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When you’ve reached retirement age and are ready to kick back and take life easy, it's not a good move to put yourself in the stressful position of having to pay a mortgage. Whether it's for a new house or second vacation home, if you have the savings, many financial advisors say pay cash.
Mortgages increase risk at a time when it should be avoided. As you move retirement accounts from high-risk stocks to low-risk money market funds as you get closer to retirement day, it's just as prudent to avoid the financial risk of a mortgage at this time.
That said, there are some cases in which it might be advantageous to the retiree to assume a mortgage. The tax benefits come to mind first. Taking advantage of this may require some fancy paperwork with your retirement accounts, though. One advisor has recommended purchasing a higher-priced home and using the income from your IRA to pay down the mortgage. The individual approaching retirement age, either sells his or her current home or purchases a second home – one that is more valuable than the current home. The individual then increases the cash flow from his or her IRA or other retirement account to pay the mortgage.
This strategy works easily for those whose retirement savings have accumulated a value of $2 million or more, though. And, as this is not most of us, we should probably consider the advice of the Finance Guy, John Henry McDonald, at News 8 Austin who echoes those advisors warning of mortgages in the retirement years.
Take the very public example of Ed McMahon. Mr. McMahon was reputed to be worth over $200 million in real estate. He was still actively working into his retirement years and therefore was confident he could easily meet the mortgage payments on the $4.8 million in loans he was carrying.
Then he fell down. Literally.
After an unfortunate accident, in which he broke his neck, he found himself unable to work. A series of operations to repair the damage set him back further. Couple this with the national real estate market on its current downward spiral, and you have a recipe for disaster that any retiree can ill afford.
Mr. McDonald says the majority of baby boomers – 55 percent – believe they can keep working, and carrying a mortgage, well into their 70s. He advises those approaching retirement age to make every effort to pay down the mortgage – doubling up on payments if they have to. He recommends refinancing at age 55 with a 10 year adjustable rate mortgage and make large monthly payments – double payments if necessary – to pay it off by age 65. He suggests that it may be necessary to downsize your residence in order to have a mortgage that is manageable.
The bottom line here is, if you're not fabulously rich – and most of us aren't – it doesn't make financial sense to carry a mortgage into your retirement years.
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