Dear MarketWatch,
My wife and I are both retirees. As of now, we have an IRA worth $800,000-plus, which is untouched, and stocks worth $600,000. We are receiving pensions and Social Security, amounting to about $9,000 a month, but have two mortgages that aren’t paid off. Our primary mortgage has $42,000 left with a 2.5% interest rate, but the second mortgage is at $160,000 with 8% interest.
I want to know if I should pay my first and second mortgages by selling stock. One-third of our retirement funds goes toward the mortgages alone, and if I add up all our expenses, almost two-thirds are being spent. I am now 70 years old and was thinking of starting to withdraw from my IRA at 73. Should I wait or tap it now?
Paying off both mortgages would bring us into the 22% tax bracket and eventually raise our Medicare premium.
See: I’m 71 and can’t decide if I should pay off my mortgage or get a joint annuity that’s cheaper — what should I do?
Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com
Dear Reader,
You don’t have to pay off your mortgages by selling your stock. There are a few ways to go about this.
One mortgage, let alone two, can be anxiety-inducing for retirees, since many are on fixed incomes and have a finite amount of money saved for the future. You don’t want to drain your life savings too quickly, as you’ll need it to last your lifetime, but you also don’t want to have this huge debt hanging over your head.
Your IRA and stocks total $1.4 million. That’s fantastic. Those certainly can be a source for you to pay off your mortgages, but before you do that, ask yourself what the goal for that money is. Your retirement income right now seems to be covering the necessities just fine, but do you at any point expect to rely on your investment funds for things such as healthcare, long-term care and so on?
And will that money also be useful when one spouse dies and a portion of your current retirement income — like Social Security benefits — disappears?
Before making any decisions, do a financial checkup of your cash inflows and outflows and your expected expenses in retirement now and in five, 10, 15 or more years, and think about what all that means for your nest egg. Make sure you have an emergency savings account — enough to cover a year or more of your annual expenses — outside of the funds in your IRA, stocks and the account you use to pay your bills.
Now, back to your mortgages. Two popular methods for debt management are the “snowball” and “avalanche” strategies. With the snowball strategy, the goal is to pay off smaller debts first and then move on to the bigger ones. In this case, that would mean tackling your primary mortgage and then your secondary. With the avalanche strategy, you’d do the opposite — the secondary first, followed by the primary. In either instance, you’d make the regular payments for each and then throw extra money at one or the other.
People who would opt for the avalanche method in your case would point to the 8% interest rate on your $160,000 mortgage, while others would be happier with the snowball approach, since that debt would be squashed quicker. Be sure to tell your mortgage lenders that any extra payment you make is to be put directly toward the principal, which will lower the balance faster.
Also see: We have $3 million in real estate, which brings in $70,000 a year. Could I make the same income investing in stocks and bonds?
Given that you do have extra money every month from Social Security and pensions, this is a viable option. It would take a bit of time, but it allows your retirement assets to continue to grow and lets you stave off any big tax bills.
If that’s too slow of a plan for you, which is understandable, you could mix in your investments. A big withdrawal will absolutely bring you into a higher tax bracket and potentially affect your Medicare costs, as you know, but you could try a smaller withdrawal that just helps you pay off the mortgages faster.
Consult a qualified and trustworthy certified financial planner or certified public accountant who can help you run the numbers. A professional can give you a few paths to consider and will advise you on the most tax-advantageous and reasonable ways to pay off your mortgages while living your lives.
It is crucial to remember the bigger picture when you’re thinking about taking a chunk of money out of your retirement assets. If you can afford your mortgages and still afford to put food on the table, keep the lights and heat on in the house and have a little extra cushion to feel comfortable, having a mortgage in retirement isn’t the worst thing in the world.
But you have two and if could bring that down to one, and could then knock that out completely without hurting your future financial health, you’ll feel on top of the world.
Readers: Do you have suggestions for this reader? Add them in the comments below.
Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com
