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TMFBro (< 20)

Don't like stocks or bonds? Pay off your mortgage

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August 19, 2009 – Comments (3)

I've blogged before about the benefits of a mortgage-free retirement. A recent Wall Street Journal article looks at the other side of the coin -- the drawbacks of retiring with a mortgage. Here are the key points:  

*Like all debt, a mortgage magnifies losses when prices go south.

*It's tough to refinance a house that has declined too much in value. I'll add: Seniors may find it particularly hard to get a new mortgage because they don't have jobs and the value of their assets has declined significantly.

*An interesting quote from Anthony Webb, a research economist at the Center for Retirement Research at Boston College: "A household that carries a mortgage and invests in the stock market is basically trading on margin."

The article also had some eye-opening stats, courtesy of the EBRI, comparing mortgage levels for the 65- to 74-year-old crowd in 1992 and in 2007 (the most recent data). Here are a few:

Percent with housing debt
1992: 18%
2007: 43%

Median amount of housing debt (in 2007 dollars)
1992: $24,609
2007: $69,000

Percent with debt payments exceeding more than 40% of income
1992: 4%
2007: 11.2%

 

Americans feel like they can retire if they have enough money. However, perhaps another way to look at it is: You can retire when you no longer owe too much money. 

Robert Brokamp is the senior advisor for The Motley Fool’s Rule Your Retirement service. 

3 Comments – Post Your Own

#1) On August 19, 2009 at 5:30 PM, outoffocus (22.75) wrote:

I've argued no mortgages in retirement for quite sometime.  The problem is you have ruthless so-called financial advisors telling retirees that if they pay of their mortgage they will no longer have the tax deduction.  That argument is completely bogus because 1. most likely in retirement you will be in a lower tax bracket which means lower tax benefit, 2. the mortgage payment itself is higher than the tax benefit recieved, therefore you "save" more money by not having to pay at all, 3. most retirees are paying mostly principle on their mortgage payments, further making the tax benefit negiglible.  The second BS argument financial advisors have is that retirees can take that money they would otherwise use to pay off their mortgage and make a better return in the stock market.  Yea tell that to all the people who lost 40% of their wealth last year.

Bottom line is, the less debt you have going into retirement, the better off you are.

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#2) On August 19, 2009 at 5:49 PM, ReadEmAnWeep (61.29) wrote:

I didn't know that people retired with mortgages. Seems really backwards to me.

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#3) On August 19, 2009 at 6:21 PM, Imperial1964 (97.77) wrote:

The way to wealth is just as much on the expense side as the income side.  Retirement is as much about not spending money as having it saved up.

Mortgages are just like any other expenses when it comes to retirement.  If you want your money to last you need to carefully manage expenses.

By the way, I paid off my mortgage shortly after turning 23 years old, before investing any money in stocks or anything else.  With no morgage payment it frees up a lot more money for both saving and spending.

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