Why Mortgages And Retirement Don’t Go Together

Why Mortgages and Retirement are a dangerous trend

What’s the biggest expense facing those over 55? No, it’s not health care. Instead, it’s what they shell out for home mortgages and property taxes.

While spending drops for most individuals once they’re in retirement, the bulk of expenditures go towards home-related expenses, according to data from the Employee Benefit Research Institute.

That research shows that while consumers progressively spend less money as they age, housing-related costs still consume close to half of their total expenses – leading to a new phenomenon among mortgages and retirement.

Even if older people eventually pay off their mortgages, they still end up paying out a good deal of cash on maintenance costs, utilities and property taxes — all of which never seem to go away, EBRI notes.

Why Paying Off The House Is Put On The Back Burner

Paying off the family house has always been a strong part of any money management plan since, for most people, that mortgage is an enormous obligation that hangs over them for decades.

More recently though, many boomers have come to look on mortgages more as large investment loans, taken out on the theory that the asset they bought will increase in value, more than offsetting the cost of the loan in the end.

The number of people still repaying mortgages in retirement is also reflected in changing work patterns. Many folks have been downsized into retirement prematurely and may still hold a mortgage because they can’t do much about it. More people are working well past the traditional retirement age as well.

Grey Divorce Proves Costly

But higher later-life debt levels also have a lot to do with empty-nesters splitting up.Though overall divorce rates have declined in recent years, “grey divorce” is definitely on the rise.

As separating couples struggle to split things pensions and assets equitably, it’s not unusual for one partner to take out a mortgage to buy out the other’s interest in the family home.

That may not a big problem for someone who’s still working, but it can really throw retirement plans into a tailspin.

Just Keep On Working

As well, people in their 60s who owe money are increasingly likely to retire or start collecting their government pensions later, according to recent research from Urban Institute, which is believed to be the first to confirm a link between debt and these major life decisions.

However it happens, someone entering retirement with a mortgage payment has a much higher withdrawal rate from their assets than those with no mortgage. That makes them less likely to be able to sustain a temporary downturn in the value of those assets.

In fact, if you see yourself retiring on a fairly modest income, that monthly payment can really blow your budget.

Check Future Cash Flow

A $575-a-month payment out of a $60,000 income may not be that onerous. But if your income is around $36,000, the average for Canadian retirees aged between 65 and 74, according to Russell Investments, well, that’s a different story.

With mortgage rates still skirting historic lows, the “pay-it-off-before-retirement” argument may seem less compelling than it once did. But it’s important to remember that interest rates really have no place to go but up.

If you expect to sell your home and move within a few years, the mortgage payoff decision matters less. You’ll pay it off anyway when you sell your home, so letting things ride until then could offer you greater flexibility without too much cost.

Longer term though, things could work out differently.

It all comes down to what your future cash flow will look like. If you’re going to carry some debt, a traditional fixed-rate mortgage is far cheaper than a reverse mortgage, for instance. Generally speaking, however, aiming for a debt-free retirement is a much better strategy.

Related Topics

Debt Repayment / Home Ownership / Mortgages

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