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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 2.5% interest but the secondary 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 my retirement funds goes to the mortgages alone, and if I add up all 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.
Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com
Dear Reader,
You don’t have to pay your mortgages off by selling your stock. There are a few ways to go about this.
One mortgage, let alone two, can be so 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. It 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 at any point do you expect to rely on that money for your retirement, such as healthcare, long-term care and so on?
And even beyond that — will that money be more useful when one spouse dies, since a portion of your current retirement income (like Social Security benefits) will disappear.
Before making any decisions, do a financial “check-up” of your cash inflows and outflows, your expected expenses in retirement now and in 5, 10, 15 or more years, and what that means for your nest egg. Make sure you have an emergency savings account outside of your IRA, stocks and the account you use to pay your bills, perhaps worth a year or more of your annual expenses.
Back to the mortgages. Two popular methods for debt management include the “snowball” and “avalanche” strategies. With the snowball strategy, the goal is to pay off the smaller debts first and then move on to the bigger ones. In this case, that would be tackling your primary mortgage completely and then your secondary. With the avalanche strategy, you’d do the opposite — the secondary first, followed by the primary. In both instances, you’d pay the minimum payments for each, but then throw extra money at one or the other.
Some people would probably opt for the avalanche method in your case, because you have an 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.
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 to 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, 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 see what the best tax-advantageous and reasonable ways are to pay off your mortgages while living your lives.
It is crucial to remember the bigger picture when looking to take a chunk of money out of your retirement assets. If you can afford your mortgages, and still have food on the table, lights and heat on in the house and 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 you could bring it down to one, and 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
