Should Retirees Carry a Mortgage Into Retirement?

image Boston College’s Center for Retirement Research recently published a brief which asked “Should You Carry a Mortgage into Retirement?”  It states that although it remains the goal of many households to repay their mortgage by retirement, an increasing proportion are entering retirement with a mortgage.

This Issue in Brief considers whether households should use retirement or non-retirement wealth to pay down their mortgage.  It first shows that it is unlikely that many retired households will be able to earn a return on risk-free investments such as bank certificates of deposit, Treasury bills, and Treasury bonds that will exceed the cost of their mortgage. 

Liquidity considerations aside, the report finds that households holding such assets will generally be better off using them to pay down their mortgage.  It then considers and (for most households) rejects the argument that households should retain their mortgage because they can earn a higher expected return in stocks and other risky assets. 

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An article from the Wall Street Journal recently covered the topic as well and says that while entering retirement without a mortgage used to be the norm, it no longer applies.  "The mentality has really changed in the last few years," says Ronald Meyers, a Fort Lauderdale, Fla., financial adviser. "People were taking on mortgages when they didn’t necessarily need them." 

While BC’s report doesn’t mention reverse mortgages, it does provide some interesting analysis.  I know there are some financial planners and tax advisors that read RMD, what do you think?   

Should you carry a mortgage into retirement?

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  • It is becoming commonplace that retirees are carrying a mortgage into retirement. I agree that it is a good idea to invest in treasury bonds if you believe you are going to live for a long time. If not and you match the qualifications, I would say grab a reverse mortgage to pay off the mortgage.

  • What the current economic crisis has stamped into many of us is the need for liquidity. With stricter income requirements and higher credit standards, getting a new mortgage once an existing one is paid off may not be as easy for most retirees or near retirees as it once was. The loss in arbitrage may not be as critical to the decision process as it used to be; liquidity for many is a bigger matter now than at any time in the last five or six decades.

    Everyone wants simple answers. This is one reason why being a retiree with an uncertain future is not necessarily what it was once cracked up to be; there are no easy or simple answers like we once thought there would be at this point in history.

    Unfortunately, reading the article is like reading the work of a child playing a math game. In the tax world, we look at financial transaction like a dog. The tail is tax. Dogs should never allow their tails to “wag them;” they should wag their tails. Like many articles of this nature, the best parts are in the notes.

    One thing I have never been sold on is keeping a mortgage for the value of the income tax deductions. This goes back to the old adage, “never allow the tail to wag the dog.” The only value of itemized deductions is the amount by which they actually reduce income tax liabilities beyond what the standard deductions would have lowered them. This becomes even more complicated if the senior is or could be liable for the alternative minimum tax.

    There are also the special circumstances of each “retiree” to consider. In the right circumstances I am a strong advocate of retirement plans. Many times they remove assets away from the reach of general creditors. Taking out a mortgage or reverse mortgage to get that done can be a real economic life saver for some seniors. A self-employed paralegal obtained a reverse mortgage from me a few years ago. She had over $60,000 left in her line of credit after paying off her mortgage. Because of a pending lawsuit against her, we talked with her attorney and all of us agreed the excess funds should go into a simple profit-sharing plan she started with a bank in her community right after that discussion. It also significantly reduced her income and self-employment taxes for that year. She took out some of her profit-sharing plan assets to pay her attorney fees with most of it left over to grow a retirement fund. She intends on working and contributing to her plan until she is 70.

    The only way I would recommend what the author purports is if all risk was the same. The income tax cost of selling certain assets is also an important consideration.

    In these situations, individual planning becomes crucial. Using rules of thumb in making critical decisions may be helpful but also can become costly solutions when used without obtaining the advice of an experienced, competent, knowledgeable, licensed, and trained financial advisor. It is usually a good idea to ask friends in similar situations whom they recommend using.

  • Interesting info Mr. V and I love the “dog” analogy that most people would easily grasp, but I have questions. The implication is that the funds available to your client through the reverse mortgage are not protected from a lawsuit even though they are part of the equity in her homestead, therefore the necessity of pulling the funds out and placing them in a protected asset – the retirement fund. Would you confirm that is what the attorney actually advised?
    You also stress liquidity and the future ability of retirees to meet loan qualifications. This sounds like you are an advocate of the HECM Credit Line that could be paid down to avoid interest expense with funds from any source, yet those funds remain available to the senior regardless of the real estate market changes up or down, is that correct? And we didn't mention that there is no credit requirement or income requirement at this time for a senior to qualify. Of course those in the industry know this fact but I have seen comments from some outside the industry so thought it would be beneficial to make that clear. This opinion (using the HECM Credit Line to provide liquidity) has been shared by many of my recent clients and their financial planners. I have wondered if they are reviewing the cost of maintaining investments rather than pay down the credit line at some point and this article and its comments indicate some are considering this aspect. Glad to hear it and hope those I have worked with are also looking at the whole picture.

    • Nancyonreverse,

      While I appreciate your compliments, several of your statements need clarification. As to the multiple myths our industry promotes on equity, that discussion will be deferred to articles this fall.

      You state: “The implication is that the funds available to your client through the reverse mortgage are not protected from a lawsuit even though they are part of the equity in her homestead, therefore the necessity of pulling the funds out and placing them in a protected asset – the retirement fund.” You have the right to infer anything you want but nowhere in the comment is there any mention of homestead laws nor are those laws or any interpretation of those laws even implied in any of my prior comments in this thread. As a CPA even with negligible legal liability concern, I must refute this quotation.

      As to homestead laws, they are complicated and vary substantially from state to state. Based on the estimated value of the home and the balance due on the HECM at the time of consideration, the attorney concluded that the California homestead law provided maximum protection on the home (and only the home).

      I am not an attorney but as a licensed California real estate broker, I am not aware of any protections that extend from California homestead laws to cash taken out of a line of credit, even a line of credit secured by a protected home. If you are aware of any such protections, please advise. Homestead laws protect homes, not cash (except in certain limited but temporary situations involving home replacement).

      We decided to remove the contingent nature of the available cash and transfer it into a protected and portable asset, a profit sharing plan, so that it would be readily available for retirement income purposes before a loss in a lawsuit could attach that cash at the time it might be taken. This course of action achieved all kinds of benefits including but not limited to asset protection, portability, security in retirement, and reduction in income tax liabilities.

      You state and then speculate: “This opinion (using the HECM Credit Line to provide liquidity) has been shared by many of my recent clients and their financial planners. I have wondered if they are reviewing the cost of maintaining investments rather than pay down the credit line at some point and this article and its comments indicate some are considering this aspect.” I cannot confirm or deny what others are thinking. While your point is a valid consideration, generally it should not be an overly significant one.

      The HECM line of credit as structured in the variable rate products (not the fixed rate generally) can be of great value to one borrower and of no value to another. It all depends on facts and circumstances, including the purpose of the loan, what types of loans are being replaced (not always mortgages) by the HECM, income tax considerations, charitable planning, retirement asset planning, estate and multiple estate planning, a future change in marital status, and many other factors. While lawmakers and regulators are correct that these factors should be discussed with seniors when getting a HECM, why should originators and counselors who have little education or training in such matters be required to advise on such matters?

      Originators and counselors should be required to discuss the benefits and detriments of HECMs not matters in which they have little training or knowledge. Those matters should be discussed with trusted advisors who have extensive training and education in the areas of concern; it should be the responsibility of originators and counselors to exhort prospects and borrowers to seek the counsel of knowledgeable, experienced, and competent professional advisors and to inform such prospects that the amount and quality of financial and other information submitted to these advisors could have a major impact on the quality of advice they receive.

  • I apologize if my brief comments made you somewhat defensive. I was trying to follow your concept from the information provided and, not ever assuming you are an attorney but had obtained information from one or more, was hoping to understand the advice your customer may have gotten from some attorney. Your comments were beneficial to me in confering with a local attorney that would allow me to make suggestions to one of my customers that he speak to an attorney knowledgeable in this field as his attorney did not suggest what I thought was in your article. I am fortunate to have many contacts in the law field, as you appear to have, that I can question to improve my understanding. While I always use a disclaimer in speaking to others by stating that I am not an attorney and may not have the information exactly correct, but know enough to tell them to raise questions with their legal counsel. But, as you very likely have found yourself, different attorneys state things differently and it is good to question ones own interpretation of those statements made. Having some knowledge assists us in alerting others to possible solutions to their problems but does not necessarily make us experts as much as someone to provide direction to the experts.

    I believe I gained from your comments and appreciate your posting same. However, I am truly sorry if my reflection caused you concern.

  • I apologize if my brief comments made you somewhat defensive. I was trying to follow your concept from the information provided and, not ever assuming you are an attorney but had obtained information from one or more, was hoping to understand the advice your customer may have gotten from some attorney. Your comments were beneficial to me in confering with a local attorney that would allow me to make suggestions to one of my customers that he speak to an attorney knowledgeable in this field as his attorney did not suggest what I thought was in your article. I am fortunate to have many contacts in the law field, as you appear to have, that I can question to improve my understanding. While I always use a disclaimer in speaking to others by stating that I am not an attorney and may not have the information exactly correct, but know enough to tell them to raise questions with their legal counsel. But, as you very likely have found yourself, different attorneys state things differently and it is good to question ones own interpretation of those statements made. Having some knowledge assists us in alerting others to possible solutions to their problems but does not necessarily make us experts as much as someone to provide direction to the experts.rnrnI believe I gained from your comments and appreciate your posting same. However, I am truly sorry if my reflection caused you concern.

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