Author Topic: Parent's Close to Retirement: To Pay Off the House or Not?  (Read 2513 times)

The Mobile Mustachian

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Parent's Close to Retirement: To Pay Off the House or Not?
« on: August 13, 2014, 10:05:40 AM »
Hello everyone,

My dad is retired and my mom has decided that she plans to retire in 18 months. They owe $200K on their mortgage @ 4.5% and their principal and interest payments total $12,000 per year. My dad is lucky enough to have a pension and my mom has about 650K saved in her 401K. She will be depending on withdrawing from her 401K @ 3.8% per year in retirement to pay living expenses.

I've been thinking about whether it makes sense to pay off the mortgage with part of the 401K which would reduce their overall household expenses, however, it would limit the future amount of her withdraws due to the decreased size of her 401K.

What are your thoughts? I would appreciate your input as I help them through this decision process. Please feel free to ask any questions.

tyd450

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Re: Parent's Close to Retirement: To Pay Off the House or Not?
« Reply #1 on: August 13, 2014, 10:26:53 AM »
I don't think I would dip into that to pay it off.  They are used to their budget and have that factored in so I think I would just let it ride at this point. 

Who knows, they may decide to move in the next few years and that $200k could go away by downsizing or renting. 

Michread

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Re: Parent's Close to Retirement: To Pay Off the House or Not?
« Reply #2 on: August 13, 2014, 11:04:21 AM »
Do the math.  How much interest would they save by paying off the loan (total life of loan & monthly) early?    ($200k @ 4.5% isn't enough info)

The Mobile Mustachian

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Re: Parent's Close to Retirement: To Pay Off the House or Not?
« Reply #3 on: August 13, 2014, 11:30:23 AM »
They would save $160K in interest over 27 years by paying off the loan now. At present, they are paying approximately $700 per month in interest or $8,400 per year.

Catbert

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Re: Parent's Close to Retirement: To Pay Off the House or Not?
« Reply #4 on: August 13, 2014, 11:54:15 AM »
Remember that taking 200K out of a 401k will give them a hell of a one year tax bill.  Depending on their overall situation this could also make SS taxable, a higher Medicare bill, lose some deductions, etc.  If they do make sure they figure out all the random things it will impact.  Paying 28-35% tax on the withdrawal could make the math unworkable.

Personally, I would not take 1/3 of my 'stache in taxable lump sum to pay off a mortgage.  But it also depends on how disciplined they are at investing and (not) spending.  If I recall from previous threads you're also concerned about your parents spending too much money too quickly.  In that case it might be good to tie it up.

JGB

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Re: Parent's Close to Retirement: To Pay Off the House or Not?
« Reply #5 on: August 13, 2014, 12:03:06 PM »
We had a discussion about this not too long ago: http://forum.mrmoneymustache.com/ask-a-mustachian/invest-vs-payoff-debts-swr-effects-of-mortgage-payoff/msg355906/#msg355906

The takeaway for me was that in the vast majority of cases, you lose money in the long run by paying off the mortgage at the start of your retirement. However, in the few cases where your initial plan might/would have failed, you can prevent some of those failures by taking this method. As with any failure case, these tend to primarily be the ones where investments take a big hit soon after retirement starts.

I know that for my FIRE goals, I will have enough flexibility in the first few years to adjust if things aren't going right and thus deal with these failure cases through changes I make (extra work, reduced expenses, returning to work, etc). To me, it is not worth handicapping the growth of my stash in the average and above-average cases, just to reduce the number of times I need such adjustment in the comparatively few below-average cases.