Working after FRS Retirement
Think Twice Before Paying Off That Mortgage
Paying off a home mortgage is often at the top of American's financial priority list, but how you payoff your mortgage can have long term effects on your future income in retirement. Today we will discuss the effects of using a retirement account to pay off a mortgage at retirement.
Many retirement accounts are funded and grow with pretax dollars. This can create a hefty tax burden if using a large lump sum from one of these retirement accounts to payoff a mortgage. This also eliminates the ability for those dollars to be used towards retirement income. As an example, let's imagine you have $200,000 that you owe left on your mortgage, which you are paying $1,900 per month and should have paid off in another 15 years. We will also imagine you have an IRA with $400k. If you were to use the IRA to payoff the mortgage, you would actually deplete more than half of the IRA to be able to do so after you are finished paying the income taxes owed on the withdrawal. If you file as a single filer, your marginal tax could be as high as 32% on the top end of the withdrawal, not including any other withdrawals or income for that tax year. This means paying off that 200k mortgage could potentially cost you over 250k.
Now, lets instead assume you were to invest your 400k in your IRA and earned an average rate of return of 6% annually. That would provide a gross return of $24,000 annually, or $2,000 per month. You could use this income to continue paying off your mortgage without depleting the principal amount of your IRA that would be able to last even after the mortgage is paid off 15 years into retirement.
How this example relates to your personal scenario will vary widely depending on your goals and lifestyle, but it is worth considering all financial options before paying a mortgage off too quickly in retirement. If you have questions about using your retirement accounts or investments to pay off your mortgage let us know and one of our financial professionals will be happy to help.
*This hypothetical example is for illustrative purposes only, and its results are not representative of any specific investment or mix of investments. Actual results will vary