Forget the Deduction: Why You Should Pay Off Your Mortgage Before You Retire
More Americans are quitting the work force without retiring their mortgage. Big mistake? It could prove more taxing than they ever imagined.
According to the most recent Federal Reserve Survey of Consumer Finances, 32% of households headed by someone age 65 to 74 were carrying home-mortgage debt as of 2001, up from 26% three years earlier.
"It's like a financial plague," says Michael Maloon , a financial planner in San Ramon, Calif. "We're getting away from those Depression-era values."
True, mortgage rates are low and mortgage interest is one of the last great tax deductions. Nonetheless, carrying mortgage debt into retirement can wreak financial havoc.
Debtors' prison. To understand why, imagine two couples who just retired at age 65.
The first couple lives comfortably on $16,000 a year from Social Security and $24,000 from their individual retirement accounts. They don't owe any tax on their Social Security because a combination of their income and half of their government benefit doesn't breach $32,000 -- the threshold at which a couple filing jointly has to start paying taxes on their Social Security.
GETTING AHEAD
Suppose you just took out a $200,000 30-year fixed-rate mortgage at 6% with a $1,200 monthly payment. Here's what it would cost you to pay off the loan early.
? If you add $50 to each mortgage payment, you will pay off the loan in 27 years.
? With an extra $200 every month, you will be done in 21 years.
? By adding $500 to each check, you will be mortgage-free in 15 years.
Our first couple would, however, be taxed on their IRA withdrawals. Figure in their two personal exemptions, the standard deduction and the additional standard deduction for folks age 65 and older and they would owe Uncle Sam just over $600, leaving them with $39,400 in after-tax income.
Our second couple could also live comfortably on that sort of after-tax income, except for one small problem: They still have a mortgage. At age 50, they had taken out a $200,000 30-year fixed-rate loan at 6%, putting them on the hook for $1,200 every month until age 80. In other words, if our second couple wants to match the first couple's standard of living, they would need enough after-tax income to cover both $39,400 in living expenses and $14,400 in annual mortgage payments.
As our second couple strives to generate that cash, they can take advantage of the mortgage-tax deduction. But that doesn't prove to be much of a bonanza. The reason: With each successive mortgage payment, a bigger chunk of their monthly check goes toward principal and less to interest.
Indeed, with our second couple now in the 16th year of their mortgage, just $8,400 of their $14,400 annual payment goes toward interest. Tack on $5,000 for other deductions, and our second couple might have a total itemized deduction of $13,400, modestly above the $11,600 standard deduction taken by our first couple.
Despite that tax break, our second couple discovers that retirement is pretty darn taxing. How come? To pay the mortgage while matching the first couple's standard of living, not only does our second couple have to make hefty taxable withdrawals from their IRA, but also those withdrawals drive up their total income, thus triggering taxes on their Social Security.
Result: Our second couple would need total pretax income of more than $58,000, calculates Glenn Frank, a financial planner in Waltham, Mass. That means drawing more than $42,000 from their IRA -- 75% more than our first couple -- and paying more than $4,300 in federal taxes.
In effect, our second couple's $14,400 annual mortgage is costing them more than $18,000. "There's a surprising sting there," Mr. Frank says.
For unsuspecting retirees, the financial hole can be even bigger. Because these seniors don't realize their Social Security has become taxable, they may fail to make the necessary estimated tax payments. That could result in tax penalties, which necessitates further IRA withdrawals, which trigger further taxes.
Harvey Gillis, a semiretired executive in Snohomish, Wash., has been trying to get politicians to fix this nasty tax trap. "This thing is worse than the alternative minimum tax," he contends. "It's a middle-class mire."
Buying freedom. Faced with this mess, our second couple might be tempted to yank a big chunk out of their IRA and rid themselves of their mortgage. But that also isn't cheap, because they still owe more than $142,000 on their loan.
In fact, if our first couple wanted to pay off their mortgage while also covering their $39,400 in after-tax living expenses, Mr. Frank calculates they would need to withdraw $217,000 from their IRA and pay almost $52,000 in federal taxes. (This assumes, once again, that our second couple receives $16,000 from Social Security.)
Carrying mortgage debt into retirement doesn't create just tax hassles. You also lose financial flexibility because you have this big fixed monthly cost. That can make for tough choices in down markets, as you try to figure out which investments to sell in order to make the monthly mortgage payment.
In addition, your mortgage debt will limit your ability to tap into your home's value through a reverse mortgage. As I see it, a reverse mortgage is the financial backstop for cash-strapped retirees. But if you already have a conventional mortgage, a reverse mortgage may not garner you much cash.
What to do? The solution is obvious: Next time you refinance or buy a new home, tailor the length of your mortgage to your expected retirement date. Alternatively, make extra principal payments, with a view to paying off your mortgage by retirement.
As Mr. Maloon, the financial planner, argues, "Every homeowner should have the goal of using their last paycheck to make their last mortgage payment." 退休之前还清按揭贷款
现在越来越多美国人还没还清按揭贷款就退休了。这是否铸成大错？他们的财务负担可能比想像的还要沉重的多。
美联储 (Federal Reserve) 最近一份消费者融资调查显示，到 2001 年为止，在 65 － 74 岁老人为一家之主的家庭中，有 32% 的家庭负担著住房贷款，这一比例比三年前上升了 26% 。
“这就像一场财务梦魇，”加州 San Ramon 的理财规划师迈克尔?马龙 (Michael Maloon) 说。“我们正在抛弃经济大萧条时期的价值观。”
的确，当前按揭利率低，按揭利息是其中一个减税大项。然而，把按揭债务带入退休生活将导致财务上的灾难。
债务人的监狱。为了更好的理解个中原因，让我们假设有两对刚刚在 65 岁退休的夫妇。
第一对夫妇每年从社保基金中领取 16,000 美元，还从个人退休帐户中获得 24,000 美元，生活十分宽裕。他们对社保基金的提取无需纳税，因为其收入和政府补助的一半加起来不超过 32,000 美元 -- 联合申报的夫妻从社保基金中提取需要纳税的底线。
但是第一对夫妇从个人退休帐户中取钱时要缴税。考虑到他们的两项个人免税：标准减免额和 65 岁以上居民的额外标准减免，他们需要缴纳的税款刚好超过 600 美元，这样该夫妇税后收入是 39,400 美元。
第二对夫妇也可以靠这种税后收入过舒服日子，但有个小问题：他们还有按揭贷款。他们 50 岁时申请了按揭 30 年的 20 万美元房屋贷款，固定利率为 6% ，于是他们不得不每月偿还 1,200 美元按揭贷款，直到 80 岁。换句话说，如果第二对夫妇想赶上第一对夫妇的生活水准，他们的税后收入必须囊括 39 ， 400 美元的生活费和每年 14,400 美元的按揭。
第二对夫妇在努力弄到这笔钱的同时，可以利用按揭税减免。不过这样做的作用并不大，因为随著每笔按揭的偿还，他们的每月还款额中本金部分会增多，利息部分会减少。
实际上，由于第二对夫妇现在是第 16 年还款，其每年支付的 14,400 美元贷款中只有 8,400 美元用于支付利息。算上 5,000 美元的其他减免，第二对夫妇的减免额总计可能有 13,400 美元，比第一对夫妇 11,600 美元的标准减免略高一些。
尽管有这些减免，第二对夫妇还是会发现退休生活很沉重。为什么？因为在支付按揭的同时要赶上第一对夫妇的生活水准，第二对夫妇就需要从个人退休帐户中进行更多需要纳税的提取，而且这将会提高他们的总收入，从而导致社保也要缴税。
结论：按麻塞诸塞州 Waltham 的理财规划师葛笺?弗兰克 (Glenn Frank) 的计算，第二对夫妇所需的税前收入超过 58,000 美元。这意味著他们要从个人退休帐户中取出 42,000 多美元 -- 比第一对夫妇多 75% ，并缴纳超过 4,300 美元的联邦税。
实际上，第二对夫妇每年 14,400 美元的按揭需要他们支出 18,000 多美元。“这让你吓一跳，” 弗兰克说。
对于那些没有意识到这点的退休者，这个理财缺口可能更大。由于没有意识到他们的社保已经开始缴税，这些老年人可能没有作必要的纳税估计。这可能招致税务惩罚而需要进一步从个人退休帐户中取款，进而交更多的税。
华盛顿州 Snohomish 一位半退休执行主管哈威?吉利斯 (Harvey Gillis) 一直试图说服政客修补这个可恶的税务陷阱。“这比替代最低税额 (alternative minimum tax) 还要糟糕，”他说。“仿佛是给中产阶级设的泥潭。”
购买自由。面对一团糟的局面，第二对夫妇也许会禁不住诱惑从个人退休帐户中狠狠取出一笔，把按揭还清。但这样做代价也不轻，因为他们需偿还超过 142,000 美元的贷款。
按照弗兰克的计算，事实上如果第二对夫妇想要还清按揭同时能够支付 39,400 美元的税后生活费，他们需要从个人退休中取出 217,000 美元，并支付将近 52,000 美元的联邦税。（在这里，我们仍假定第二对夫妇从社保获得 16,000 美元）
把按揭贷款延续到退休后不仅引起税务方面的麻烦，你还会因为每月固定的高额费用而失去理财的灵活余地。在市场下跌时你将面临艰难的抉择，为了支付每月的按揭，你必须考虑出售那些投资。
另外，按揭贷款债务还会限制你通过反向按揭 (reverse mortgage) 利用房产价值的能力。我认为，反向按揭是为现金有困难的退休者提供的一个理财支撑。但是如果你已经有普通按揭贷款，反向按揭贷贷款也许不能给你带来多少现金。
怎么办呢？解决办法很明显：下次你再融资或者买新房子时，把付清按揭贷款所需的时间长度和你预计的退休时间结合起来考虑。或者你可以追加本金还款额，以便退休前还清按揭。
正如理财规划师马龙所说的，“每个房产所有者都应该建立一个目标：争取用最后一份工资把最后一笔按揭还清。”
