Retiring With a Home Mortgage

Managing cash flow while retired can be a challenge, particularly when facing several more years of mortgage payments. Retiring debt-free is the goal of many Americans. Increasingly, members of the baby boomer generation are retiring with substantial amounts of mortgage and consumer debt that will constrain their cash flow and lifestyle options during retirement. According to the February 2009 Federal Reserve Bulletin, the percentage of households age 65-74 with a mortgage on their primary residence increased from 32.1% in 2004 to 42.9% in 2007. Cash Flow Options The optimal solution is to pay off debt – all debt – before retiring and enjoy a relatively stress-free lifestyle as a result. On the other hand, cashing in all or a large portion of one’s nest egg just to retire the mortgage may not be a practical solution, particularly if doing so will generate a large immediate income tax liability. Imagine the amount of income tax that would be due by suddenly distributing $100,000 or more from a 401(k) plan or an IRA to pay off one’s mortgage balance. When paying the mortgage off early is not an option, there are generally two other options available: 1) purchase an immediate annuity to cover the monthly payment, or 2) gradually cash in investment assets to make the payments. Other options are also available, but this article will focus on these two.