If you read no further than this short paragraph, let me answer one question. Should you pay off your mortgage debt before retiring? For 95% or more of us the answer is Hell Yes!
We hear that more and more people are carrying their mortgage debt into retirement. Please know that I’m a strong proponent of most retirees not carrying mortgage debt (or really any debt). It’s hard enough to generate sustainable income in retirement let alone trying to generate income to cover a mortgage too.
Here’s how I look at the situation. To cover a $1,500 mortgage payment (principal and interest only), you’ll need approximately $450,000 (using the 4% rule) in assets to produce $18,000 yearly to cover the monthly mortgage payment. This example doesn’t include taxes or insurance because those will need to be paid even when the mortgage is paid off.
In reality, you don’t really need an extra $450,000 in assets. You’ll likely have the mortgage paid off in 1-20 years, which means you’ll need less than $450,000. Though my example is simplistic, the truth still dictates that you’ll need more in assets to cover the payments.
And most people don’t have those kinds of assets anyway. So the reality should be to eliminate all debt before retirement. At least that’s the answer for most of us. Let’s not make this retirement planning harder than it already is – let’s get the mortgage paid off.
My Approach
And this brings me to how I’m addressing our mortgage debt prior to retiring. First a little background. I purchased our house in 2002 and had a $223,000 30-year mortgage. Two years later, I refinanced it for another 30-year term because rates had dropped that quickly.
Over the years, I’d contribute an extra $50-$100 every time I had some extra cash. I figured every bit would help and someday I’d be happy with the nickel and dime approach because I shaved a few years off my mortgage. The problem was I didn’t do it consistently and I didn’t have a plan. I always found competing priorities for my cash and paying extra on the mortgage rarely made the final cut.
Finally, in 2015, I got serious about getting the mortgage paid off. Since then, I’ve been implementing tactics to get it paid off even sooner. Here are five significant tactics I’ve done so far to accelerate the payoff.
Refinance
In 2015, I realized that I had reduced my mortgage from $223,000 to only $169,000 in 13 years of payments. That’s a miniscule reduction of $54,000, which makes me sick to think of the interest I paid to the bank. After 13 years of owning the home, I still had 19 years remaining on my mortgage loan.
So, once I figured I wanted to retire at 62 years old, I figured I needed a new plan. I refinanced to a lower rate and targeted my payoff date to just before I retired. This gave me a 10-year term loan. This raised my payment amount by about $350 monthly, but it would save me lots of interest and have the loan paid off by retirement.
Even if I don’t make any extra payments, the loan will be paid off by before I retire for a total of 23 years (versus 30 years since I owned the house). Not bad but I want it paid off even sooner.
Bonus Money
I receive two bonus checks annually and for a while, those checks had been going toward my kid’s college education. Just recently (and going forward), those checks have been building my cash and taxable stock portfolio.
This year, I made the decision to apply $5,000 annually to the mortgage principal when I receive one of the checks. This one tactic will reduce my payoff by 1 year and save me from paying some interest.
Two Yearly Extra Paychecks
Since I get paid bi-weekly, I receive two extra paychecks per year. In 2019, I made the decision to apply $2,500 per extra paycheck ($5,000 annually) toward the mortgage principal. Again, this will reduce my payoff by another 1 year and save more interest.
Post 401(k) Catch-Up Contributions
Normally, I’ve contributed all $6,000 of my 401(k) catch-up contributions (since I’m over 50) by the month of May. This provides me with an opportunity to take those funds from June – December and apply them toward the mortgage. This means another $3,500 annually can be applied to the mortgage principal for 7 months of the year.
Cancelling Group Term Life Insurance
I just wrote an article on this topic last week. I’ll be cancelling my group term life insurance at work and applying those dollars to the mortgage principal. This will occur in January 2020 and apply another $4,200 annually to the mortgage principal until the loan is paid off.
Conclusion
With this plan, I’m taking some very aggressive tactics to get that mortgage paid off much earlier than 62. If all goes well, I’ll have that debt paid by the time I turn 59. This will allow me to put all my final 3-years resources toward savings.
And this just shows you that you can still be aggressive with your debt reduction and save at the save time. As I aggressively payoff the mortgage, I’ll still be saving $75,000-$100,000 yearly to my investment portfolio.
Without these 5 steps, I’d still have 9-years remaining on my mortgage by the time I retired at 62. That would mean I’d be paying my mortgage payment until I was 71 years old. And that would likely mean that I’d wouldn’t be able to retire at 62.
Finally, let’s not forget about peace of mind. Peace of mind for a retiree is critical. Mortgage debt is scary enough for most people and retirees don’t need scary in their lives.
Having peace of mind and knowing that you’ll be in your house with no mortgage debt is a tremendous feeling. It’s something we should strive for in our retirement planning. It will make life so much easier and we’ll need less income to pay expenses during retirement.
Thanks for reading!
Mr. TLR