Paying Off Mortgages (pension, move, state, relative)
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I'm less than three years away from being eligible to retire from my current job and I'm also retired from the military. I've accrued a nice nest egg in my 401K and recently met with a retirement benefits planner to help me develop a sound strategy utilize these funds after I retire. One option that he suggested was setting up an account to pay off my mortgage with funds from my 401K. He stated that I can commence monthly payments using this plan at age 59 1/2 without penalty but the funds would be subject to federal income tax. there is no state income tax in the state that I currently reside. Or I can wait until I retire at age 62 when my income will be much less and I'll be eligible for social security. The funds will still be subject to federal income tax but my liability will be much less because I won't be working. The balance of my mortgage is about $95K. Has anyone used this mortgage payment strategy themselves and if so did you find it beneficial? If not what are some of the financial and tax perils that I may be over looking? Thanks!
Mel
I've been retired for three years. I have a mortgage with approximately $83,000 balance. My PITI is $650/month (at 3.625 rate; I itemize, so the mortgage interest deduction slightly reduces that cost of borrowing). I COULD pay it off but have no plans to do so. My investments are doing okay although I realize there is no guarantee that this will always be so, but I have enough even in just I bonds to pay the payments or pay it off if need be. Even my Ibonds were making 4% for a while, though most aren't right now. Still got some at 4.18%. I don't want to tie up my money in the house. I've paid off houses in the past and it never really improved my situation dramatically. I think I am doing better by keeping the mortgage. It's low enough that cash flow isn't a problem.
I guess I don't really see how setting up a special account just for the mortgage would be of any benefit--to you anyway. Maybe the advisor gets a fee?
If you want or need to draw from your 401k, just have the money sent to your checking account. I rolled mine over to Vanguard after I retired. I have dividends from one IRA swept into a money market account and Vanguard will even withhold taxes from it for me.
why do they want you to pay off the mortgage ? it may not make sense if the rate is low enough and the money you would use is invested and doing well
Thank you for all of the feedback and suggestions. Paying off the mortgage was merely suggested as an option because my retirement annuity will be substantially less that my current salary. This option was suggested as a means offset my reduced monthly income while paying off the mortgage. The current balance of my mortgage is roughly 25% of the balance of my 401K. Unless the market tanks this percentage should shift significantly in my favor before my retirement date in 2020 as I pay off the mortgage and continue to contribute to the 401K. It was suggested that I open a separate fund specifically for the mortgage and maintain the rest in a growth fund as several of you have suggested. I have several options besides this. As stated I'm researching the pros and cons of each one. Thanks again.
I submit for consideration a minor correction . . .
Simple answer is to get a mortgage beforeinforming your employer you are going to quit.
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Great advice. Luckily my corporate office which would confirm my employment is on the other side of the country and they have no idea what my personal plans are. They only know I'm currently employed, have been for a number of years and what my pay is.
Another aspect of paying off one's mortgage in/before retirement is that getting a HELOC has become a complex and difficult process. Thus, if OP wants to keep funds available at a low interest rate, it would be better to NOT first put those funds into a mortgage.
I was thinking that I would use HELOC funds (perhaps 20-percent of my home value) - to help my daughter with a new home (rather than withdrawing high tax rate funds from deferred income funds). In the past, it seems like HELOC's were virtually a signature loan process (we have a paid off mortgage and 800+ credit rating).
Wow! - Was I ever surprised when I found that a HELOC has now become a 60-90-day process - requiring as much documentation and detail as a first-time buyer - and involving a higher than prime interest rate with very limited loan terms. (I decided to go another direction and avoid this hassle).
I have a HELOC with no balance and also didn't realize how difficult getting one had become. Any idea why?
^I don't know, but my guess would be the 2008 crash.
In 2011 I got a HELOC and it took months; so many in fact, that the expiration for the rate was about to expire. I sent them whatever they asked for very quickly and they still asked for more and more and more, which I sent in a timely manner.
And I had to keep nudging them...asking what was going on. It was ridiculous. Finally, I sent them yet another pile of information, and more that they didn't ask for and ended with a note stating that there wasn't anything else to give them except my first born child.
i so far have not found any in our area that will do asset based lending
Yeah, that is the problem, finding a lender willing and able to work like that. For us, all the bank cared about was that we had assets in the IRAs to cover two years of the automatic withdrawals I had set up three months previously. Once we closed on the house, I just stopped the automatic withdrawals.
I am grateful this conversation got started...we live in a retirement community (a Del Webb) and have friends here that are of TOTALLY opposite views...some are VERY vocal about putting very little down on their "retirement" home here and carrying a mortgage stating they "will never live to see it paid off, let the kids take that "hit" on their inheritance" while others have it paid in full and are happy not to have to "worry" about anything except the property taxes (which are HIGH here, but no state income tax so it all comes out in the wash I guess).....feeling that piece of mind is better than a monthly mortgage payment.
I can HONESTLY see the benefit of both ways of thinking. Grateful for dialog about both options.....
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