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Let's Run the Numbers - Paying off the House for the Golden Years

Imagine that glorious day when your last child has completed their higher education and tears come to your eyes as you hear the words, “I got the job!” The period of long financial suffering ends. No more paying for cell phones, car insurance, medical bills, food, books, clothes, and everything else for your kids. 

After the wild celebration, you will probably find yourself wondering what to do with all that money.  Trip to Tahiti? New car replacing the exhausted family van?  Hot tub?  Sweet!  But then the financial gurus suddenly are everywhere, talking about catch up contributions to your retirement fund and how the future of social security is not so secure.  You look at your retirement plan statements and panic, realizing you will never reach $1 million in retirement savings they say you need! 

Relax.  Take the trip (Tahiti, really? Ok, maybe the Bahamas).  Do you actually need that much money or more to retire?  Let’s say you (and your spouse) are age 52 and have 25 years left on your home’s mortgage, after buying a bigger house with a full basement “teen zone” five years ago.  You didn’t really think about having a mortgage payment at age 77 did you?  Fortunately, during your kids’ college years you were able to put some money into your 401k, but just the minimum to get the company match. What should you do now? Almost every financial advisor will tell you to increase retirement savings and will have the charts and predictions to back it up.  While that may work for many people, here’s another path to consider.

Let’s run the numbers.

You borrowed $200,000 at 5% with a 30-year fixed mortgage to buy the house and, after five years, you owe just under $184,000.  Assuming you’ve paid off credit cards and car loans first, you could pay $375 extra each month toward the principal balance and have the loan paid off in 15 years, just in time to start drawing full social security retirement benefits at age 67.  Your $1074 mortgage payment is gone (Don’t forget you still have to pay property taxes and insurance).  Positive cash flow is $1074 for 10 years, until age 77, compared to paying the mortgage for the full 30 years.

Or, you could invest $375/month into your retirement plans for those 15 years. If your investments return an average of 7% per year (nearing retirement age you won’t be investing with high risk and high potential return), you will end up with approximately $118,800 at age 67.   Drawing that down for 10 years, while earning 6%, will provide $1320/mo before taxes and $1056/mo after 20% for income taxes or roughly the same positive cash flow as in the early mortgage payoff scenario.

If investment returns are higher you’d come out better, but that’s a big IF.  Consider the certainty of paying down the mortgage faster, especially if you are risk averse.  You can control paying off the mortgage before retiring, but you can’t control the financial markets.  Picture the excitement of watching that mortgage balance shrink to nearly zero, versus the anxiety of scanning the financial news for signs of a market drop.  Once that mortgage is wiped out, rejoice in the beautiful retirement spending plan you have created, and then dash off to Tahiti!

By: Dave Werle, OnTrack WNC Certified Financial Counselor

United Way NFCC Council on Accreditation