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Listener Email: Take a Mortgage Into Retirement?

Over the last month, we have had a few listeners email questions to us at info@vanwiefinancial.com, and here is one of the better ones. 

A listener named Brenda wanted to know if she should refinance her house or take money from her retirement account to pay off her debt. Brenda is 65 and still working, and makes a six-figure salary.  She isn’t married, but has a long-time significant other that lives with her.  She has a reasonable mortgage, she owes $140,000 on a house that is worth about $300,000.  She has over $600,000 saved in an IRA, and she is still contributing to her 401k at work. 

There are two things that Brenda wants to accomplish, the first is to pay off her credit card debt, which is about $30,000, and the second is to take $20,000 and fix up her bathrooms in the house. 

Brenda has a lot working for her.  The first thing is that she has a great income, and the second is that she has saved a good amount of money toward retirement.  It is always better to have more, but she has done a much better job of saving than many people her age. 

Brenda also has some things working against her.  The first is her age.  She says she is willing to work for a few more years, but she is very close to retirement.  With retirement, that big salary goes away, so whatever she chooses, she needs to keep that in mind.  Brenda is also going to go into retirement with some debt.  I don’t see any way around this, she is not going to pay off $200,000 over the next couple of years. 

Considering Brenda’s situation, I think it would be foolish for her to take the money out of her IRA to pay off this debt.  In order to access the $200,000 in her traditional IRA, she would have to pay taxes on it at her marginal rate.  Because she is a single filer making over $100,000 per year, that withdrawal from her IRA would push her into the 33% tax bracket.  That means that she would actually have to withdraw almost $300,000 from her IRA to pay her debt and her taxes.  Depleting your retirement savings by 50% just a couple of years from retirement is more or less financial suicide, so this is not a good plan! 

However, I do think there is a better way.  Brenda is in luck because mortgage rates are near their all-time lows, and she has an income and a debt to equity ratio on her house that should allow her to do a cash out refinance.  There is no reason that consolidating all of that debt into a 30 year, $200,000 mortgage with an interest rate of about 4% shouldn’t result in a reasonable monthly payment of about $1000 in principle and interest.  Not to mention that interest is tax-deductible, so her effective rate is going to be even less than 4%.  That gets rid of the 17% rate on her credit card debt, gets the bathrooms improved which should result in a higher house value, and lowers the interest rate on her existing mortgage.  And getting a 30 year mortgage doesn’t always mean you have to pay it like a 30 year mortgage.  You can make payments like it is a 15 year mortgage while you are working, and then go back to the 30 year payments when you retire.