We still owe $46,000 on our mortgage — should we deplete savings to pay it off before we retire in 2021?

by Eren Rosa
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Dear Ms. MoneyPeace:

My wife and I will be retiring in 2021. The company I work for was recently sold, and because I stayed through the sales process – which actually took years – the old employer gave me a bonus. I put the money in savings because I did not know about my employment status. Then, unexpectedly, the new owner kept me on.  

issue is my wife and I disagree what to do with our savings. There is $50,000
now and we have $46,000 left on our mortgage. I want to pay it all off. She is
fearful that we will run into a large expense in retirement and not be able to
get a loan because we do not have jobs. She wants it in savings.

We will both collect Social Security, and she has a teacher’s pension, so our basic expenses are covered. I have a small 401(k) – just under $100,000 – if we need extras. I am 67 and she is 64. I keep telling her we will be fine. And everything I read says to pay off your mortgage before retirement. That is what my parents did. 

What should
we do?

Ready to Retire Ralph

Dear Ready to

First, let me commend you on talking with your wife about
this decision as well as for staying at your job when there was the anticipatory
stress of new owners. You earned that bonus. 

have changed, so what served your parents well may not be best for you. As
far as retirement planning, here are some expenses you need to reconsider:

Health insurance: After housing, health expenses are the largest expense in retirement. Part of that expense is unknown and dependent on good health. You do not mention any employee health benefits for retirement. Explore these with both of your employers. In addition, work your Medicare and health-care premiums into your retirement spending. Medicare isn’t free or automatic).

Income taxes: Before you do anything with that bonus, wait until your taxes are done for 2020. This added income may have boosted you into an increased tax bracket. This bonus from your former employer is taxable income. If enough taxes haven’t been taken out, you most likely will need to pay when you file your tax return.

 As a Certified Financial Planner, I have three concerns:

1. Your Social Security timing: Continuing to work or working part-time in retirement – even at your current employer — could let you delay taking Social Security and therefore receive a larger Social Security check each month. You can see what it means for you – and your wife — by logging onto your Social Security account. Explore your options, as they are not limited to both of you taking Social Security at the same time or starting a pension and Social Security together.

Read: Should I take a $1,913-a-month pension or a $445,000 lump sum?

Also: How much more will you get if you delay taking Social Security?

2. Your DIY style: When it comes to retirement, you and your wife are doing it once. Professionals deal with the nuances every day. Spend some money now on advice; even the best financial people I know also have their own objective professional. 

Do yourself a favor and consult an objective source of information: an accountant or financial planner or investment person you both trust. Plus, with the proper professional in room, you and your wife will have a deeper conversation about your fears and concerns. Then the professional can aid in creating a better plan around retirement life. 

For example, that $100,000 won’t
be $100,000 if the stock market drops or you run into some large expense. Over
the next 20 years, you may be dealing with everything from inflation to health
issues to home maintenance. All these variables need to be discussed as they
are crucial to your long-term plan. 

Some clients come to an impasse and need some help, like a long-married couple who came to see me. He was getting ready to retire and continually laid out the facts about all their sources of income in retirement for his wife. She was against him stopping work and reducing their current income.

When we met, I agreed with him on the numbers, yet, I asked a lot of questions, seeking to understand the wife’s concerns. It turns out that in the past he had been financially unfaithful — secretly giving money to friends and family. When he came clean, they had scrambled to get out of thousands of dollars of credit-card debt and personally recover from the deceit. No amount of facts would change her mind because she was worried about his spending, not the actual retirement.

From an emotional as well as practical side, a professional already on your side eases the ups and downs of financial life. Death is inevitable and losing a spouse is a reality for long-term couples, leaving the survivor overwhelmed and fragile. I have seen too many DIY retirees have no one to turn to when they are at their most vulnerable. Getting help now makes many aspects of life easier.

3. Clarifying basic expenses: How do you define “basic” expenses? Will your Social Security checks and the pension also cover the monthly mortgage payment? If so, paying off the mortgage may give you more financial flexibility with the regular monthly checks. There are always extras, emergencies and changes in life, including in retirement. However, don’t forget that most mortgages roll in insurance and taxes too. So when you pay off your mortgage, you will need to save money each month for real-estate taxes and home insurance. 

If basic expenses did not include the mortgage, than you must keep working and building more savings in the bank and more money into your 401(k). With the average life expectancy growing, you have at least 20 years of retirement to fund. There is a 20% chance one of you will live to be 95.

If you had more
cash and investments available, I would be on board with your idea. 

So no, I do not think you should pay off your home in full at this moment. No debt and owning a home outright are ideal at any stage in life, but timing is everything. So your wife is right and wrong about this point. Getting a loan in retirement is possible but the amount you receive may be lower or at a higher interest rate because you have less income. Having more in savings will address this valid concern.

Finally, consider applying now for a home equity line of credit while you are both working. With a fair amount of equity in your home and regular income, a small home equity line of around $20,000 should be easy to get. Though you may have to pay a small fee to apply, you won’t pay interest until you access it. Having this credit line will give you flexibility and a back-up plan should you suddenly need money in retirement. 

Peace and prosperity
to you,

Ms. MoneyPeace

CD Moriarty, CFP, is a columnist for MarketWatch and a personal-finance speaker, writer and coach. She blogs at Money Peace. If you’d like to ask her a question, click here.

Also read: Skip these ‘free’ sources of financial advice — they will cost you dearly

And: I’m retired, my wife isn’t — how should we pay off our $60,000 mortgage before she retires?

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