 Carrying debt into retirement can make your finances as a retiree challenging. In fact, most people work to pay off any debt they’re still holding well before they enter full-time retirement. Usually, people look to pay off the usual suspects first:
However, most pre-retirees who are going through this debt pay-off process miss something critical: their mortgage. A Mortgage Is Still Debt We’re often sold this concept that a mortgage isn’t technically “bad” debt. Home ownership comes with so many upsides, that we forget that it still comes with a huge amount of debt that weighs on our finances and deters us from meeting other money-related goals before retirement. Your home may provide you a safe and comfortable space to live out the entirety of your retirement. You may feel like it’s a fantastic piece of your financial portfolio because you’re gaining equity as a homeowner and investing in real estate. You may even be planning to leave your home to your children in your estate plan because it’s worth a significant sum. While all of this might be true, none of it matters if you struggle to pay your mortgage bill each month throughout retirement. What Does It Mean To Be “House Poor”? Too many retirees are “house poor”. This means they’ve spent a significant portion of their savings on a home through a down payment, and continue to spend the majority of their monthly income on a mortgage payment, homeowner’s insurance, utilities, maintenance, and property taxes. They have very little left over to put toward retirement savings, or facilitating lifestyle goals during retirement like travel or pursuing a new hobby. At the end of the day, this may not sound all bad. If you love where you live, it’s okay that you spend a little bit of extra money on it each month, right? In some cases this might be true. But if you’re heading into retirement, this strategy likely won’t work for you. Retirees need to free up as much of their cash flow as possible to create a reliable income throughout their retirement. Your income during retirement typically consists of three parts:
While you can partly count on a reliable pension, the total amount you’ve saved when you retire, or an estimated Social Security payment each month, these income streams can still be variable. A dip in the market, or a change in Social Security or your unique pension program could mean a notable dip in your monthly retirement income – and it’s not always fully in your control. However, having a home that’s been fully paid off before you enter retirement is a decision you have control over. So, what should you do? You Have Options If you still owe money on your home, you have a few options as you move toward retirement. First and foremost, if you love your home and it meets your retirement lifestyle needs, you can look to pay it off before you retire. Many pre-retirees are relatively close to paying down their mortgage, and with a little bit of extra focus and budgeting, paying it off in full is easily achievable. However, there are some cases where paying off your mortgage in full before you retire isn’t a possibility. This is typically due to one of two reasons:
There are solutions for both of these options. If your mortgage is too big before you retire, it might be time to reevaluate your living space. Even if you love your home, if it’s going to have a long-term negative impact on your financial health throughout retirement, it’s not worth staying in. You could consider selling your high-mortgage home and downsizing to something more manageable. If you don’t have very long until retirement and are worried you won’t be able to pay your mortgage off in full before you make the transition, you might want to consider delaying retirement. Delaying retirement has several benefits including continuing to grow your retirement savings by taking advantage of employer match programs through your workplace retirement savings plan. By delaying retirement, you might be able to pay off your mortgage, then retire with significantly more cash flow than you would have otherwise. Deciding how you want to handle your home during retirement can be a financial and emotional challenge. Working with a financial planner can help! Together, we can put together a strategy for your retirement income – including what to do with your existing mortgage. Interested in learning more? Schedule a consultation with us today! Tony Velasquez runs Wisely Advised, LLC a full-service Registered Investment Advisory Firm offering Financial Planning, Accounting and Investment Advisory services to individuals, families, and businesses. Whether it's traveling, being at the beach, or at his family's ranch in Texas, Tony loves enjoying time with his family and friends.
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 Technology has transformed the financial industry-- from the practice of investing to the strategy of saving, and flexibility of spending, technology’s hand is present in the many ways that we interact with money. One of the ways we see this most often is through the process of automation. A technique and system for operating, automation uses electronic devices to streamline a process without the need for human interference. Automatic investing is when you arrange to have a fixed amount of money come out of your paycheck or bank account every month and contribute to a predetermined account. This process finds many of its benefits in the personal finance realm. For example, you can select to automate your credit card payments each month so that you never miss a payment. This can also be done for a myriad of other expenses like rent, utilities, loans, mortgage, car payments, etc. With automation, hitting your goals becomes so much easier. Why? Because it is really easy to manually miss a credit card payment or forget to contribute to your 401(k) account. You have deadlines, errands, family, a swirl of distractions which increases the likelihood for human error. By automating the payment, you never touch the money. Along with adding to your investment each month, the payoff is wonderfully favorable. By utilizing the gift of automation in your financial planning, it allows for good, sound financial decisions without the ‘human’ element. How can this practice be applied? At the OfficeIt’s wise for employees to automate workplace retirement or savings plan contributions each pay period. This way, you do not have to take money out of your account to put into your retirement plan or health savings plan that your employer offers. If you don’t see the money, you won’t think about spending it. Automating your contribution to your investments will decrease the likelihood for extraneous or discretionary spending habits. You won’t miss the money because it is going toward your future financial needs. This method of savings, called systematic investing, focuses on investing small but consistent amounts over a long period of time. Spending more time in the market by consistently growing your portfolio through wise investments means growing your wealth faster as a result of compound interest. Whether these funds are coming from your paycheck and being deposited into your workplace retirement plan, like a 401(k), or are coming from your regular checking or savings account into a separate retirement or investing account, knowing that you’ll be able to account on slow and steady growth to reach your savings goals often comes as a welcome relief. Most retirement plans have high tax penalties should the money be removed for a different purpose, therefore many people leave these accounts alone and just let them grow. The steady growth each month, leaves these accounts in quite healthy states when they do need to be used. With each payment automatically taken out of your paycheck, you will also be able to budget your expenses off of your current paycheck already knowing that your retirement account is being added to in the background. These automated payments can be used for many workplace benefits:
Keep in mind that if you elect to put money into any of the accounts that your employer offers, it is a good idea to have the money taken out of your paycheck. This action alleviates the stress and time of calculating and adding the appropriate amounts to the coordinating accounts each month. In the Home Automating your financial obligations can also be applied to other investments outside of your workplace. You and your financial planner can work out a plan for automating contributions to different investments you may have. Examples could be:
By automating contributions to your accounts, you are eliminating the possibility for human error and ensuring that you are putting in money each month to the accounts you wish to grow. Automating your financial contributions to different investment accounts is a great way to promote good, sound, and practical financial decisions. Embrace the technology, and let it transform the way you handle your finances! Tony Velasquez runs Wisely Advised, LLC a full-service Registered Investment Advisory Firm offering Financial Planning, Accounting and Investment Advisory services to individuals, families, and businesses. Whether it's traveling, being at the beach, or at his family's ranch in Texas, Tony loves enjoying time with his family and friends. |
MEET TONY
Tony Velasquez runs Wisely Advised, LLC a full-service Registered Investment Advisory Firm offering comprehensive financial planning and investment advisory services to individuals, families, and businesses.
Whether it's traveling, being at the beach, or at his family's ranch in Texas, Tony loves enjoying time with his family and friends. Archives
November 2019
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