difference of opinion on use of retirement savings

kate38October 1, 2013

My closest friend and I disagree on something: She has a retirement portfolio of $1,000,000 and has a $100,000 balance on her home mortgage. (These numbers are close but not accurate to the penny.) It's an ARM, low now (3.25%) but will most likely go up in five years. She pays $650 per mo. on the mtg. She has another 20 years to go with the interest rate probably going up often. Let's say she retires and takes 4% of that million every month--$3333 and still has to pay 650 out of that, bringing down her available monthly funds to $2683. If she pays the $100,000 off, she will then have a portfolio of $900,000. 4% of that comes to $3,000 per month but now she has no debt. She loses $333 per month, but doesn't she actually gain $350 per month by not having to pay the mtg. payment any more? She thinks she's better off keeping everything invested and taking the mortgage deduction for interest at tax time. What do you all think?

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Your friend is in the very situation I'm in, but my mortgage is $85K. My financial advisor has told me I personallyI need the mortgage for the interest it generates for taxes. I would wager a guess she NEEDS the same deduction. My DH is taking wonderful care of me and unfortunately isn't here to enjoy what he worked so hard for. The down side is, when I receive my statements from Smith Barney, I don't understand everything he used to explain to me, and I didn't listen well enough! How is she dealing with her portfolio re:stocks, bonds, annuities, IRA's, 401 K's and other investments? I am completely in the dark and know that's not where I should/want to be.

    Bookmark   October 1, 2013 at 4:16PM
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One thing to consider when thinking about paying off mortgage is that when you do generally your credit scores drop. I recently paid mine off and the FICO dropped 10+ points.

You have to also realize that the interest and dividends on her investments should increase more than the amount that she would save paying of the mortgage. I would suggest turning the ARM into a regular long term 20/30 year mortgage for stability of payments.

    Bookmark   October 2, 2013 at 12:35AM
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Patty Cakes if you have any place that provides community education, local school districts, colleges they normally have classes on how to read the reports.

As far as deductions go if the mortgage is your only deduction and you can use the standard deduction ignore the advise. There is a lot of informational sources but if the source is pushing a product to sell to you they are only interested in the commission they will earn.

    Bookmark   October 2, 2013 at 12:41AM
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Her mortgage deduction is the only one she has because she pays credit cards off every month. She gets her advice and help reading her monthly statements, etc. from her ML broker, and he says keep the mortgage. I just wonder if he wants her to keep that $100,000 invested because he gets a commission on it. As far as FICO goes, how important is that when we are in our retirement years and don't really need to borrow anymore? And if your score is as high as it can be, how important is 10 points off? These are things that I don't know about either.

    Bookmark   October 3, 2013 at 9:20AM
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I'm not concerned in 'keeping score regarding the score'. I keep a small balance on 2 major credit cards, as well as 3 other cards, but always pay 2 times or more on the balance.

Fun, how does the advisor benefit from the $100K mortgage? Is he paying the bills out of a trust? If not, I don't understand why he would care one way or another, except if he's advising because use of interest is needed for taxes.

    Bookmark   October 3, 2013 at 6:27PM
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Mafleur, thank you for your advice. The problem is my adviser is back in Ca and I've been in Tx for the last 5 years. I would like to find someone I can sit down and personally talk to when need/want to, and have my tax person doing a little scouting also. Even though my advisor calls, it isn't frequent enough for me, and we really can't get into financial issues too much for security reasons. I do feel I'm paying for services I'm not really getting. My husband would go into the office every month and talk to him, and on the phone at least once a week. I think they 'bonded' and formed a friendship, and this makes him not want to loose the business from his personal standpoint. There 's also the possibility he feels he's taking care of me in lieu of my husband not being here, but sometimes I can't help but wonder if it's more about what he's getting.

    Bookmark   October 3, 2013 at 6:41PM
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Even in retirement things break or just wear out. By maintaining a credit history even it is just using one credit card a couple of times a year and paying off as soon as bill arrives you maintain a good FICO score which comes in handy for the replacements. Most would not be able or wish to pay cash for a new vehicle. I recently purchased a new vehicle and was worried because I was purchasing in my own name My husband has dementia and things need to be in my own name. The car dealer was only interested in the score not how I would pay for it.

Before changing brokers talk to your tax person about best way to handle the change. If you like the company and they have an office in your area do the transfer. Except for taxes should be no difference between CA and TX.

    Bookmark   October 3, 2013 at 10:08PM
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It depends on whether her retirement portfolio includes enough non-tax deferred investments (money that isn't in a traditional IRA or 401k) to pay of the principal. If so, it's probaby a reasonable thing t do.

But if her regular savings fall more than a little short of 100K, that means she'll have to withdraw enough from the non-Roth 401k or IRA to pay off not only the mortgage balance, but also the income tax owing on the withdrawal., thereby depleting her principal by a lot more than 100K. Even worse, if the withdrawal is sizable, it would no doubt put her into a higher tax bracket for the year the withdrawal is made, So she'll wind up paying a lot more income taxes than she would otherwise, even further depleting her principal.

Not good. I'd say wait untill the mortgage balance is low enough that she can comfortably pay it from her regular savings.

    Bookmark   October 4, 2013 at 3:46PM
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Personally I would pay off the home. No one can take your home from you except the IRS or the mortgage company. You can loose your money in the stock market, or being under insured for health or being sued and then you might not be able to make your home payments. I don't care what the money people say she needs to be sure she has a home. If she lost her money after she paid off her home loan, at least she would have a home that was hers.

I always paid off my homes ahead of time in spite of what the money guys say. If I lost my income and savings, I could sell my home, buy a cheaper one and have money to live on.

I also bought an umbrella policy to protect me if I was sued. It will furnish the lawyers and pay any claims if I lost the court battle.

1 Like    Bookmark   October 4, 2013 at 6:51PM
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In many areas your property could be condemned for many reasons. The most common here is a business that wants to build something on your land. Occasionally condemnation is for worthwhile projects like schools and hospitals. Just because it is paid for does not mean it can not be taken from you. Chances of it happening are small but here it happens often enough. I live next to a site that is prime for development and I am in a holding pattern.

    Bookmark   October 5, 2013 at 12:35AM
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She needs a good accountant who can compute the cost/benefit for her. Sometimes people pay more in mortgage interest that they save on the tax deduction. I would not factor in the "lost gain" of taking the funds out of investment, as it is never guaranteed to be a gain.

Our financial advisor is listed as one of the top 100 in the country, and he was fine with us paying off our mortgage early. The peace of mind from having no debt is wonderful.

    Bookmark   October 5, 2013 at 12:57PM
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A business cannot take your home. There is a way the city can do it, but they have to pay fair value for it, I think it is called urban renewal. My Mom's home and all of the others in her area were taken that way. They called it a blighted area and it was bad, but a few like my Mom's were very nice. They did not want to give my Mom a fair price and she went before the city commissioners and got her price. No one with a million dollars is going to get their home condemned unless they have dementia. We have homes here in my city that are condemned but the still won't take them. They just won't allow anyone to live in them.

    Bookmark   October 5, 2013 at 2:13PM
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Thanks for all these responses. I will pass them along to my friend. I learned some things I myself didn't know. I never considered that taking $100,000 out of investments to pay off a mortgage would indeed put one into a higher tax bracket. Does it make more sense, then, to make extra principal payments every month in small doses with leftover money, i.e., an extra $50 or $100? PattyCakes, the advisor gets a commission every month on the balance she has with him, so the more she keeps in there, the more he makes. That's why I said he would benefit. $100,000 won't make him much, but if everyone took $100,000 out of the portfolios he manages...

    Bookmark   October 7, 2013 at 11:29AM
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A bit at a time is exactly how I paid off the mortgages on my homes. I did not have the money on hand to pay it all at once. My Mom had plenty of money and paid cash for her home. She did it against what the loan people told her. She did not like debts. When my husband retired we talked to our accountant and we cashed his VIP in. We wanted it in our control so we could spend it.

I met a young man this week that was visiting his grandparents across the street from me. He said his family is after him to get married, he is the last of his line and his father told if you don't I won't have any one to leave my money to. He wants is son to marry so they can just keep passing the money down. What is the joy in that.

    Bookmark   October 8, 2013 at 12:44AM
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Hi functionfirst,

Not being a U.S. person, I'm not familiar with the number of levels of income tax rates, but if your friend has, say, $40,000./year income, and she wouldn't have to pay tax at a higher rate until her income rose to $50,000., maybe it would be a good idea for her to cash some of her assets, to bring her income for this year up to near the place where the rate increases, and pay that down on her mortgage.

There may be an issue with regard to whether she can make extra payments on the principal, and how often and how much at a time.

Does she prepare her own taxes?

If she has an accountant do them, quite likely s/he can give advice as to whether the tax saving on the mortgage interest deduction is preferable to cashing out some of the assets, whether registered or non-registered.

ole joyful

    Bookmark   November 21, 2013 at 1:45PM
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I'm sorry to respond so late. Just getting caught up on GW. She does have an accountant do her taxes and he advised to either pay extra principal or take last year's earnings (only) and use just that amount towards her mortgage. Thanks very much.

    Bookmark   March 24, 2014 at 2:51PM
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