Tag: real-estate

Should You Pay Off Your Mortgage Before You Retire?

For generations, the ultimate retirement milestone was the “mortgage-burning party”—that moment you paid off your final home loan statement and officially owned your piece of property free and clear.

Entering retirement completely debt-free sounds like a no-brainer. But as with most things in financial planning, the actual answer to “Should I pay off my mortgage before I retire?” isn’t always a simple yes or no.

While eliminating a monthly mortgage payment provides undeniable psychological comfort, writing a massive check to clear your home loan can sometimes work against your overall financial flexibility.

If you’re approaching retirement and weighing this decision, here are the core trade-offs to consider before making a move.

The Case FOR Paying Off Your Mortgage

1. Lower Monthly Overhead

Your mortgage is likely your single largest recurring monthly expense. Eliminating principal and interest payments drastically lowers the baseline income you need each month to maintain your lifestyle. Lower required income means smaller withdrawals from your portfolio.

2. Protection Against “Sequence-of-Returns” Risk

One of the biggest risks in early retirement is a major market downturn right after you stop working. If the market drops and you still have high fixed expenses (like a mortgage), you are forced to sell depreciated investments to pay your bills. By eliminating the mortgage, you lower your mandatory distributions, allowing your investment accounts more room to recover during lean market years.

3. Unbeatable Peace of Mind

The emotional benefit of owning your home outright cannot be overstated. For many retirees, knowing that their housing is secure—regardless of what happens to the stock market or the economy—is worth more than any theoretical mathematical gain.

The Case AGAINST Paying Off Your Mortgage

1. The Opportunity Cost of Capital

If you secured a low fixed mortgage rate in past years, the math may favor keeping the loan. If your mortgage rate is sitting at 3% or 4%, but your diversified investment portfolio or high-yield cash vehicles are earning a higher return, your money may work harder for you staying invested rather than locked up in home equity.

2. Illiquidity: You Can’t Eat Real Estate

Home equity is illiquid wealth. Money used to pay down a mortgage is tied up in bricks and mortar. If an unexpected medical emergency, home repair, or family need arises, accessing that home equity quickly isn’t easy—especially once you no longer have a earned income to qualify for a traditional home equity loan. Having liquid cash or accessible taxable investments provides a safety cushion that a paid-off house cannot.

3. The Tax Trap of Large Lump-Sum Withdrawals

If you don’t have enough liquid cash sitting in a bank account and need to withdraw funds from a Traditional IRA or 401(k) to pay off the mortgage balance, be extremely careful. That withdrawal counts as ordinary income. A single large distribution can instantly push you into a significantly higher tax bracket, trigger higher Medicare premium surcharges (IRMAA), and create a hefty tax bill that wipes out any savings on mortgage interest.

A Quick Checklist: Which Side Are You On?

It may make sense to KEEP your mortgage if:

  • You hold a very low fixed interest rate.
  • Paying it off would drain your liquid emergency reserves.
  • Clearing the balance requires pulling a large lump sum out of a taxable retirement account.

It may make sense to PAY OFF your mortgage if:

  • You have excess idle cash sitting in low-interest savings accounts that can cover the balance without tax consequences.
  • Carrying debt causes you significant stress or anxiety.
  • Eliminating the payment is essential for your retirement cash flow to balance out.

The Bottom Line

There is no one-size-fits-all answer. The choice between mathematical optimization and emotional peace of mind comes down to your personal risk tolerance, tax profile, and retirement cash flow goals.

Before making a large lump-sum payment on your mortgage, it’s always wise to run the numbers to see how it impacts your long-term retirement projections and tax liability.

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com

Sell In May And Go Away?

Sell in May and go away is an old Wall Street saying that is the basis for a market-timing investment strategy which calls for you to sell your stock holdings right before summer and buy them back in late fall, or right before Memorial Day and right after Halloween.

Historically, the S&P 500 has performed better during the winter months than in the summer months. So, there is evidence that this strategy could work, but we are really Monday-morning quarterbacking here. In reality, you have to be very good at timing the market not once, but twice every year! You have to pick when to sell and then you have to pick when to buy back in. Plus, you have to consider your holdings’ short-term versus long-term gains and losses as well as the associated tax ramifications.

I don’t know of anyone or any firm that has been able to do this successfully for an extended period of time.

So, whenever I hear the “Sell in May and go away” adage, I like to think of another old Wall Street saying: Time in the market, not timing the market. This means relying on a strategy where you don’t try to guess when the market is at its lowest or highest point. Instead, you invest knowing that your timing is probably going to be off, but that eventually, investing in great companies with strong fundamentals matters more than the timing.

Now is when I roll out my favorite illustration to show why time in the market is better than timing the market for investors.

Picture the movement of the yo-yo as the short-term fluctuations of the stock market and the guy walking up the stairs as the long-term trend of the market. The market has its ups and downs, but over time, has consistently moved higher. This is a simple, but effective, way to illustrate why time in the market is better than timing the market.

Please comment or send an email if you have any questions. Have a great Memorial Day weekend!

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassemanagement.com

Why Hiking Rates Isn’t Having The Desired Effect

In the financial world, everything today is about the Federal Reserve and interest rates. Currently, rates are at a level not seen since about 2007. As you know, rates affect how much it costs to borrow money and also how much interest that you receive when you lend money, like when you deposit it in a savings/money market account or buy a bond. So, it’s not all bad when interest rates are high. In fact, rates are closer to historical norms now than they have been in the last 16 years.

That said, why haven’t these higher rates had their desired effect on reducing inflation? Here are a few reasons:

  • About half of all mortgages have an interest rate locked in below 4% – When rates plummeted during Covid, anyone that had a high mortgage rate refinanced to a fixed rate mortgage below 4%, many in the 2% to 3% range. So, their biggest monthly expense was reduced significantly and will be for decades to come if they don’t sell. Thus, higher rates will have less of an influence on these consumers.
  • Homeowners are making money on their mortgage loans – You heard that right. People with a low-rate fixed mortgage are taking the money that they borrowed and are buying CDs and government bonds that pay five percent interest or more. For example, if you have a mortgage at 3.5%, instead of paying down your mortgage, you can take any extra cash and buy a CD at 5% and make 1.5% on your money.
  • People are still spending even with sustained high prices – Usually, when prices have risen this much (groceries, utilities, insurance, etc.), consumers tighten their belts and pull back on discretionary spending (vacations, big ticket items). This has not happened, at least not yet. With historically low unemployment and decent wage increases, people are still traveling and spending, especially those with no mortgage or a low mortgage rate.

Higher interest rates will eventually work to lower inflation, but it may take longer than anyone expected. Plus, it is a good thing for risk-averse investors and savers.

Please comment or send an email if you have any questions. Thanks!

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassemanagement.com

A Reverse Mortgage Story

Here is a quick story that illustrates how a reverse mortgage can help free up cash for someone in their retirement years. This is a scenario from an actual client of a colleague of mine, David Heilman of HomeGrown Financial, that specializes in reverse mortgages.

Client Spotlight

We had the pleasure of working with a client recently who was referred by his Certified Financial Planner. We first established a meeting via Zoom with both the client and his advisor to make sure everyone understood exactly how the loan program works and what the expectations were in terms of the process.

The client’s goals and objectives were met as we:

  • Paid off a small current mortgage
  • Set up an initial draw for home improvements
  • Put remaining funds in a line of credit for future needs

Worth noting that this line of credit is very different than a traditional home equity line of credit as it GROWS by 0.5% above the current interest rates. So, this client now has a growing line of credit, expanding as he ages and allowing for more borrowing power.

This was all accomplished using the FHA-Insured Reverse Mortgage which doesn’t require a monthly mortgage payment. The client is still responsible for paying his homeowner’s insurance and property taxes and of course the title/ownership of the home never changed. The loan will be paid in full when the client decides to sell the home, or lives there until death and then the heirs would decide if they want to retain the property (pay off debt) or sell. Any equity still in the home belongs to the estate/heirs!

Reverse mortgages aren’t for everybody, but in the right situation, they can be very beneficial as a source of income in retirement.

Please comment or send an email if you have any questions. Thanks!

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassemanagement.com

Your Balance Sheet Is Looking Good!

Just like for a company, the balance sheet is one of the most important financial statements that a household can use to monitor its financial health. Put simply, it is a snapshot of your net worth, which is just your assets (stuff you own like your home, stocks, retirement plans, etc.) minus your liabilities (stuff you owe like mortgages, credit card debt, student loans, etc.).

Recently, households in the U.S. have been getting healthier financially than at almost any other time in history. In fact, if you look at homeowners, about 39% have no mortgage and roughly 85% of homeowners that do have a mortgage, their mortgage rate is under 3.5%. When you couple this low amount of debt with all-time highs in the stock market, historically low unemployment, and decent wage growth, household net worth has never looked better.

Here are a few charts that illustrate this topic more clearly:

In the chart above, you can see that since the great financial crisis, household net worth has consistently grown over the last fifteen years.

In this illustration, a more recent time period (from the pandemic in 2020 until the end of last year, 2023) shows the significant growth of household assets over the last three years while liabilities have dropped quite a bit.

Of course, the economic picture isn’t as rosy as it appears. There are some under currents to consider despite this encouraging data:

  • There is still significant wealth inequality. The top 1% hold a much larger share of the total wealth compared to the bottom 50% [Pew Research Center]. This falls under the old saying that “The rich get richer”.
  • Stubborn inflation could deplete some of the assets of households as they try to continue their same lifestyle without adjusting their spending habits for inflation.

For most households, things are looking pretty good, financially. If we can win the battle with inflation, we’ll see interest rates head lower, which will benefit the economy even more.

Please comment or send an email if you have any questions. Thanks!

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassemanagement.com