Home ownership with no mortgage is the best retirement plan
The best savings and investment plan for a stress-free retirement involves paying off a home mortgage.
Four years ago when I was raising money for the Las Vegas venture, I gave presentations on why I believed cashflow-positive rental houses were a good investment. One of the primary reasons was to provide for retirement.
Most people look at investment as the process of picking which asset will appreciate the most during a holding period. In my opinion, that is speculation. Ultimately, speculative assets need to be converted back to cash in order to provide benefit to the investor. That brings emotion into the decision and timing becomes overly important to performance. When do gold bugs sell their gold?
I prefer selecting assets based on their capacity to provide long-term income, and in that regard, rental property is superior to most other investments. Irrespective of what happens to the resale value of a rental property, the asset provides cashflow the investor can use to reinvest when they are young or spend on lifestyle in their retirement. There is no subsequent sale required to extract value from a cashflow investment, which is one of the main reasons I believe everyone should have rental income as part of their retirement planning.
One of the best cashflow investments generally isn’t regarded as such: paying off the mortgage on a primary residence. I consider this a cashflow investment because the impact this has on a family’s monthly expenditures. Mortgage payments are often 30% or more of a family’s gross income, a significant drain on the family’s finances. If that payment is extinguished through paying off a mortgage, it either frees up the family to spend more on other items, or it allows breadwinners to retire, reducing the family’s monthly income without sacrificing lifestyle. I think that’s a huge benefit, not to mention the peace of mind that comes with it.
That’s why, in my opinion, home ownership with no mortgage is the best retirement plan.
This should be a simple accomplishment: buy a house, work 30 years, and pay off the mortgage. But if it’s that easy, why do so few accomplish it? Because lenders make it far too easy to raid this retirement nest egg through mortgage equity withdrawal.
There are always pressures to extract and spend this money. The kids need to go to college, the house needs a new roof, the strippers in Las Vegas look hot through beer goggles (okay, forget that one): life constantly challenges people not to raid this piggy bank, and most people don’t resist spending at least some of this money.
I recently suggested Mortgage equity withdrawal should be regulated like retirement account loans. I’m not hopeful politicians appreciate the wisdom of this idea, but I hope you will.
Owning a Home Outright Benefits Retirees
Paying off the mortgage isn’t the priority it once was, and for many households, it isn’t even a possibility.
Sadly, we just trained a generation to believe appreciation is income and paying off a home mortgage is a foolish waste of money.
But a new report from Harvard University’s Joint Center for Housing Studies reaffirms the common belief that retirees who own their homes outright are considerably better off than those carrying mortgages or paying rent.
The report, called “Housing America’s Older Adults,” … found that paying off a mortgage dramatically reduces housing costs and provides an equity cushion to help cover other major expenses.
Exactly. This kind of long-term goal has it’s benefits, and Ponzis will never enjoy the benefits of owning assets with no debt. At some point all Ponzis endure the unceremonious fall from entitlement, and the prudent savers of the world get to reap what they sow.
About a third of mortgaged households between the ages of 50 and 64 are moderately to severely burdened by housing costs, which include property taxes, insurance coverage and utilities, the report said. (Moderately burdened is defined as spending 30 to 50 percent of income on housing costs; severely burdened households dedicate more than half their income to housing.)
About a third of the population are spenders, a lifestyle choice they hope never catches up with them. Eventually it does.
But among similarly aged homeowners without mortgages, only 12 percent are cost-burdened.
Because income declines with age, the housing burden rises dramatically for households aged 80 and over. Nearly two-thirds of these households still paying mortgages are cost-burdened, compared with less than a quarter of homeowners over 80 without mortgages.
If I still have a mortgage at 80, I hope it’s a very small one. The stress of that would be terrible.
Chris Herbert, the center’s acting managing director, noted that spending such a large percentage of income on housing has a far greater effect on lower-income households than more-affluent ones. The report found that housing costs above 30 percent of income commonly force low-income households to skip meals or cut back on health care.
Lower-income renters are in the worst financial position. Some 77 percent of renters over 50 with annual incomes below $15,000 are cost-burdened, as well as about half of those with incomes from $15,000 to $29,999. Unlike homeowners, renters lack an equity cushion to ease the strain.
“Those groups are going to struggle through much of their retirement years,” Mr. Herbert said, “and at the end have very little to draw upon.”
As people age the problem with paying off a mortgage but not having other cashflow assets becomes apparent. They are happy to own the house, but they must take out a reverse mortgage (cancer mortgage) to access that money. Ideally, people need both a paid-for house and other cashflowing assets to pay lifestyle expenses. That’s my plan anyway.
Among baby boomers with mortgage debt, more are carrying it into retirement. As of 2010, 40 percent of households 65 and up were still paying a mortgage, compared with about 18 percent in 1992, according to the report.
Mr. Herbert, who is in his early 50s, said his own situation puts him on a similar trajectory. He recently refinanced at a lower interest rate, which means he could be paying a mortgage into his 80s. His children’s college expenses are competing with the possibility of paying the mortgage off more quickly.
As I noted above, life always pressures people to modify their financial plans, not always for the better.
The report’s findings “opened my eyes to think that you really do need to have a financial strategy toward paying off your mortgage,” Mr. Herbert said. “Many people in a similar situation may not have any option about paying off the mortgage,” he said, “but for those who can, it would be beneficial to pay more attention to it.”
The first step toward solving a problem is awareness of the problem. This man took the first step, and so have you.
Homeowners nearing retirement who have a mortgage with a low fixed-interest rate shouldn’t necessarily pay it off, so long as they have accumulated enough assets in retirement accounts to comfortably cover the monthly expense, said Jacob H. Gold, the president of Jacob Gold & Associates, a wealth management firm in Scottsdale, Ariz.
Unless those assets are paying a higher return than the mortgage interest rate, people are better off financially to retire the debt. People rarely consistently get better compound returns through investing than the interest rate on their mortgage; after all, the people who funded that mortgage were professional investors who determined making that loan was the best investment available.
Still, with fewer employers offering pensions, whenever a homeowner “can financially afford to redirect their efforts to pay down the mortgage,” Mr. Gold said, “that should always be their intent.”
My advice is similar; when in doubt about a particular investment, or if you have idle cash you don’t know what to do with, use it to pay down mortgage debt, even the low rate mortgage debt today. Perhaps some people may miss opportunities, but rarely do people regret paying off debts.