Interest rates have been below 5% for the past six years but now it looks like they might be inching up a bit but still in the 4% range so if you’re approaching retirement or in retirement should you pay off an existing mortgage or even consider taking on a mortgage?
This is not a Yes or No question… it depends.
It depends on whether you can get a better return on your money in an investment than what you’re paying in interest on your mortgage and whether you’d qualify for a mortgage interest deduction on your income taxes.
If your response is “I want to invest it in the stock market.” I’d say, “Pay off your mortgage and you’ll sleep better.” If on the other hand, you have an investment that you are confident that you’ll get a 8% or better return on and that return will come in cash flow, I’d say “Keep your mortgage or add to it and let Uncle Sam help finance your mortgage with a mortgage interest tax deduction.
Let’s play with the number a bit and see how they work out. You’re retired, you live in a $1.5 million home and you live in Mountain Brook, you have a good investment portfolio of over $1.5 million. You and your wife want to downsize and get away from the yard and house maintenance on a large older home, the $15,000 property taxes and the $3,000 a year home-owners insurance. Between your retirement income and Social Security, you have an income of about $200,000 a year.
You put your house on the market and sell it netting $1,400,000, you buy a $800,000 home is Shelby County, you take out a $700,000 mortgage with a 4% interest rate. You’re able to get your adjusted gross income down to $150,000 with your itemized deductions which qualifies you for a $9,240 mortgage interest deduction or a 1.3% return on your $700,000 investment; as good as a CD. Your property taxes will drop to $3,500 and maintenance will be a non-issue. I’d suggest that you use the remaining proceeds of $1,300,000 from the sale of your home to invest in an apartment building project or the renovation of a building in downtown Birmingham which should yield you 8% plus.
Why not the stock market; Apple, Google or Amazon. Do we know that markets are guaranteed or what’s going to happen? No. We don’t have a clue. They giveth and they taketh away, so we should put our money into investment that produce a predictable return and that we have some level of control over.
From there on we need to manage our liabilities? Our liabilities are those payments that we have to make every month and the liability side of the equation is more important than the asset side of the equation because it is easier for us to control.
By “liabilities” I mean more than mortgage debt. For example, near-retirees and retirees should consider selling all but one car, the capitalized cost of the average car is upward of $500 a month. If you start to reduce your liabilities, now you’ve got a much higher degree of control over your spending. If you have a higher degree of control over your spending, you’re less dependent on markets, so they can’t be as disruptive in your financial plan.”
Generally, the goal is to get your debt down as much as you possibly can, even at the expense of investing, particularly if you’re getting very close to retirement.
You want to get that debt off the balance sheet as quickly as you can, so that you are freed up to invest wisely and where you have some level of control. Warren Buffett said that he never invests in anything that he doesn’t understand, he told his good friend Bill Gates, “I will never invest in Microsoft, I don’t understand your business, I understand Coke and American Express.”
I understand real estate. I'm Changing the way luxury homes are sold in Birmingham.
Kerry Grinkmeyer is a real estate agent in Birmingham, AL specializing in the marketing and sales of luxury homes. Kerry's a retired financial advisor, he sold his firm, one of the largest in the Ameriprise Financial Advisor system in 2005 to his son, daughter and nephew. Now he's building one of the largest boutique real estate agencies that he'll eventually sell to his grandchildren. He the author of the children’s book The Christmas Web- A Family Christmas Tradition. Kerry competes in the Senior Olympics in to 50M, 100M and 200M dash as well as the 5k and 10k time trial cycling events.
Kerry offers you his financial background, knowledge of the community, love of business and family and energy to assist you in one of the most important financial decisions you'll make in your lifetime.
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