Dear MarketWatch,
I am 57, single, and have a $113,000 mortgage with a 3.75% interest rate. I have $240,000 in a Roth IRA, $120,000 in a deferred compensation plan and $270,000 in a savings account. My savings earn me little interest.
At age 62, I receive a pension of $35,000 per year. I plan to take Social Security at age 67. Should I transfer my savings to a high-yield savings account like Vanguard or put it in an ETF like SCHD so I can reap the dividends?
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Should I also try to pay off the mortgage?
Thanks for the advice.
Ready to retire
Dear preparation,
You ask an age-old but important question about mortgages and pensions, which I will address separately. There are many factors that determine where your savings should be parked, including your retirement goals and needs, your expected expenses in retirement, estimated inflation and interest rates, and so on.
I’m not recommending any specific funds in this column, but I do caution you against putting all your eggs in the same basket. While it’s great to have investments that produce dividends, you should always aim to diversify your assets, which is a much healthier way to invest, especially as you approach retirement age.
Consider having a separate savings account with six months to a year’s worth of expenses as an emergency fund. The typical guideline is three to six months of expenses, and tends closer to six months for people on one income. If you’re nearing retirement, it never hurts to put a little more into that account.
Categorize your savings into short-, medium- and long-term goals. Keep your short-term money in easy-to-liquidate assets, such as high-yield savings accounts, which currently offer interest rates of up to 5.3%. When investing money, make sure you have enough time to recover in case of a market downturn.
Paying off your mortgage
If you can afford to continue paying the mortgage after retirement, there’s no harm in keeping it, especially if the alternative is draining some of your savings to pay off the mortgage. You want to have as much savings as possible that you can rely on after you stop working. I gave similar advice to a 67-year-old reader with $57,000 left on her mortgage and $600,000 in savings.
The interest on your mortgage is relatively low, especially in the current time when interest rates fluctuate around 7%. Additionally, home loans aren’t considered “bad” debt like credit cards, at least not if you can afford it and haven’t taken on more than you can afford to pay off.
Emotions obviously play an important role in your decision. You don’t want to retire and be so stressed about a home loan that it affects your quality of life. But if it doesn’t necessarily bother you — and you have the income in retirement to pay it off as part of your other necessary expenses — it’s not the “wrong” move.
One option is to try to pay extra to your client. This means you may still have a mortgage when you retire, but the burden is lightened. And when you retire and pay your last mortgage payment, you’ll have extra money to play with in your golden years—and that’s a goal worth striving for.
Related: ‘My colleagues have 10 to 20 times more saved for their retirement’: I am 67 and have saved $100,000. I want to retire in three years. Can I do it?
