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Retire an Owner?

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Posted On: 12/14/2016

Question: My parents will be retiring in a few years. They currently have jobs so monthly mortgage payments are easy to handle, however once they retire that income will go away. Do many people at retirement age still have mortgages? What are the pros and cons of paying off such debt before retiring?

Answer: According to a 2014 study by the Consumer Financial Protection Bureau (CFPB), among those “age 65 and older, the percentage carrying mortgage debt increased from 22 percent to 30 percent from 2001 to 2011. Among those aged 75 and older, the rate more than doubled during that same time period, from 8.4 percent to 21.2 percent.”

Not only do more people over the age of 65 have outstanding mortgage balances, they owe more than in the past. “From 2001 to 2011, said the study, “the median amount older homeowners owed on mortgages increased 82 percent, from approximately $43,400 to $79,000.”

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The typical Social Security payment was $1,238 in August and, according to the Social Security Administration, “most financial advisors say you'll need about 70 percent of your pre-retirement earnings to comfortably maintain your pre-retirement standard of living. If you have average earnings, your Social Security retirement benefits will replace only about 40 percent.”

In other words, there's a 30-percent gap between Social Security payments and what you need to comfortably retire. Of course, if you don't have a monthly mortgage payment, then monthly retirement income needs can decline significantly.

The traditional idea has been to own a home debt-free by retirement age. For most, income declines in retirement and it's best to have lower monthly costs. With the mortgage paid off, monthly costs include only insurance and property taxes. In some jurisdictions there are additional property tax reductions for qualified owners age 65 and older.

If you can get financing at today's low rates, it might seem best to have a mortgage. The money that would have gone to paying off the debt can – it is claimed – be used instead to earn a higher return elsewhere or to pay off expensive debt such as credit cards. However, with less income keeping a mortgage is not comfortable for many seniors, getting a better return elsewhere is not a sure bet, and paying off credit cards does not mean they will stay paid off.

The result is that a debt-free house is a cherished goal for many homeowners. For details and specifics speak with a fee-only financial planner, visit the Pension Rights Center or contact the free Pension Counseling and Information Projects available in many states.

Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.

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