Dear MarketWatch,
I am 68 years old and have been retired for three years. I realize that I am very lucky because I earn €12,000 per month after taxes. All this income comes from two separate government pensions and social security. We have excellent medical coverage and virtually no out-of-pocket costs.
Throughout our forty years of marriage, we have been a single-income household. We have $500,000 in savings and our 401(k). I have a very low mortgage rate of 2.25%, which is a $100,000 balance on a $600,000 house. We want to pay off the mortgage with money from our 401(k), which will make us debt free. We can easily survive on our monthly income and still save a significant amount of money every month.
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After paying off the mortgage, our 401(k) will remain in place until we need to start taking RMDs in four to five years. Our 401(k) is in a fund that mimics the S&P 500. I know this is a higher risk, but with our guaranteed monthly income I think we can accept this risk.
Are we following a good plan, or do you recommend something else?
Almost debt free
Related: I’m 51, make $80,000 a year and just inherited $170,000. I want to increase my pension savings, but how?
Dear almost,
It’s a great achievement to put that much aside, plus the income from two pensions.
Many people wonder whether they should pay off their mortgage in retirement, and the answer depends on whether they are financially able to do so without risking their future security. For some people, taking out such a large portion of their retirement savings to pay off the mortgage isn’t a good plan because they’ll use those assets to pay for some or most of their living expenses in their old age . The more money in your account you can grow with investment returns and/or interest, the more money you will have to live on later.
Your situation is a little more unique. You have healthy, guaranteed income streams, which is why you’re right to say you’re lucky. Taking $100,000 – or 20% – from your 401(k) to pay off the mortgage may not hurt your future security as much as someone without those pensions, but you still have to ask yourself if you really want to do that. Your interest rate is low compared to the current 30-year fixed rate, which fluctuates around 7%.
A mortgage isn’t the kind of “bad debt” that retirees should necessarily avoid in retirement, like credit card debt, and if the monthly payments don’t put a strain on your lifestyle from month to month, it won’t necessarily hurt to keep it . You also receive a tax benefit every year with a mortgage. Couples who are married and filing jointly are allowed to deduct the mortgage interest they owe up to the first $750,000 of that loan, if it is for the primary or secondary home.
On the other hand, by lowering your 401(k) balance you’ll help yourself later when it’s time to take required minimum distributions, since the balance affects how much you need to withdraw. Another thing to keep in mind as you assess your plans.
For some people, paying off a mortgage is a badge they can wear with pride. For others, it’s just one less thing to pay every month. If those are the only reasons you’re doing it, that’s fine, but at least weigh the alternatives of keeping more money in your retirement account to fall back on and a small tax break for the next few years.
Or you can also meet halfway: pay off half the mortgage with some savings, and pay more on top of your monthly bill, which goes only toward your principal. This allows you to withdraw less from your 401(k) but accelerate your payout date.
As for your asset allocation in the 401(k) – yes, it is risky to let your retirement savings only mimic the S&P 500 SPX without any other diversification. You are also right in saying that you can take more risk given your monthly income, but again ask yourself if you really want that, or if you could compromise with yourself?
You do have a substantial monthly income to rely on, but if you’ve worked so hard to amass that small fortune in your 401(k), you don’t want to take too much risk on it. You never know what the future holds, and you may need some of that money when you’re older.
If you want to maintain an aggressive position with your investments, why not divide them into segments, with one segment being a mix of conservative and aggressive assets that generate income but provide some protection from the market, and then another segment that is riskier? ? With such a strategy, you don’t have to worry too much if the market drops.
Whatever you decide, it sounds like you’re in a great place. In the meantime, keep track of your monthly savings habits.
