Posted by Should we pay off the mortgage before we retire?There is actually no standard answer to this question.The strategy of paying off the loan depends on our tax situation, asset and income levels, and personal attitudes towards debt and investment.American Life Insurance GuideCommunity’s RetireGuru©️ Retirement College shared by CNBC columnistDeborah Nason on the pros and cons of paying off loans before retirement.
Advantages of early repayment before retirement
Paying off the loan before retirement reduces the pressure and calms down the subjective mentality in retirement.This approach also provides more cash flow after retirement, and provides a financial buffer for future emergencies, such as the need for long-term care.
"When you hear some people say that they can earn 8 to 10 points from the stock market, and the loan only spends 3 to 4 points, you have to proceed with caution," said Patnick Stark, RS Crum Director of Financial Planning , "Although the historical long-term average may reach this high, we, as investors, calculate the returns based on the day, not the 50-year cycle."
"The market's volatility may exceed the period during which you can remain calm," Stark said.
Sensible Money CEO Dinah believes that in some cases, paying off loans is a better way to handle taxes.
She warned about how to withdraw cash from 401k and IRA accounts to repay the loan.She gave an example: If you only need to repay a loan of $1,500 per month, but if you withdraw from the above account, you need to withdraw more than $2,000 per month to pay the corresponding taxes and loans.
"The extra withdrawal will put you in a better tax rate zone, and even more of your social security pension will be taxed," she said. "These extra taxes may far exceed your loan interest Possible tax relief."
So what are the specific benefits of paying off the loan before retirement:
- After paying off the loan, you can reduce your cash flow requirements in this area, and you can change your asset allocation to be more bold.
- Get rid of debt-just like investing.For every dollar you pay back on the principal, you will no longer need to pay interest on this part of the principal.For example, paying off a loan with an interest rate of 4% is equivalent to receiving 4% of income without management fees.
- Paying off the loan is 100% safe and will not bear any market risk.
- Out of sight out of mind.
Disadvantages of paying off the loan before retirement
Leon LaBrecque, Ph.D., CEO of LJPR Financial Consultants, also pointed out the disadvantages of paying off loans before retirement:
- When the interest rate increased, you could have repaid the loan with 4% interest, but now it is 5% to borrow from the bank.
- The money deposited in the 401k, IRA account is tax deductible.In contrast, using the money to pay for loans may only have a partial tax benefit.
- Part of the mortgage payment can help, but it won’t change your cash flow.It is best to pay off the mortgage completely when you retire.
The biggest disadvantage of repaying the loan early is that the bank assumes all the risks of fighting inflation with the fixed interest rate repayment originally used. After the early repayment, the risk is transferred.
"For those who have sufficient assets to face stock market volatility, use loans to release other assets and use leverage to obtain higher long-term returns in the history of the stock market." He said.
The founding partner of Warren Street Wealth said that there are many optimization options for assets that are not used to repay loans in advance.
If you have already filled your 401(k) account or IRA account, it is recommended that you continue to put the after-tax money in your account if allowed.
"If all of the above practices are used up, you can start to establish a more liquid investment account and invest in tax-friendly assets, such as municipal bonds, or mutual funds or ETFs with low turnover."
Michael McVett, a financial planner from Guillaume & Freckman, reminded that using assets to repay loans will also reduce the total amount of money that people have only at their disposal.
Article Source:CNBC
