Many people approaching retirement consider where they will live during their retirement years. Relocating to a more affordable or comfortable area could be an important part of your retirement lifestyle planning. Even if you plan to remain in your current home, however, your family nest egg will be influenced by your home financing.
Cash vs. Mortgage
Different schools of thought exist about whether it’s best to pay off your home and live debt free or carry a mortgage during your retirement years. It seems like a simple decision, but several factors complicate this decision. Further, there isn’t a one-size-fits-all answer to this question. Depending on your personal retirement lifestyle planning goals and your current situation, one of these options will likely be more advantageous than another. Your financial advisor can help you sort out the ramifications of whether to pay off your mortgage, carry a loan, or consider a reverse mortgage.
Let’s take a look at these options.
Mortgage Interest Deduction
Most retirees find that they have few if any tax deductions left. Children have grown up, so you can’t count them as dependents anymore; you’re not funding your 401(k) or 403(b), so you can’t deduct your contributions; and former business owners can no longer write off business expenses.
Therefore, if you’re in a high net worth tax bracket, you’re in need of some tax deductions. Mortgage interest can fit the bill. With mortgage interest rates still at historic lows, it makes sense to many retirees to mortgage their homes in order to claim the mortgage interest deduction on their taxes.
Debt-Free Peace of Mind
On the other hand, some retirees feel that the peace of mind that comes from being completely debt free is worth more than any tax deduction. Without a mortgage and the long-term interest expenses accompanying the loan, many retirees feel a sense of relief.
Additionally, money that would have gone toward the interest on your mortgage could be spent on investments that balance out the mortgage-interest deduction on your taxes. Your accountant or financial advisor can help you to run the numbers and find out which option will be more beneficial in the long run—but don’t discount the psychological benefits of entering retirement without a mortgage hanging over your head.
Reverse Mortgage
Don’t forget to consider a third option in your retirement lifestyle planning: a reverse mortgage. A reverse mortgage gives homeowners a loan against the equity they already have in their home. Lenders give homeowners a lump sum of cash, monthly payments, or a line of credit. In some cases, homeowners can receive a customized combination of all three forms of payment.
Homeowners considering reverse mortgages will want to think about how they will use the equity money they receive. Some people end up using this money for home improvements, college tuition, or other expenses they hadn’t originally considered in their retirement lifestyle planning. Make a plan for how you will handle unanticipated expenses in the future so you don’t draw down your equity too quickly.
Decide What's Right for You
Smart retirees do plenty of research as they make decisions such as whether to pay off their mortgages, claim their mortgage-interest deductions on their taxes, or assume reverse mortgages. After you’ve educated yourself and discussed the decision with your financial advisor and other trusted advisors such as your CPA and mortgage specialist, trust your instincts.
To speak with a Wealth Manager about your own personal situation, contact us at WrapManager. Call 1-800-541-7774 to talk about running through various scenarios and creating a plan that will help you achieve your own personal retirement goals.
Learn more about how WrapManager can help you with your retirement planning.
To the extent this presentation includes any state or federal tax advice, the presentation is not intended or written by WrapManager, Inc. to be used, and cannot be used, for the purpose of avoiding federal tax penalties. WrapManager, Inc. does not advise on any income tax requirements or issues. Use of any information presented by WrapManager, Inc. is for general information only and does not represent tax or legal advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.
