Many financial planners advise clients over 55 to pay off their home mortgage so they can live debt-free after retirement. But what if you must draw down savings to wipe out your home loan? Then your choices get much tougher, says Thomas J. Casey, a veteran financial adviser.
"After you retire, you won't want all your money in the ground in real estate. That's the downside of pre-paying your mortgage from your limited savings," says Casey.
An alternative to mortgage pre-payment is to refinance your home loan to lengthen the term and thereby reduce your monthly post-retirement housing costs.
"The upside of refinancing is that it gives you predictably low monthly payments, which is a strong positive for retirees on fixed incomes. But the downside is that you'll pay much more interest on a longer-term mortgage and you won't free yourself of that debt for many years," Casey says.
"The fees for refinancing are substantial. Because of that, it's important to be very sure you'll be staying in that house for at least five to seven more years," Casey adds.
Eric Tyson, co-author of "Personal Finance for Seniors for Dummies," urges those over age 55 to carefully think through any potential decision about real estate.
"If you make a major financial mistake during this time in your life, you'll have much less time to recover from your error," Tyson says.
-- Begin with an analysis of your full financial picture.
Before you retire, you need a spending plan that documents your current expenses and helps you closely estimate your income versus living costs for future years," Casey says.
In the first few years of retirement, he says most people spend roughly the same amount as they did during their working years, though their medical expenses usually rise. But by their mid- to late 70s, however, retiree living costs tend to decline, as interest in travel and entertainment start to taper off.
One way to develop a comprehensive spending plan is with the help of a financial adviser. If you go that route, Tyson recommends you choose an adviser who's compensated on a fee-only basis, meaning the planner wouldn't receive commissions by selling you stocks, bonds or insurance products.
You can locate the names of fee-only planners through the National Association of Personal Financial Advisors (www.napfa.org).
Another option is to hire a certified public accountant to guide you through the planning process. One way to find a CPA who specializes in personal finance is through the American Institute of CPAs (www.aicpa.org). This organization maintains a list of CPAs who've earned the "personal financial specialist" (PFS) designation.
-- Reduce your outlays for financial planning by doing prep work yourself.
The first step in developing a financial plan is to track your current spending patterns. You need to know how much it costs you to live, both in terms of mandatory costs (such as out-of-pocket health care expenses) and discretionary outlays (such as restaurant tabs).
Unless you routinely track these numbers (on paper or with a specialized personal finance tool, such as Quicken), assembling these data can be time-consuming. To avoid paying an adviser to assist with this grunt work, Tyson suggests you scrutinize your account statements and do these tabulations yourself before going to see the planner.
An online retirement calculator can be another handy tool. Tyson recommends the free online calculators available through such investment firms as T. Rowe Price (www.troweprice.com), Vanguard (www.vanguard.com), and Fidelity (www.fidelity.com).
Such calculators can help you estimate how much money you'll need to cover your expenses in retirement.
-- Don't overestimate your home's appreciation potential.
It's true that since the post-recession economy started improving, residential values have gradually risen in many areas. But in most neighborhoods, the upside potential for real estate remains limited. Because of that, Tyson says it's unwise to stake your financial future on the notion that you could fund your retirement by selling your house for a big profit and then moving.
"Of course, it's psychologically comforting to pay off your mortgage before retirement. But it's also true that you'll need probably need much or all of your savings to get you through your retirement years," Tyson says.
-- Don't forget your lifestyle preferences when weighing financial decisions.
Through the years, Casey has noticed that his clients vary widely in terms of how they wish to live in retirement. For example, some intend to pursue expensive hobbies and travel abroad in luxury. Others are happy with home cooking and inexpensive camping trips with their grandchildren. Most plan to stop working entirely, but many intend to work part-time for as long as possible.
Why are your retirement lifestyle expectations relevant to your mortgage planning? Because your living expenses, along with your income levels, can be a major factor determining how much you could afford for mortgage payments.
"In your prime retirement years, you don't want to shortchange yourself just for the satisfaction of having a paid-off home," Tyson says.
(To contact Ellen James Martin, email her at email@example.com.)