Why a Financial Plan Is Essential
Chapter 2 discussed how a financial planner might be of assistance if you are preparing to borrow for the first time, but it's also good to consult an expert about balancing your debt level with your plans for retirement. The so-called Sandwich Generation — individuals with kids still in the house and elderly parents who need care — are particularly susceptible to debt trouble. Consider what they face:
Kids preparing for college, in college, or returning home after graduation
Retirement savings inadequate to the task
Parents with health issues
Need to pay for health issues of their own before Medicare kicks in
Some families facing particular stresses in those areas find it particularly tough to avoid borrowing.
Seniors are a target for various scams — one might be mortgage insurance or mortgage disability insurance. Talk to your financial advisor about appropriate insurance options for your age or circumstance.
Mortgage debt is actually a very important part of the whole retirement discussion because not everyone is planning to have the same retirement their parents had. Many people want to continue working at their current job (if they have that option), start a business, or change careers into a field that may not pay as much as the one they left. Add these income-related factors to various pressures faced by today's over-fifty set, and debt overall actually does become a very important part of the picture.
It's one of the most important questions you should ask yourself as you near retirement age, even if you don't plan to quit working. Many people feel a sense of satisfaction in paying off a major debt like a home. But since mortgage debt is a particularly different animal than most debts you face, here are some factors you should consider:
Can you afford to take the tax hit? As comfortable as it feels to have that monthly payment out of the way, the mortgage deduction is a significant break on your taxes. Say, for example, that you're paying 7.5 percent on your mortgage. That means you're saving 7.5 percent on the principal of the loan you're paying over the term you're paying. If you pay off your mortgage, your tax bill will go up considerably, and you won't have extra money in your pocket to invest defensively — you'll have handed that to the bank.
Consider the lost investment advantage. If you give the bank whatever it takes to go away, whether it's $50,000 or $100,000, that's money you won't have to invest on your own. As a result, you lose the potential for even greater returns than you're making on your mortgage deduction. Granted, the stock market is not a sure thing, but keeping all your money in your home is simply not a very good idea.
If you do need money, how easy will it be to dump the house? Granted, slow real estate markets are a problem whether you own the house or not if it's time to sell. But again, it's wise to consider whether you want your money tied up in the stock market or in real estate.
You really need to consider your income going forward. If you're going to continue to work and make a reasonably good salary, and you're not planning on tapping your retirement accounts any time soon, it might make sense to hang on to your mortgage a little longer for the protective tax benefits.
With financial lives more complicated than ever, it really makes sense to get some advice about paying off a mortgage in your later years. If you have money set aside that can be invested shrewdly while remaining available to pay off the property in an emergency, that might be a desirable situation based on your circumstances.
As you near retirement, it may make considerably more sense to consider what you can do about nondeductible debt, particularly credit card balances you're carrying and home-equity lines with balances over $100,000. The age of fifty should be a trigger point for revising your relationship with debt while maximizing investments and insurance options to guide you into the potentially expensive end-of-life years.
It's time to learn to live without revolving credit cards except in emergencies and put a stop to any borrowing you're doing against home equity unless your situation is dire. Think of this as the last debt rescue you'll be able to do for yourself — no further bailouts with convenience checks, home-equity borrowing, or more credit cards.
Did you know you could join AARP before age fifty? The American Association of Retired Persons is a great retirement-planning resource no matter how young you are. AARP helps you think about other typical lifestyle issues as you get older — health, care-giving, paying your kids' college tuition, relationships, and travel. To find out more, go to
It's so important to understand how many financial issues interlock when you're thinking about retirement. What you do with your cash — whether you use it to pay off your mortgage or redeploy somewhere else — is critical. You need to be thinking about issues like these:
Consider what your health-care coverage will cost now and in the years before and after Medicare. There is more evidence each day that private health-care coverage as well as what you're going to be able to access through Medicare (after age sixty-five) will be uncertain. How closely you watch that picture and what you're doing with your various assets now will affect how well you do in this area.
Think about long-term care. Again, what is this issue doing in a book about mortgages? A stay in a nursing home isn't covered by insurance, and costs currently average $60,000 a year. How you handle the debt and equity on your home may come into sharp focus if you have to pay for this expensive item. Everyone wants to dream of a healthy life until their last breath, but that's not very realistic. People typically downsize their property as they get older so they can deploy assets toward savings, long-term-care insurance, or other protections for their later years. You need to think about this.
