Whether or not to carry a mortgage into the golden years of retirement is a highly debated topic among seniors and financial advisers. Sure, eliminating debt as significant as a mortgage is a great goal – but is it the best option for all retirees? Depending on the circumstances, carrying debt into retirement may be the wiser financial decision.
Perks of Having a Mortgage in Retirement
Higher Annual Rates of Return: Clearing up mortgage and owning a home is often a sound investment decision. However, the annual rates of return from home equity (residential real estate) are typically single-digit. From a financial standpoint, the logical strategy would be to take out a home loan and reinvest the funds in a diversified portfolio of securities – which historically perform better in the long term.
Reduced Costs: Aside from the increased investment opportunities, interest charged in mortgages is tax-deductible – leading to lower costs and a better return on investment. This deduction is only available on itemized tax returns.
Investment Diversification: It’s never a good idea to put all your eggs in one basket. With this in mind, home equity from a single property is an undiversified investment – and it exposes the owner to substantial risk.
The Downside to Having a Mortgage in Retirement
Diversify But Don’t Be Afraid of Risk
Increased Risk Exposure: Despite the obvious financial benefits of having a mortgage through retirement, retirees increase their total asset exposure to “sequence risk” (the danger that the timing of withdrawals from your retirement account will damage its overall return). Retirement is arguably the worst time for an investment portfolio to underperform. This concern is especially real when the fixed mortgage interest payments are pitted against variable investment returns.
Additional Financial Complications: Retirement is a time to wind down and enjoy the finer things in life. Therefore, having a mortgage in retirement, reinvesting the cash in diversified portfolios, and keeping up with the interests/rates of return might deter some seniors from taking out a home loan.
To carry a mortgage into retirement or not? This question lingers in every retiree’s mind. Whereas perks such as increased income to enjoy retirement sound lucrative, it’s not a straightforward decision. Typically, the returns from the investment portfolio must surpass the total cost of the mortgage. To ascertain this, a retiree should determine their tax bracket, creditworthiness, the impact of the home on net worth, risk level, and other financial factors that are specific to an individual’s situation. In a nutshell, it’s a personal decision that should be guided by informed financial advice.
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