Hardly a week goes by that I’m not asked the question: “Should I pay off my mortgage before I retire?” The answer, of course, depends. On math. On your situation. On your personal preferences. Let’s look through some of the key variables to consider and then I’ll tell you what I’m doing with my house (spoiler alert: I’m a big proponent of retiring debt free) and give you some tips on how to retire your mortgage early, should you choose to do so.
Variables to consider
Interest rate. What is the interest rate on your mortgage? If you buy a $250,000 home and have a 30-year mortgage at a rate of 4%, you’ll pay $179,674 in interest over the life of that loan. That same loan at 6% would cost $289,595 in interest, about $110,000 more. The higher your interest rate, all else being equal, the more incentive there is to pay it off sooner.
Other debt. Mortgage rates are typically lower than rates on other forms of debt like credit cards or car loans. If you look strictly at the math, it makes sense to pay off your higher interest rate loans first. If you carry a credit card balance or car debt, focus on those first. Once those are gone, you can target your mortgage.
Investment alternatives. Your house is an investment. Whether you use available cash to pay it off will partly depend on the other investment opportunities you have for that available cash. If your mortgage is 4%, but you have another investment opportunity that yields 8%, it might make sense to hold off on the house and invest the cash at the higher rate. Just keep in mind that paying off your house offers a guaranteed return (the interest disappears), while alternative investments likely do not.
Income sources in retirement. Think about your income sources in retirement. Social Security. Pension. Income from your investments. Add that up and then compare it to your retirement budget. Is there enough there to easily service your mortgage without limiting your other plans for retirement? If so, carrying a mortgage in retirement might not be a burden. If not, it might make sense to pay it off early.
Nest egg. Are you on track with your retirement savings? Are you maxing out your 401k and IRA contributions each year? If not, focus on those things first and then, if you still have some extra cash, consider paying down your house second.
Peace of mind. The decision to pay off your house isn’t entirely numbers based. I’ve had plenty of clients who could justify carrying a mortgage, but they paid it off anyway because they wanted the peace of mind of being debt free. I’ve never had a single client tell me that they regret the decision to pay off their house.
How long will you live there? Do you plan on downsizing to a different house or moving somewhere else in retirement? If you only plan on being in your current house for a few more years, it might not make sense to pay it off. If you plan on being there for a while, however, owning it outright would probably be best.
Tax considerations: Many people argue against paying off your house because of the “tax benefit.” Recent changes to the standard deduction make this argument less compelling, but even before then, I think this argument didn’t hold water. Consider a person in the 20% tax bracket who paid $10,000 in interest and got a $2,000 deduction. They paid $10,000 to get $2,000. Better to pay it off, spend a little more on taxes and save the $10,000 in interest.
What I’m doing and why.
As you’ve probably guessed (both from this article and others I’ve written on debt), I’m paying my house off early. I thought through the math, but to be honest, that was secondary. The three primary drivers of my decision are:
- Peace of mind: I sleep better when I’m debt free.
- Security: Debt adds risk and reduces cash flow. Both are bad for retirees.
- Priorities: According to the Employee Benefits Research Institute, the average retiree spends 40-45% of their budget on housing. I have other plans for that money! (For more, read The benefits of an extravagantly modest lifestyle)
A few tips to pay it off early.
Below are a few strategies I use:
- Set a goal and re-run the amortization schedule: If you have 7 years until retirement and want to have the house paid off by then, re-run your loan amortization for 7 years and figure out how much extra you need to pay each month to reach your goal.
- Make it automatic: Once you know how much you need to pay each month, make it automatic. Saving in your 401k is easy because it automatically comes out of your paycheck. Set up your extra principal payments to do the same thing.
- Refinance: Rates are still historically low. If you haven’t refinanced in a while, call your bank to see if it would make sense. Just don’t refinance into another 30-year loan. Keep the payback period as short as possible so more of your payments go to principal.
- Stop escrowing: This is more of a mental trick. When I started paying off my house early, I got discouraged each month at how much of my payments went to taxes, insurance and interest. So I called the bank and asked them to stop escrowing. Yes, I still need to pay my taxes and insurance, but now those bills come separately. Most of my payments go to principal and I’m forced to save extra to cover the taxes and insurance.
- For more ideas, read How (and why) to retire debt free and Your biggest retirement expense (and how to get rid of it).
Have you ever wondered what it would be like to live in one of those newfangled senior living facilities that are popping up all over the place? I was curious too. So I moved into one. I have a friend whose company owns a number of these retirement centers and they had just finished building a new one called Aksarben Village in Omaha. Since it was new and not yet full, I asked him if they had room for a temporary resident. He pulled a few strings and before I knew it my name was on the door of room 217, I was getting my hair cut at the in-house salon and I was sitting down to meals with my fellow residents. How did it go, what are these facilities like, what are the pros and cons of assisted living and what can you learn from the experience if you ever need this type of care for yourself or a loved one?
Who’s the new guy?
“Hi, I’m Pat,” she said as I sat down beside her for lunch. She was friendly and had that gleam in her eye that immediately puts you at ease. She quickly introduced me to the others at the table, including Dick, Kris, Martha, Dee Dee and Alice. We spent that first meal talking and laughing and I got to know a little bit about each one. I heard about kids, pets, spouses and stories from back in the day. They knew I was writing an article about assisted living facilities, so I asked them what prompted them to move. Most gave two or three reasons, but a common thread throughout revolved around health.
There aren’t many certainties in life, but this is one: Your health is going to change. Your mental and physical abilities will look different at 70 or 80 than they did at 50 or 60. Sometimes the changes are minor and sometimes major, but about two thirds of us will need help coping with those changes. In the past, as abilities diminished, your choice was either a curtailed lifestyle (e.g. no driving, less cooking, etc.) supplemented by whatever assistance friends and family could provide or a move into a nursing home facility that was very expensive and provided way more care than you needed.
The basic idea of the new retirement living options is that they broaden the spectrum of help available. They provide a base level of services that cover issues most of us deal with as we age and then provide a laundry list of à la carte services so that people get help where needed while still maintaining their lifestyle and independence.
I learned all about these different levels of care during the check in process. At one end of the spectrum are independent living facilities. As the name implies, residents basically live independently (similar to renting an apartment), but the facility provides services like housekeeping, home maintenance, some meals, security and a number of other amenities.
Assisted Living, where I stayed, is next on the spectrum and provides much more involved care. You have your own apartment (equipped with things like zero entry showers and an emergency response system), weekly housekeeping, laundry services, access to onsite medical personnel, transportation to outings or appointments and three restaurant style meals per day in the dining room. In addition you have a personalized care plan based on an assessment completed at admission and then updated every 30 days. This personalized care includes things like medication management, breathing treatments, bathing, grooming, using the restroom, mobility, dressing, safety checks and help with things like the phone or email.
People who need more intensive or specialized care—such as those suffering from dementia or Alzheimer’s disease—can move into either a memory care facility or a nursing home. These facilities have specially trained staff and caregivers who are there to provide care 24 hours per day.
Many facilities (including where I stayed) recognize that people may need all three of these levels of care at some point, so they build them together into a sort of senior living campus. This allows a person or his/her spouse to move up to the next level of care when needed.
Amenities and Activities
These new facilities are definitely not like nursing homes of old. For example, where I stayed there was a large movie theater complete with popcorn machine and iPad controls that are connected to cable, Netflix and just about every other streaming service you could imagine. There was a banquet room, private dining rooms for when family comes to visit and a full service kitchen with chefs who were more than happy to take any special requests. There is also a workout room, a physical therapy room, billiard room, beauty/barber shop, chapel, library and an activity/craft room.
Residents put these facilities to good use. Each month the lifestyle coordinator releases a new activity calendar containing church services, workout classes, movie nights, political discussion groups, cooking classes and trips to places like museums, stores and local restaurants. Partnerships with community organizations provide additional benefits. For example, the Omaha Public Library rotates new books each month through the library based on resident requests and Hy-Vee does free delivery of groceries each week to any resident that orders them.
As you can probably imagine, these services are not cheap. The more care a person needs, the more expensive it gets. Independent living averages about $2,500 per month nationwide. Memory care and nursing home care are higher, averaging $6,000-$7000 per month. Assisted living falls somewhere in the middle with the median cost of care nationwide around $3,600 per month. Studio apartments where I stayed start at $3,500, but you could spend much more if you wanted a 2 bedroom, 2 bath unit. The monthly care plan can add additional costs to assisted living. Where I stayed, services are given a point value and any additional costs are based on the point total. For example, someone who needs 2 medication reminders per day as well as assistance with shaving and getting dressed would have a point total of 14, which would cost about $285 extra each month.
How to pay
Except in very limited circumstances Medicare does not cover any long-term care costs. Medicaid does, but to qualify, you basically need to be both sick and poor. Even then, the amount Medicaid provides is limited, so most private facilities have a minimal number of beds set aside for Medicaid residents. Because of that, those who want to live in these facilities will need the means to pay for it, which can be a major obstacle. Most of the people I talked to were covering the costs from a combination of personal savings and payments from long-term care insurance. Those policies can be expensive, but one month of care will usually cost more than one year of insurance premiums, so having a policy can make financial sense if you end up needing it. In some cases, adult children were also helping to cover some of the costs so they could have peace of mind that mom and dad were well cared for.
Pros and Cons
One of the first people I met when I arrived at Aksarben Village was Colleen. She is suffering from mild dementia which affects her short term memory, but was otherwise healthy, sharply dressed and a kick to talk with. She has six kids and we spent the better part of an afternoon talking about each of them. On the last day of my stay, I actually got to spend some time visiting with one of her daughters, Sara Wachter. Her perspective gave me some great insights into the pros and cons of assisted living facilities.
Prior to moving into assisted living, she told me that her mom’s dementia was causing problems like social isolation, missed medications and missed meals. Even with a big, supportive family the memory loss was creating issues that were impacting Colleen’s health, safety and lifestyle. Their gerontologist said it was time to make a move so they started exploring options. “Mom grew up in this part of town, so it was a good fit,” Sara said. It wasn’t without challenges, however. Finding out she had to leave her home was initially a shock, but hearing the news from the gerontologist gave it more weight and took the pressure for that decision off Colleen and her family. Giving up her car was also tough, but since the facility had transportation the kids thought it was for the best. Expenses were also a concern, but Colleen’s mother lived to be 104 and was in a nursing home, so Colleen purchased a long-term care policy years ago which has helped with the costs.
As Sara and I talked, we saw her mom come down to the front lobby and start chatting with other residents. Dick Loneman, the driver at the facility, was getting ready to take them for an afternoon at the Joslyn Art Museum.
“Mom has thrived since moving in here,” said Sara. “The things she couldn’t take care of were all of a sudden being taken care of by someone else. Now she’s free to enjoy life and doesn’t have the responsibility for all those day to day things that had become so challenging for her. It’s less stressful for us too, because we know she’s in good hands.”
Let’s take a poll. What do you think will be your biggest retirement expense? Travel? Healthcare? Plaid pants? Mai Tais?
Actually, according to a recent report by the Employee Benefit Research Institute (EBRI), you’ll likely spend the most (40-45% of your budget!) on housing. That’s right. The Casa. Good old home sweet home. Nearly half of your income will likely go to cover things like your mortgage, taxes, utilities, and maintenance.
For some reason this doesn’t sit well with me. Just like the argument for life insurance becomes less compelling as we age, it would seem to me that the argument for spending the lion’s share of your budget on housing becomes less compelling as well.
Yes, there was a life stage where it made sense to spend heavily on housing. You hadn’t saved much and needed to borrow. You needed space for a growing family. You wanted to be near good schools. A nice house was comfortable and conveyed a certain amount of status. But are those reasons as compelling in retirement?
After the EBRI report came out, most articles I read on the subject focused on how retirees could cover such a large expense. But what if you reframed the debate from “How?” to “Why?” WHY spend such a large portion of your income on shelter? Especially during retirement. Every dollar you spend on shelter is a dollar that you’re not spending on travel, hobbies, and other pursuits that provide meaning, purpose, fulfillment, and enjoyment.
Quick Note: I am NOT saying that having a nice house in retirement is bad. Some have their house paid for and it’s a low cost option. Some can totally afford a nice house without it impacting their other plans. For some, the house IS their plan (e.g. a place for kids and grandkids to gather, a neighborhood close to friends, a place to entertain, etc.). The only time where an expensive house might become a problem is when the costs associated with it prevent you from being able to afford the things you really want to do in retirement. If that’s the case, I think it’s worth considering alternatives.
With that said, I’d like to ask you three questions that will hopefully challenge your thinking on your house and just might lead you to pare back your spending on shelter so you can maximize spending in other areas that matter more to you.
Question #1: What would it take to pay off your house before retirement?
One way to reduce your housing expense would be to outline a plan to have your house paid off by the time you retire. You’ll still have expenses like taxes, insurance, and maintenance, but you’ll no longer be paying principal and interest on a loan. Here’s a post that will walk you through how and why to retire debt free. And if you want to play around with different payoff scenarios and run some amortization schedules, the app “Debt Free” is helpful and simple to use.
Question #2: Would your retirement be better if you made a conscious effort to downsize and simplify?
A few months ago I interviewed Joshua Becker of Becoming Minimalist (you can listen to the full interview here). We talked about ways that you can simplify life, minimize stress, and focus on what you really want out of life and retirement. One of those ways was to declutter your house and possibly even downsize to something smaller. This frees up time and money to focus on other priorities. If simplifying sounds appealing, check out the Intentional Retirement Pinterest Page where we have boards for things like cooking for two, tiny houses, and the art of simplification.
If you want to go one step further, I personally think it’s worth at least asking if homeownership still makes sense for you during retirement. Taking care of a house is more difficult as you age. You don’t have the same space needs. It ties up a huge chunk of your nest egg. If you compare owning vs. renting, you might find that owning is not the “no-brainer” that it was during your working years.
Question #3: What if you redefined status in retirement?
Let’s be honest. Our culture confers a great deal of status based on things like homes and cars. It’s easy to get sucked into that game. Especially when banks are more than willing to put you in debt up to your eyeballs so you can make a good showing for the neighbors.
What would happen if we started to buck that trend? What if, instead of the currency of status being “stuff”, we started to make it travel, purpose, time with family, happiness, and freedom.
A year or so ago I read about a couple living in California who spent about $7,000 per month on housing, cars, groceries, eating out, entertainment, and vacations. They wanted a bit more adventure during retirement, so they sold the house and cars and hit the road with the goal of extended stays in interesting places for the same or less than what they were spending in California. They stayed several months in London for $6,800 per month. Florence and Paris were a bit less at $6,050 and $6,550 respectively. Buenos Aires was a comparatively modest $4,400 per month and Mexico was practically a bargain at $3,450 per month.
Is this for everyone? No. Should we do those things simply for the status associated with them? Definitely not. Climb the mountain so you can see the world, not so the world can see you. But if we’re going to admire people for something, we could pick worse criteria than looking up to those who live a full life.
Bottom line – think through what’s important to you during retirement. What do you really want to do? Once you have that list, invest heavily in those things. If your house is on the list, great. If not, don’t allow it to consume most of your resources at the expense of everything else on your list.
Photo by Joe Hearn.
“Should I buy long term care insurance?” I get asked that question at least once a week. As you prepare for retirement, I’m guessing that question has crossed your mind a time or two as well.
Well, you’re in luck. I do my best to provide useful resources for my readers (who, like those in Lake Wobegon, are all strong, good looking and above average), so I called one of the country’s foremost experts on long-term care and asked her if she’d be willing to spend some time educating us on the ins and outs of this important area.
She agreed and we scheduled a conference call for June 12 at 11:00 a.m. Central Time. You’re all invited to attend. The first part of the call will be informational and then we’ll reserve time at the end for Q&A. The purpose of the call will be to provide you with information and options. It will not be a sale pitch.
What we’ll talk about
- Preparing for when your health changes.
- How does long term care work?
- What is the range of care options available today?
- Who should consider buying a policy?
- How do Medicare and Medicaid factor into your decision?
- What types of things should you look for in a policy?
- When is the best time to apply?
- How can you protect yourself against the rising cost of care?
- How much will a policy cost?
- What percentage of people will need some form of long term care (spoiler alert: 50 percent of men and 75 percent of women)
Call in details
- The system I’m using has a limit of 96 people per call. Access will be on a first come basis.
- The information is free. Your only cost will be whatever your phone company charges you for a normal long distance call (sorry, but I can’t pick up the phone bill for everyone)
- The call will be June 12 at 11:00 a.m. Central. Call in 5 minutes early so we can get everyone situated and start promptly at 11:00.
- The call in number is (712) 451-6000.
- After calling the number, you will be prompted to enter your Participant Access Code. Enter 256869# and you will join the rest of us on the call.
- If you plan on sitting in on the call and would like a reminder, just email me at firstname.lastname@example.org and I’ll try to send out a reminder email a few hours before the call.
If you have a specific question you’d like to make sure we cover, email it to me sometime over the next week or so at email@example.com. Thanks and I hope to see as many of you as possible on the call.
Quick Note: The material on the call will be for general purposes only. For specific legal, financial or insurance advice you should contact your attorney or financial adviser. You can also contact the guest speaker on the call (Marlene Lund) at 402-896-9193 if you have specific long-term care questions. FYI, I refer clients to Marlene and she and I work together to help them with their long-term care needs. Because of that, if you end up doing business with Marlene, I will likely receive some sort of compensation. I just wanted to make that totally clear. Thanks.
Raise your hand if you’ve ever made it through a particularly stressful day at the office by doing a Google image search for “Tropical Island.” Me too. In fact, if I type the letter “a” in the search bar, Google automatically thinks I’m looking for “Aruba” (B is Belize, C is Curaçao, etc.). While I’m partial to the tropics, you can also practice this desk-top-escapism by Googling London, Paris, Sydney or any other destination that suits your fancy.
There’s just something about our fast paced lives that makes a simple life in an exotic locale sound pretty appealing. Which raises the question: Should you retire overseas? Before packing the snorkel and sun block and buying a one way ticket to retirement paradise, it’s important to do your homework and determine if the expat life is right for you.
No matter if you retire in the States or abroad, much of your planning will revolve around your retirement budget. It will influence how much you need to save, when you can afford to retire and what types of things you can afford to do.
One of the appeals of retiring overseas is finding a location with a lower cost of living than the U.S. This is particularly true recently as the poor economy has battered retirement portfolios. If you’re ready to retire, but your nest egg isn’t, one option is to delay retirement and give your portfolio a chance to recover. Another option would be to move to a location where your dollar will go further. The website Xpatulator.com will help you analyze how far your dollar will take you in hundreds of different locations.
Most retirees in the U.S. rely on Medicare to cover a majority of their health related expenses. Unfortunately, Medicare will not provide coverage for U.S. citizens living abroad. That can seem like a deal breaker to many, but there are alternatives to Medicare.
The most obvious option would be to self-insure. Healthcare costs can be significantly less in some countries and it could make sense for a healthy individual to pay for care out of pocket on an as needed basis.
Another option is to purchase local coverage (which can be very reasonable, if available) or buy an international health policy through a company like Aetna International or ihi Bupa.
If quality of care is a concern, visit Joint Commission International to learn about internationally accredited and certified health care organizations in the country that you are considering. Keep in mind that if you eventually move back to the United States and want to sign up for Medicare, you will pay stiff penalties for waiting past age 65 to enroll.
Unlike Medicare, your Social Security check can follow you beyond U.S. borders (assuming you don’t decide to retire to sunny North Korea or some other restricted country). Practically speaking, it may be easier to have your check deposited into a U.S. bank account and then access your funds using your ATM card abroad. This can help you avoid certain delays and fees if you try to have the check deposited directly into your foreign bank account. For more information, read Social Security Administration Publication 05-10137.
Calculating your tax liability can be difficult under the best of circumstances. Add foreign residency into the mix and things can get downright complicated. Generally speaking, you will be subject to the same income taxes abroad that you would be within the U.S. You may also be subject to state taxes if you are still considered a resident of a state because you maintain a house or bank account there.
If you get a job overseas to supplement your retirement income, you may be able to exclude up to $95,100 of that income from your U.S. tax bill by claiming the Foreign Earned Income Exclusion (FEIE). This can help you avoid paying taxes to both the U.S. and your new country of residence on the same income. Before moving overseas, meet with a trusted tax advisor who is experienced in foreign tax issues so you can minimize your tax bill and stay within the good graces of the IRS.
Many countries require you to obtain some form of work permit or visa before you will be able to legally work in that country. Keep that in mind as you consider where to retire. If possible, design your retirement budget so that it is not dependent on income from working. If you do decide to work, consider jobs where expats have a competitive advantage such as teaching English as a second language (ESL).
Buying property in a foreign country can be complicated. Some countries prohibit ownership by a foreigner altogether. Because of this, renting may be a better option. Either way, you should work with a local real estate agent and local attorney to make sure that any contracts are in order and that the transaction goes smoothly.
Retiring overseas isn’t for everyone, but it can be a great fit for some. If your dream retirement includes Panama instead of Pennsylvania or Uruguay instead of Utah, just make sure to do your homework and work closely with your advisers to ensure a seamless transition.
And don’t forget to send me a postcard!
I originally published a version of this article at www.fpanet.org.
If your kids are grown and moving on to the next stage of their lives, it’s time for you to begin thinking about the next stage of yours. For many, the empty nest years fall in that decade or so just before retirement. Because of that, it’s an ideal time to make adjustments to your finances and make sure you’re on track to meet your retirement goals. Here are 7 financial tips for empty nesters.
Adjust your insurance coverage
With your kids out on their own, it’s time to review your insurance coverage. If they’re no longer driving your cars, ask your insurance agent about removing them from your policy or getting a distant-student credit. Similarly, if they have health coverage provided by their school or a new employer, removing them from your policy will likely reduce your premiums. And don’t forget about life insurance. If your kids are through school and the house is paid for, you probably don’t need as much life insurance, but you may want to consider adding long-term care insurance. Meet with a trusted adviser to evaluate your circumstances and craft a plan that is appropriate for your current stage in life.
Re-focus your finances
Several studies have shown that the cost of raising a child from birth to age eighteen can run anywhere from $250,000 to $500,000. That’s a big chunk of change and causes many people to neglect their planning for things like retirement. With fewer mouths to feed and big expenses like college and braces out of the way, it’s time to re-focus your finances on you.
The good news is that you’re likely in your peak earnings years and retirement plan contribution limits are higher for people over age fifty. Take advantage of those higher limits by putting away as much as possible. The maximum 401(k) contribution for 2019 is $19,000 plus an additional $6,000 if you’re over 50. IRA contribution limits are $6,000 plus an additional $1,000 if you’re over 50. That means that a working, married couple could sock away an additional $320,000 in just five years simply by maximizing their 401(k) and IRA contributions.
Re-do your budget
A budget for a family of five looks drastically different than a budget for two. Take a hard look at your expenses and re-design your budget with your new circumstances in mind. I’ve already talked about insurance and savings, but don’t forget to consider things like cell phone plans, cable tv channels that only junior watched, the grocery bill, and memberships or subscriptions that you were covering for the kids. Once you’ve freed up some extra money each month, see point two.
Go back to work
If you stayed home to raise your kids, consider going back to work at something you really enjoy. Not only can a job replace some of the purpose you derived from raising the kids, but it can also increase the Social Security benefits you’ll be eligible for and provide extra money for savings or meaningful pursuits.
Selling the home you raised your family in can be difficult, but it might make sense if you don’t need the space or if you plan on moving when you retire. Even if you don’t initially downsize your house, work at downsizing your stuff, especially those things that you no longer need now that the kids are gone. Paring down your stuff will make the transition easier if you eventually decide to move to a smaller place or retire in a different state.
Downsizing can also help you unlock the value in your home. For many, their home is their biggest asset. If your house made sense for a growing family, but is overkill now that the kids are gone, moving to a smaller place could free up tens or hundreds of thousands of dollars for retirement.
Get out of debt
The typical empty-nester has about ten or fifteen years to go until retirement. That’s plenty of time to make sure your debt retires when you do. Retiring debt free can slash 20-40 percent off the amount you need to save for retirement. For more information, read my earlier post on how (and why) to retire debt free.
Review your asset allocation and retirement plans
As you get closer to retirement, you will likely want to adjust your investments to make your portfolio more conservative. Meet with a trusted financial adviser to make sure your asset allocation is appropriate and to track your progress towards retirement goals. If married, it’s also a good idea to talk with your spouse about your retirement plans and dreams to make sure you’re both on the same page.
As you can see, sending the kids out on their own can be a major transition, both emotionally and financially. By taking a few simple steps and being intentional with your planning, you can enter the next stage of life with confidence and purpose.