Should I Pay Off My Mortgage? – (Q & A)

May 2020


Dear Rick:

I have taken the time, as I’ve been in quarantine too, as you say, “to get your financial house in order”.  I was shocked to find out what it cost me to live a month.  It was a lot more than I expected.  I started to make adjustments to reduce my cost of living.  In doing so, I have a couple of questions.  My first is related to my mortgage.  I am not sure if I should pay it off or not.  I currently owe about $125,000 and my rate is five percent.  I have about 16 years left on the mortgage.  I called about refinancing; however, because of my credit score, refinancing does not make sense.  Unfortunately, I’ve been laid off and I am currently collecting unemployment.  My boss has told me that some time this summer, I’ll be back to work.  I’m in my late 50s and I plan to work for at least another year-and-a-half.  When I turn 60, I am eligible to receive a pension that I received in my divorce.  If my house were to be paid off, the pension would more than cover all my needs.  In addition, I also have about $95,000 in my 401(k) plan and about $115,000 in a personal account at Vanguard.  I am a conservative investor.  I have another $30,000 between my checking and savings accounts and another $260,000 in a money market account. The money came from my divorce settlement and, it has been sitting in the money market account for about 10 years.  I’m either thinking of taking advantage of the low market and investing my money market money, or paying off my home. What do you think? In addition, when should I take social security?


Dear Wendy:

Congratulations on being productive with your time in quarantine.  I wish more people followed your example and took the time to get their financial house in order.  After all, we are stuck in our homes, so we might as well do something productive, and getting your financial house in order is productive.

In reviewing your situation, I think without question, you should pay off the mortgage.  Since you are not itemizing your deductions, you will get a guaranteed five percent after-tax return on your money by doing so.  Five percent after taxes is a very good return for a conservative investor.

The next issue is what you should do with the remaining money in the money market account.  Of course, you should make sure you have enough for an emergency fund, and my recommendation for you, being a conservative investor, would be six months of living expenses.  After you have established your emergency fund, you should consider investing the remaining money.  The money you would invest, along with your other monies, would provide you with a nice amount to establish a growth portfolio.  After all, you want to make sure you have a rising income the rest of your life; you cannot live on a shrinking income.

With regards to your Social Security, in the back of your mind, I would plan to take it at a minimum when you receive your full Social Security, at 66, but you also may want to give consideration delaying until age 70.  I certainly don’t think it makes sense for you to take Social Security at 62.  If you find you need additional money to cover your living expenses, before you collect Social Security, you can withdraw from your portfolio thus, allowing you to delay Social Security.  By delaying, you’re going to get approximately an eight percent return on your money.  Therefore, from a strategy standpoint, I would plan on delaying Social Security to receive your full benefits at age 66, or even better, delaying until age 70.

For most people, having your home paid off when you enter retirement is generally a good strategy.  Particularly under our new tax law, since the standard deduction has been increased substantially, most people are not itemizing their deductions.  Therefore, the tax benefit of having a mortgage is no longer relevant and the focus is economics.  In your case, if you pay off your mortgage you will get a five percent after-tax return without risk. I can tell you there’s no other investment that will accomplish this.  More and more people, particularly as they get closer and closer to retirement, should look at ways to pay off their mortgage.


Good luck!




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