What Paying Off Your Mortgage (Or Not) Means to Your Retirement

(The Hartford Courant/MCT) -

Conventional wisdom says you need 70 percent of pre-retirement income to keep up the same lifestyle after you stop working.

That makes sense if you’ve been putting away more than 20 percent of your income in your final working years. With those savings, and no more work-related expenses for commuting and dry cleaning, you’d probably get away with a lower income.

But if you weren’t saving heavily to the end, it’s hard to see how you’ll reduce expenses 30 percent instantly at retirement,unless you’ve paid off the mortgage on your home.

In 2010, according to the Federal Reserve Survey of Consumer Finances, 40.5 percent of households nationwide in which the head was between 65 and 74 years old, were paying a mortgage. But while that’s down slightly from 2007 (42.9 percent), it’s up from 2004 (32.1 percent) and substantially higher than a generation ago.

“It really started to uptick around ’95, and it’s gone pretty much consistently upward since then,” says Craig Copeland, an economist at Employee Benefit Research Institute of Washington, D.C.

Why, then, don’t more people make paying off the mortgage before retirement a priority?

Copeland explains that a lot of things have changed. Housing values went up and credit loosened at a time when many baby boomers were in their 50s. Many families did cash-out refinancings to help pay for their kids’ college tuitions, or for home renovations.

Analyzing the data,”You see a lot of people in their 50s buying bigger houses, new houses, as their incomes went up,” says Copeland.

Guy Cecala, publisher of Inside Mortgage Financing, notes that in his parents’ generation, a lot of people planned to pay off their houses before they retired, then sell them and pay cash for smaller houses in warmer climates, living on the remainder.

“My parents, they had a house in Connecticut,” he said. “They viewed that as their retirement, their nest egg. You don’t hear people doing that anymore.”

But, as the mortgage numbers show, a majority of people own their houses free and clear by 65 – people like Jim and Sallie Cappadora, for example.

Jim, 63, and Sallie, 60, paid off their Ellington, Conn., house eight years ago. If they had let their 30-year mortgage run its standard course on the house they bought in 1986, they’d have three years left to pay.

“From the very first mortgage payment, we paid an extra $50 a month toward our mortgage, and after five years, we had paid off 10 years of principal,” says Sallie.

In 1986, the Cappadoras sold the first house for $104,000, and bought a $158,000 house with a $90,000 mortgage.

Sallie stayed home with their kids for eight years. After  that, when she began working full time as a real estate agent, she and Jim husband started putting $100 a month toward the principal on their mortgage.

Then, in 2003, when their two children were in college, Jim lost his manufacturing job. Without the employee benefits that had covered the family’s insurance needs, the Cappadoras  now had to pay $1,360 a month for insurance.

“Believe me, it wasn’t easy when he was laid off,” Sallie remarks. Before her husband lost his job, her annual earnings were roughly equal to his. Jim remained out of work for several years.

The kids took loans for some of their tuition costs at the University of Connecticut. But  Sallie Cappadora says she only missed five months of putting extra toward the principal in the 29 years they had a mortgage.

Copeland says it’s possible for  someone in his 50’s to build assets faster in his 401(k) , with  the right investments, than he would by putting money toward mortgage principal. But, he adds, “Even if you think you’re investing properly, it’s impossible to predict (the outcome).”

He says that anyone who has a 401(k) employer match should be putting enough in to get that match.

But once that’s done, he believes the wisest move for a person who’s 55, who has just $30,000 in a 401(k) but also has 17 years left on a mortgage, would be to try to reduce that number of years. If someone had a $130,000 balance at 55, at 4 percent interest, and paid an extra $175 a month, the mortgage would be paid off in 13 years and three months.

“It’s easier to work two years longer than five years longer,” Copeland somments.

Whether the value of the house drops or not, owning a house free and clear has the same value.

“If you can get rid of something that costs you 20 percent of your budget, that is enormously beneficial,” he says. “To be able to get rid of that expense is … a key choice they can make that will allow them to have an easier retirement.”