Ever heard someone say the costliest item in retirement is health care? I have, too, many times. Turns out that may not be true.
Dr. Joseph F. Coughlin, PhD is Director of the Massachusetts Institute of Technology AgeLab. Look them up at https//agelab.mit.edu. It’s a great source of free information on aging and retirement. Dr. Coughlin teaches in MIT's Department of Urban Studies & Planning and the Sloan School's Advanced Management Program. He says healthcare is not the #1 expense in retirement. Housing and transportation are #1 and #2.
Think About Housing in Retirement Now
Housing in retirement is one financial planning item you may want to address early. The principal and interest portion of your house payment typically amounts to 20% to 35% of your total household income. That’s significant. Pay off the house by your retirement date, and you eliminate a significant outlay.
When should you start thinking about paying off that mortgage? How about 20 to 30 years before retirement? The typical mortgage is 20 to 30 years in length. That seems like a reasonable timeframe. Just remember, as with all things financial, the earlier the better.
Options for Paying the Mortgage Off
Say you plan to retire at age 65. You could buy the house in which you intend to retire when you are 35 using a 30-year mortgage. It’s paid off when you retire.
That won’t work for most of us, so you can double up on principal payments. You can pay an extra flat amount each month. You can even make double payments, if you can afford that.
You can also save money each month in a bank account or mutual fund. This way you can control the payoff date or use the funds for other planning objectives.
Pay on the Mortgage or Invest
So, which you should do, pay of the mortgage or invest for retirement? The correct answer for most people is that you should do both. Pay off the house and you can’t be evicted. Save for retirement and you can maintain your lifestyle, or something close to it.
Don’t think of it as an either/or proposition. If you own your retirement dwelling free and clear, you have in effect created some positive retirement cash flow. The money in the budget for principal and interest can then be spent elsewhere. Or, in calculating monthly retirement needs you can eliminate that line item.
Talk to your advisor. He or she can help you connect the dots and formulate a workable strategy.