Should You Be Mortgage-Free in Retirement?
According to a new financial planning theory, individuals who want to achieve a comfortable retirement should not only be mortgage-free by age 65, but should have a reduced debt level by 45.
The recommendation is to have a debt-to-income ratio of 1 at age 45, and then gradually reduce it to 0 by age 65. A ratio of 1 would mean that, if you earned $100,000/year, your total debt (including mortgage, credit cards, car loans, etc.) should not exceed $100,000.
This theory is based on 3 ideas:
1. A home is an asset, not an investment. An investment is defined as something that can generate cash to live off of during retirement. It is unrealistic to expect people to downsize their home for the purpose of tapping equity for retirement.
2. Mortgage debt is something to avoid in retirement because a mortgage payment is fixed, while retirement income (except inflation-adjusted social security) will fluctuate with markets and interest rates.
3. Retirees usually do not have dependents, and tend to fall into a lower tax bracket. This erodes the tax benefit of itemizing their deductions.
How should you begin to pay off your mortgage?
An effective way would be for an individual to obtain an amortization schedule for their particular loan amount and interest rate. Then, the individual can examine his or her latest mortgage bill, to find the amount of principal that is being paid off. Simply locate this amount on the schedule to find the current position.
The individual can then add the next principal amount to their payment. This would allow them to effectively check off that position - even though they did not pay the interest part. The interest has been saved and, next month, the homeowner would have to pay the next payment on the schedule.
Praveen Puri has almost 20 years of trading and investment experience - including serving as a consultant to major insurance companies, banks, and the Chicago Board of Trade. He writes about business, trading, and finance on his Simple Trading System blog.
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