Reader’s Question:
I’m 59 and recently had to retire and go on disability.
I’ve always made a good living, been a great saver, and a careful, conservative investor. (The only debt I carry is my $200,000 mortgage.)
The positive in all this is, that, over the course of my career I’ve managed to sock away about $2 million into retirement and brokerage accounts.
Should I pay off my mortgage? (My broker told me to keep the deduction.)
~Michelle M.
Answer:
Michelle, first, I’m sorry your health has forced you to retire.
If it’s any consolation, we see similar situations with clients all the time. In fact, around 50% of all people are forced to stop working (usually due to health issues) earlier than they’d planned.
To begin with, I’m going to advise you to ignore the advice of your broker.
Based on what I gather from your question, I feel pretty comfortable recommending that you go ahead and pay off your mortgage.
There are a lot of reasons why, but here are the high points.
You’re a conservative investor.
When someone says they are a “careful, conservative investor,” based on your age, I naturally assume you’ve allocated a good-sized portion of your portfolio toward very conservative investments.
And that means bonds.
A few things: First, whatever the total, with bond interest rates being what they are, you’ll come out ahead just by saving the amount of interest you’re paying on your loan (let’s assume 4%).
Second, it’s not as though you’re losing $200,000 out of your investments, and the only “upside” is that it eliminates a large monthly expense (along with the black hole that is the monthly interest rate portion of the payment).
You’re actually investing $200,000 in an asset that is appreciating, and, depending on your market, possibly doing so at a faster rate than even your less-conservative investments. (Remember, you can always re-borrow the money in a pinch.)
Third, liquidity is not a concern.
If you had, say, $500,000 in savings, then I might actually advise you to refinance your mortgage out 30 years so you could lower your monthly payment to the bone.
But you still have disability income, you have ample savings, and so you should still easily be able to live off the income from your investments.
With this being your only debt, you are actually improving your liquidity by ridding yourself of the monthly albatross that is your mortgage payment.
You’re retired.
I understand how strange it must sound, but you’ve retired from full-time work. We like to say, “Money that is not going out is the same as money coming in.” We advise our clients to, whenever possible, enjoy the peace of mind, security and freedom of living mortgage and debt free.
Now, not only can that mortgage-payment-money be directed elsewhere (even invested), but nobody owns you.
Who’s advising you?
In the past, whenever I heard that a broker had recommended that a client keep their mortgage, maybe half the time it was because that broker just wanted to keep getting paid to manage the money.
Simply, some professionals dispense advice that’s not in the best interests of the client, which is why you should only agree to work with a full-time fiduciary.
Which brings us to the last reason you should pay off your mortgage:
The new tax law.
You sound like an “itemized deduction” type-of-person. But, unless you donate heavily to charity (which is but one consideration), the new tax law has nudged most of us into the land of the standard deduction.
Quickly, the standard deduction is basically a flat-amount reduction in your adjusted gross income. It’s faster and easier (than itemizing), it’s just about double what it used to be, and it will likely go up year-after-year to account for inflation.
The new law capped deductions for state and local taxes at $10,000, which is (obviously) less than the new standard deduction thresholds of $12,000 (for individuals) and $24,000 (for married couples).
In short, you just lost probably your biggest incentive to keep carrying a mortgage.
Conclusion
You’ve just been dealt a bad hand. But the positives in all of this are, that in spite of the challenges of becoming disabled, you now get to reap the benefits of your lifetime of good financial habits.
We see a lot of people in their early 50s who are just kicking their “saving for retirement” mojo into high gear, and who are forced to stop working well before they are financially ready.
Circumstances such as yours, though unfortunate, are softened (I hope) by the undeniable fact that you’ve done a tremendous job of preparing for this moment.
For that, congratulations!
And for readers who might be saving some, but not as much as they could, I’ll simply paraphrase Ernest Hemingway, and say: Do not ask for whom retirement tolls, it tolls for thee.