Tug of War

There is a classic battle between financial strategists when it comes to retirement strategies and paying down mortgages. 

It can be a veritable tug of war! 

Some say being debt free is the most important thing while others would suggest that debt, as long as it is a mortgage, is not a bad thing.

Some experts suggest that paying off the mortgage will give home owners invaluable peace of mind. As a top priority, these experts favor becoming mortgage free and suggest restraint with discretionary purchases or offering financial assistance to family members. They favor large lump sum pay-offs to become mortgage free as quickly as possible when the home owner is approaching retirement.

This may be a good strategy for some if there are savings or a steady source of income to rely on to cover expenses.

What these strategists sometimes fail to mention is that they are assuming that a person has enough contingency funds to sustain themselves in case of an emergency.  

In retirement, the classic recommendation of having three to six months of living expenses on hand as a safety net still applies. If paying off the mortgage depletes these reserves, then the home owner is left vulnerable in case of unexpected expenses.

Other experts suggest it may be a better course of action to maintain a substantial reserve and to use these funds to make mortgage payments, if needed. In this way the retiree can avoid assuming high interest consumer debt for unexpected expenditures such as emergency home renovations or repairs, or even sudden medical expenses by using cash from savings.

It is not prudent to think of retirement funds as a reserve. Cashing out at the wrong time, such as a period of poor performance, can precipitate a loss. Cashing out when performance is optimal should also be avoided, when these funds produce cash flow. This should only be done as the last course of action if circumstances are dire.

Bottom line is that there is no blanket strategy. Each person must evaluate their own circumstances, income stream and potential for risk with their home and other expenses to enjoy a safe and secure retirement.

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Sources:

Lynda at Sonoran Sun | Private Equity Investments