COUNTDOWN TO RETIREMENT
Pay Off the Mortgage? Maybe Not
Do the math, and then decide how much debt you can stomach. BY JANE BENNETT CLARK
Weigh return versus
risk. This calculation
RETIRING YOUR HOME LOAN MAKES
sense if your stomach churns at the
idea of making payments into old age,
or you aren't confident that you can
get a return on your money that beats
your mortgage rate. "Financial planning is not only about money-it's
also about peace of mind," says Jana
Davis, a certified financial planner in
Manhattan Beach, Cal. On the other
hand, moving heaven and earth to
write that last check may not be the
best use of your resources. Before you
decide, follow these five steps.
Payoff consumer debt. Given today's
interest rates, you're probably paying
less than 5% on your mortgage, compared with, say, 13% on credit card
balances. Paying credit card debt
gives you an instant return on your
money equal to the rate on your
cards-and you can continue to deduct the interest on your mortgage
(you get no such tax break on credit
card ba lances). "A mortgage is one of
the few good debts," says Ken Weingarten, a certified financial planner
in Lawrenceville, N.J. "It should be
the last one you pay off."
gage. With a traditional IRA, you'll
owe tax on the distribution, plus a
10% penalty if you take a withdrawal
before you're 591/z-and the distribution could kick you into a higher tax
bracket. With a Roth IRA, you won't
owe tax on withdrawals up to the
amount of your contributions (no
matter how young you are), but you
will pay tax and a penalty on earnings for an early withdrawal if you're
younger than 591/ z and haven't had
the account for five years.
Keep a reserve fund. Even if you don't
Fuel retirement accounts. The remain-
ing few years before retirement
represent your last chance to stash
money in tax-advantaged retirement
accounts. You'll waste that opportunity by not maxing out your accounts. In 2013, you can sock away
$23,000 in a 401(k) and $6,500 in
an IRA if you're 50 or older. An even
worse idea is withdrawing money
from your IRA to pay off the mort-
II
KIPLINGER 'S PER S ONAL FINANCE
05/ 2013
plan to touch retirement savings to
pay off the mortgage, be sure to have
enough in your emergency fund to
cover six months of living costs;
otherwise, you could end up tapping
retirement accounts anyway. Also be
mindful that you'll need income in
retirement to cover other expenses.
Draining investments to pay off the
mortgage could leave you house-rich
and cash-poor.
seems straightforward: If you're paying 4% on your
mortgage and you
have nonretirement
cash accounts earning less than 1%,
retire the mortgage.
But if you think you
can earn, say, 6% on
your investments
and your mortgage
costs 4%, keep the
mortgage and let
your investments grow-assuming
you won't kick yourself if your investment return takes a dive. "The
decision is not just about the math,"
says Ben Birken, a certified financial
planner in Chapel Hill, N.C. "It's also
about how you'd feel if the plan
doesn't work out."
Stay flexible. You could refinance
to a shorter-term mortgage, saving
thousands of dollars in interest.
The downside: You would incur closing costs and could also lock yourself
into a higher monthly payment,
depending on your current interest
rate. Consider prepaying your current mortgage each month instead.
"You can cut the years dramatically
and not have to go through the refinancing process," says Rocco Carriero, a chartered retirement planning
counselor with Ameriprise, in Southampton, N.Y. And if your finances hit
a rough patch, you can revert to the
lower payment. •