market. If you pay off the mortgage now, you would save $142,000 in interest over the next 20 years. In addition, you would free yourself of those mortgage payments.
If you left $250,000 in the market instead of paying your mortgage off, you would make roughly $967,000 in 20 years with a 7% annual return; with a 10% return, you’d end up with closer to $1.68 million. So the opportunity cost of paying off your mortgage in one fell swoop could be well over $1 million in lost returns. Those figures might help you make up your mind.
Treat this dilemma as an opportunity to create a picture of what your retirement will look like. What will your expenses be versus your income? Will you need to draw more than 4% from your investments? Do you have a modest lifestyle or do you wish to use your retirement to travel? Would you consider downsizing in the future? What about long-term care, if you need it?
A 100% exposure to equities seems like a high-risk strategy. You don’t say how much money you have in cash. For safer havens, as you age, consider shorter-duration bonds with a maturity of five years or less; mutual funds and exchange-traded funds; and Treasury inflation-protected securities (TIPS), which are inflation-protected bonds issued by the U.S. Treasury.
In uncertain economic times, Morgan Stanley MS cites possible upside in “value-oriented” and defensive sectors.” So-called defensive stock sectors include nondiscretionary consumer goods, utilities and healthcare. You could also invest a portion of any cash in gold futures, which passed the $3,000-per-ounce mark for the first time earlier this year and are now at $3,673.
The good news: You will have three sources of income when you retire — Social Security, a pension, and income from your investments, if you choose to keep all or part of that $770,000. Even if you had $500,000 in the S&P 500, withdrawing 4% annually and adjusting for 3% inflation, your portfolio would last 30-plus years with average market conditions (an 8% nominal return).
Delaying your Social Security until you reach 70 will give you more money in retirement. You will get your full Social Security benefit at full retirement age, which is 67 for anyone born in 1960 or after, and you receive a lesser amount if you claim between the age of 62 and 67. But if you wait until age 70, you receive roughly 8% more per year.
Some advisers say it can work out roughly the same whether you start taking your benefits at 62 or at 70 — it all depends on how long you live. Others advise delaying Social Security benefits as long as possible, especially if you expect to live a long life. If you claim on your spouse’s Social Security before full retirement age, your benefits may still be reduced.
It’s an issue that is continually debated. Researchers who published this paper last year in the Journal of Financial Planning concluded that their calculations “do not support the presumption that the vast majority of people who choose to start their Social Security retirement benefits before age 70 are making a mistake.”
“A person has to live to 89 for it to be beneficial to delay the start of benefits from age 67 to 70,” they wrote. “However, 77% of 67-year-old males die before 89 as do 65% of 67-year-old females. Age 70 is not the most financially rewarding age to initiate benefits unless an individual has a low discount rate and/or is confident they will live several years past their life expectancy.”
“There are admittedly nonfinancial considerations that may punish or reward the postponement of retirement benefits,” they added. “For example, people who fear that the government will impose more onerous rules in order to keep the Social Security system from going bankrupt may reasonably conclude that they should lock in soon-to-be grandfathered benefits.”
You have the biggest luxury of all in your retirement: choices.
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Previous columns by Quentin Fottrell:
I’m 67. My wife, 48, is financially illiterate. How do I teach her to manage our money? After all, I won’t be around forever.
‘He is increasingly angry’: My troubled son lives with me. How do I ensure he is financially secure after I die?
‘I am my mother’s caregiver’: My mom, 93, added my name to her retirement accounts. Will she qualify for Medicaid?
