Tag: retirement

If you are like most Americans, your mortgage payment is probably your highest fixed expense. A mortgage is often seen as “good debt” since you need somewhere to live and you’re going to have to pay for it. But what about when you retire and you are living off of your savings? Will your mortgage payment overwhelm your budget? Should I pay off my mortgage before I retire? Or should you carry it with you? As with most things in life, the answer is not cut-and-dried. Answer these seven questions to decide what is best for you.

How Tight Will Your Retirement Budget Be?

Have you determined your investment withdrawal rate and what your monthly income will be once you leave your working years behind? If your budget will be tight or your income will be significantly lower than what it is now, you might want to work longer to eradicate your mortgage payment. This will increase your cash flow in retirement, possibly freeing up some funds so that you can travel or pursue other passions. Evaluating these factors can help answer the question, should I pay off my mortgage before I retire?

What Is Your Interest Rate?

Over the lifetime of a mortgage, you pay tens of thousands of dollars in interest. If you pay it off early, you will save a lot of interest charges. Even though you would lose the tax benefits mortgage interest offers, you would still have more at the end of the day. Understanding your mortgage interest rate is key when considering if you should pay off your mortgage before you retire.

But, if your choice is between paying off your mortgage and investing more to build up your retirement wealth, you need to do the math. Compare your interest rate with expected market returns based on historical data. If you locked in your mortgage when interest rates took a nosedive and only pay 3.5%, then you might want to pour your extra cash into your savings if you believe you could get a return of 6%. The opposite is also true. If your interest rate is higher than what you think the market could give you, pay off your mortgage first.

Do You Have Additional Debt?

Is your mortgage your only debt, or are you paying off student loans or credit cards too? Make sure you use any excess cash to pay off higher-interest debt first. Addressing other debts can influence your decision on whether you should pay off your mortgage before you retire.

Are You Maxing Out Your Retirement Contributions?

The benefits of retirement savings accounts are touted everywhere we turn. Roth IRAs offer tax savings in retirement, Traditional IRAs and 401(k)s let you save on taxes now, and many employer-sponsored plans give you a match, essentially building up your nest egg with free money. If you aren’t maximizing your savings to the limits these accounts allow, you should do that first.

This will bulk up your retirement savings and give you more financial flexibility and freedom in retirement. Consider your retirement savings goals when deciding if you should pay off your mortgage before you retire.

How Will You Pay Off Your Mortgage?

Getting rid of this budget line item is a noble goal to have, but where will you get the money to accomplish this? Are you thinking about withdrawing from your retirement accounts to make this goal a reality?

First, don’t pay off your mortgage at the expense of your standard of living in retirement. If you are worried about your retirement income already, don’t increase that worry by decreasing the balance in your accounts. Second, maybe use funds from a Roth IRA before taking from a taxable account, that way you won’t be adding to your annual income tax, potentially pushing you into a higher tax bracket. Depending on your age, you will not only face taxes but also penalties if you make a withdrawal from an IRA or 401(k). You will also lose the future growth on the balances in your accounts.

But if you are determined to pay off your mortgage before you enter your golden years, here are some other options that avoid raiding your precious retirement nest egg:

Make Extra Payments

To slowly but surely minimize the amount you owe on your home, put any extra cash towards additional principal payments. It might not be as satisfying as paying your mortgage off in one big chunk, but even small amounts can take years off of the back end of your mortgage and reduce the total amount of interest you pay. Making extra payments is a strategic way to approach the question of whether to pay off your mortgage before you retire.

Think About Biweekly Payments

Another option is to make biweekly payments of half your usual monthly payment. Because there are 52 weeks in the year, you’ll make the equivalent of 13 monthly payments by year-end. On a 30-year mortgage, making 13 monthly payments each year instead of 12 would reduce the term of your loan by about four years. Biweekly payments are an effective tactic if you’re wondering, should I pay off my mortgage before I retire?

15 Years vs. 30 Years

One way to slowly decrease your mortgage before retirement is to refinance to a 15-year loan. Your monthly payments will most likely be higher than those for a 30-year mortgage, but the increase will be balanced out by a lower interest rate and you will save thousands of dollars in interest over the term of the loan. Make sure you speak with an unbiased professional before taking this step to ensure the difference in interest rates will be worth the refinancing fees.

Are You Planning To Move?

If you want to relocate to a sunnier place or maybe move to be closer to your grandchildren, don’t worry about paying off your mortgage before taking on a new one in a different location. You can take the equity from the sale of your home and combine it with your savings to put towards the new house if you decide to go that route.

Moving plans are crucial when considering if you should pay off your mortgage before retirement.

How Much Peace of Mind Will a Mortgage-Free Life Bring?

Many people place a high value on being debt-free. They want to enter retirement with nothing holding them back financially. Retirees with the least amount of stress and the most financial freedom are those with the lowest fixed expenses. If you want to retire with a clean slate, paying off your mortgage might be the right decision for you. When contemplating if you should pay off your mortgage before you retire, consider the peace of mind it might bring.

After answering each question with your personal situation in mind, where do you stand? If you want help weighing your options and making the decision that will benefit you the most, click here to schedule a phone call.

About Richard

Richard Archer is a financial advisor and the President of Archer Investment Management with more than eighteen years of industry experience. Largely working with successful individuals and couples, he specializes in providing comprehensive investment guidance and personalized care and attention to each client. Along with holding a Bachelor of Science in Economics and a MBA, he is a CERTIFIED FINANCIAL PLANNER™ certificant and a Chartered Financial Analyst®. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com. 

I’m Richard Archer, founder and President of Archer Investment Management. While it’s tempting to tell you all about me, the truth is that I’m all about you—your financial goals, dreams, concerns and success. That’s what I’ve built my company on, and that’s why I’m so proud of it.

You’ve probably had it drilled into you since you were young that owning a home means that you are on the road to success. For generations, buying a home was considered the cornerstone of the American dream, but is that still the case? Is buying really better than renting in retirement?

You may be surprised by this, but the Harvard Joint Center for Housing Studies tells us that the majority of renters are 40 or older and that there has been an increase in the number of renters in their 50s and 60s. This shift shows that more people are questioning whether to rent or own in retirement.

Questions to Consider When Deciding to Rent or Own

When it comes to retirement, here are some questions to ask yourself when making the decision to rent or own your home:

Is Your Home Providing a Return on Investment?

A common cliché is that your home is an investment. But despite the benefits of homeownership versus renting, owning a home can be a considerable drain on your resources. It’s true that you can gain from owning a home. If you bought when the housing market was low, you may have amassed a large amount of equity. But that equity only serves you well if you are planning to sell. Unless you downsize or move to a cheaper area, anything else you buy will be a similar price; therefore, the equity you gain will just be going towards your new home.

But what if you feel like you are throwing away money on rent? While rent payments only go into the hands of a landlord and don’t increase your net worth, there are additional hidden costs that come along with homeownership that you might be forgetting. If you own your home, you need to budget for property taxes, maintenance, and insurance. Not to mention the time and effort required in keeping up a home. This makes the decision of whether to rent or own in retirement more complex.

If you are in it to invest, let’s consider an example. Say your mortgage interest rate is 5%. If you estimate that, based on your risk tolerance and time horizon, you can expect an investment return of 4%, it would make more sense to pay down your mortgage. Otherwise, you’re potentially throwing away 1%. However, if you are an aggressive investor and believe you could earn 8% on your investment, it would make more sense to invest. Or, think of it this way: if your ownership costs total $2,000 a month and you could rent your ideal property for $1,800 a month, you have $200 to invest. Use a calculator to compare the potential investment growth with how much equity you could gain.

Is the Tax Benefit Worth It?

If you enjoy benefitting from the tax deduction that home ownership offers, renting won’t look enticing. But remember that in order to receive the deduction, you must itemize your taxes. Depending on the value of your home, the standard deduction might be more than the interest rate deduction. Also, as you pay off your mortgage, the amount you dedicate to interest decreases each year, meaning you will receive a small deduction. And if you have already paid off your home, you can only deduct your property taxes. These factors might influence whether it is better to own or rent in retirement.

What Can You Handle in Retirement?

As you age, you might realize that you can’t handle the upkeep of your home. Even if you previously enjoyed puttering around with tools and landscaping the yard, your health might prevent you from continuing these activities. Take a look at your lifestyle and make an informed decision. If you would gain peace of mind with someone else maintaining your residence, you might want to rent.

You may be drawn to the amenities that come with renting and want to be part of a community with others who are in the same phase of life you are. Even if you enjoyed living in the suburbs or country as an empty-nester, you may be drawn to a more urban setting with more transportation options.

Is it better to own or rent in retirement? This depends on your personal circumstances, and considering the convenience of renting might sway your decision. Retirement is a completely new season of life, so you need to evaluate how you want it to look instead of relying on old ways of thinking.

Are You Planning to Leave Your Home to Your Heirs?

If part of your estate plan is to have your children inherit your home, it makes the most sense to stay put as a homeowner. According to a Trulia study, it’s only worth it to be a homeowner if you are going this route. Otherwise, it’s always cheaper to rent than own in retirement. One of the most important benefits of owning a home is building equity. If your children sell the home when you pass, the equity becomes their inheritance. But again, you need to weigh the pros and cons of the potential growth of that equity. If you sell now when the market is up and rent for considerably less, you could invest the equity you gain from the sale and use that money as an inheritance.

Do need more convincing that homeownership may not be the best financial decision for your golden years? Take the time to watch this video to get a thorough picture of why homeownership might not be your wisest choice.

Making the Decision: Rent or Own in Retirement?

Whether you rent or own in retirement is a personal decision you must make based on your unique set of circumstances and values. Do you own your home outright? How much equity do you currently have? Does your home require minimal upkeep? How are the advantages and disadvantages balancing out for you? Is it time to reevaluate your situation? I would be happy to help you think through your options and make a decision that will benefit you for years to come. Click here to schedule a phone call.

About the Author: Richard Archer

Richard Archer is a financial advisor and the President of Archer Investment Management with more than eighteen years of industry experience. Largely working with successful individuals and couples, he specializes in providing comprehensive investment guidance and personalized care and attention to each client.

Along with holding a Bachelor of Science in Economics and a MBA, he is a CERTIFIED FINANCIAL PLANNER™ certificant and a Chartered Financial Analyst®. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com.

You may think I’m crazy, but I’m about to embark on the hardest physical challenge of my life: The Gran Canaria & Tenerife Ride Camp. Some of you may remember that I rode in the climbing camp at the Tour de France two years ago, so this is right up my alley. Here’s what the trip will look like: 7 days, 426 miles, and 60,000 feet of climbing. That’s like riding from Chicago to Pittsburgh while climbing Mt. Everest twice…all in one week!

This camp is the annual spring mecca for top Tour de France contenders, and it will not be a leisurely ride through the park. I’ll face immense climbs, such as the Valley of Tears (the name says it all) and Pico de las Nieves. The most difficult, though, will be the famous inactive volcano, El Teide. It’s the longest continuous climb in Europe, with an incline of 5-7% as it rises to over 12,200 feet.

How am I preparing myself for this enormous challenge? How does a physical race compare to your finances?

SET SHORT-TERM GOALS

I’m approaching my training the same way I work through financial planning with my clients: breaking big, long-term goals down into smaller, achievable pieces.  We all know that saving for retirement is a long-term goal, but having short-term goals along the way can help you stay focused to make your dreams seem attainable. Planning for retirement requires mental fortitude!

As a real-life example of this concept, last weekend I completed a 112 mile, eight-hour climbing ride that, taken as a whole, seemed absurd and unachievable.  However, I had already ridden each of the hills on the course and completed a relatively flat century ride, so I knew I could complete both the distance and the hills. Mentally, I broke the route up into three 35 mile segments and focused on one loop at a time as I rode.

I kept energy in reserve, knowing that I would need it for the hardest climbs at the end of the ride. When it comes to saving for your future, you will also require more focus, energy, and resources as you get closer to your retirement date. Do everything you can to ensure that you stay strong after decades of working hard.

As I train for the Gran Canaria camp, I’m tackling increasingly difficult goals each week, taking baby steps to prevent injury and strengthen myself physically and mentally. I’m planning to build my mileage and climbing each week while staying just within my physical abilities.

HAVE THE RIGHT SUPPORT

One thing that is crucial to my success is having the best equipment and professional support. I will ride a light, carbon fiber Bianchi climbing bike with an excellent seat. I will also have access to an experienced support team to assist me when I need food, water, guidance, and encouragement.

In the same way, you will be most successful with your financial plan if you have the proper support and tools. You may be okay doing it on your own, but if you have professionals who can guide and encourage you as well as educate you, the chance of reaching your goals is higher.

Just like I did at the Tour de France a few years ago, I look forward to riding and living with cyclists from all over the world. I’ve met athletes from Australia, England, France, Spain, and Italy on previous trips and these encounters always remind me how small the world is and how similar people are, no matter where they come from. Cycling trips like these make me feel small and big at the same time as I experience the elation of successfully summiting a massive climb in a foreign land while simultaneously hearing jubilation in four different languages. Surrounding yourself with people who are on a similar journey as yourself can create a community that will strengthen you when things get rough.

PREPARE FOR THE DESCENT

Most people don’t know this, but the descent is more difficult than the climb. This is when my equipment, preparation, and support team are essential. The absolute focus and preparation it takes to descend safely requires me to clear my mind of everything else and stick to my riding plan no matter what. Descending at speed for long distances on unfamiliar, foreign roads is scary. Knowing my own riding ability and tolerance for risk is of absolute importance to complete my ride in one piece. 

As you are saving for retirement, you can expect to experience market volatility and multiple downturns. When these situations arise, stay calm, rely on your support team, and focus on the solid strategy that you have created with your advisor. This is how you keep your portfolio safe when the markets go haywire.

BE PROUD OF YOURSELF

As you get closer to your goals and see growth in your portfolio, be proud of yourself for your determination and hard work. Find ways to reward yourself for reaching your goals!

My reward for all of this training is a week on an exotic Spanish island that I would probably never visit if it weren’t for this cycling trip.

When was the last time you pushed yourself to do something that scared you? Have you ever taken the time to evaluate your goals, your support team, and your “equipment”? If you think your retirement “trek” is missing something, I’d love to chat with you! Click here to schedule a phone call.

About Richard

Richard Archer is a financial advisor and the President of Archer Investment Management with more than eighteen years of industry experience. Largely working with successful individuals and couples, he specializes in providing comprehensive investment guidance and personalized care and attention to each client. Along with holding a Bachelor of Science in Economics and a MBA, he is a CERTIFIED FINANCIAL PLANNER™ certificant and a Chartered Financial Analyst®. He combines his advanced industry education and knowledge with his genuine care for people to provide clients with an exceptional experience. To learn more about Richard, connect with him on LinkedIn or visit www.archerim.com.

As Americans increasingly rely on their 401(k) retirement plans to secure their financial future, understanding the nuances and benefits of these plans is crucial, especially for Microsoft employees and others planning their retirement savings.

What is a 401(k) plan?

A 401(k) plan is a retirement savings account funded by employees. For 2024, employees can contribute up to $19,500 (or $26,000 for those aged 50 and older) to their 401(k) accounts. These contributions can be made on a pretax basis, reducing taxable income, or through a Roth 401(k), where contributions are after-tax but withdrawals are tax-free.

Employer Contributions and Matching

One of the significant advantages of a 401(k) plan is employer matching. Employers often match a portion of employee contributions, such as 50% of the first 6% of salary contributed. This employer match enhances retirement savings significantly, subject to vesting periods that ensure employees receive full entitlement to these contributions over time.

401(k) Contribution Limits and Tax Implications

Total contributions, including employer matches, cannot exceed $61,000 in 2024. Contributions to traditional 401(k) plans grow tax-deferred until withdrawal, where they are taxed as ordinary income. In contrast, Roth 401(k) contributions are taxed upfront, but withdrawals are tax-free during retirement.

Distributions and Withdrawal Options

Withdrawals from 401(k) plans are typically penalty-free after age 59½, though early withdrawals may incur a 10% penalty. Employees leaving their jobs can roll over their 401(k) balances into an IRA or their new employer’s plan, avoiding immediate tax consequences.

Borrowing from Your 401(k)

Many plans allow borrowing against vested balances, up to $50,000 or 50% of the account balance, whichever is less. Loans must typically be repaid within five years to avoid penalties, with unpaid amounts treated as taxable distributions.

Investment Options and Flexibility

401(k) plans offer diverse investment options, including stocks, bonds, and cash equivalents. This flexibility allows employees to tailor their investments based on risk tolerance and retirement goals, ensuring a well-rounded portfolio.

Key Takeaways for Microsoft Employees

For Microsoft employees, maximizing employer matches and understanding Roth 401(k) benefits can optimize retirement savings. Consulting with a financial advisor or plan administrator can provide personalized guidance on leveraging 401(k) plans for long-term financial security.

A 401(k) plan remains a cornerstone of retirement planning, offering tax advantages, investment flexibility, and employer contributions that bolster financial futures. Whether choosing between traditional or Roth options, prudent management of 401(k) plans is essential for achieving retirement goals.

Source/Disclaimer: Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund may seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. Diversification and asset allocation do not ensure a profit or protect against a loss. Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

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