Paying off the house is a significant milestone for many and can be a big relief once achieved. But is wiping out the mortgage before retirement always the right approach? Nicole Ewing, Director, Tax and Estate Planning, TD Wealth, joins Kim Parlee to discuss what to consider and why the answer will depend on your financial plan and situation.
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Paying off your home is typically a big accomplishment for homeowners. And doing so before retirement is often a big goal. But with everyone's financial situation and goals being a bit different, is paying off the mortgage before you retire always the most appropriate approach?
Nicole Ewing, Director of Tax and Estate Planning, is here now to tell us what her thoughts are on that. Everybody is happy when they pay off their mortgage. And, again, you just don't want that hangover of that debt going into retirement. So let's just reiterate why that is a good idea if you can.
If you can, it really does provide that level of certainty for you. So we know that our incomes are likely going to be reduced in retirement. And there might be unexpected things happening. Knowing that your home, that you have that home security, you're not going to be defaulting on a mortgage is a very important aspect of going into retirement feeling confident that you're going to be safe and secure for the long term.
OK. And if we dig in on that a little bit in terms of the specific downsize, you have that feeling of confidence. There's that certainty, you don't have it. Because that can be a bit volatile.
Well, it can. And we've seen that, of course, with interest rates changing. And that's had a significant impact on a lot of people. And so if that's happening to you during retirement when your cash flows are, perhaps, limited or spoken for, that can be a real challenge for people.
And some of the other risks we want to think about is just natural things that happen with a home. So we want maybe to be accessing some of the equity in our home to be paying for things like repairs that might need to be done. Or we might need to be doing some accommodations as our lifestyle changes going into retirement as we're getting older. We might want that flexibility of knowing that we can access that equity without being concerned about losing the home that you're in that is providing that security.
I know a lot of people sometimes think too that, oh, you know I'll be inheriting some money and that will take care of it too.
Oh, gosh, and I've heard this so many times when I'm speaking with people about their retirement plans. And they're including what they expect to be receiving from their parents. And it's a very, very dangerous approach to retirement planning and to debt repayment.
Because as longevity of our lifespans continues to increase, the expenses that your parents are likely going to incur themselves in retirement to fund their own care, it's really not a secure bet to assume that you're going to be getting that money. There, might frankly, not be anything left by the time your parents have passed.
It's like that liability matching, right? If you have a expense that is certain but a revenue that is uncertain, that's a bad match.
Absolutely.
That's coming in. When you think big picture-- when people are thinking about their retirement and their retirement goals, how should they be approaching their mortgage?
Well, we want to, again, always step back and look at what the overall goals are. What are we trying to achieve? When do you want to be retiring?
Is that a fixed-- so in some industries, of course, that is fixed and you're required to retire at a certain time. And others are some flexibility. So having an idea of what your timeline looks like, what your income sources are going to be in retirement, also what other liabilities are you going to have at that time as well? So really stepping back and thinking about what your competing objectives might be and working with somebody-- if need be, if you're finding yourself in this situation, it might be advisable to get some advice.
What if you're 10 years away from retirement, what would be some things that should or could override your mortgage? Because I know some people who are in the minority, but they're like, I need to pay this off. I need to pay this off. And they will sacrifice so much to make that happen.
And that can be quite a risk in and of itself. If you are diverting all of your funds to pay off a mortgage and you are, at the same time, neglecting your retirement savings, perhaps you're carrying other high interest debt that should be paid in priority to a mortgage-- and, ultimately, we want to be thinking about having an emergency fund if something were to go wrong. We don't want, necessarily, to be completely tied up all of our cash. Being house rich and cash poor can be very problematic-- quite problematic.
So we always want to be balancing what our different objectives are. If you're in this situation where you're 10 years out and you want to be thinking about, what do I need to do to ensure that my mortgage is paid off or if I'm carrying it into retirement, that I know what my income sources are going to be to be paying it off, we need a plan. We need to step back and look at the big picture, the overall plan-- how are we going to achieve that?
Well, let's talk about the plan. Ideally, the plan is hopefully pay off your mortgage before you go into retirement. But if you can't and if you choose not to for other reasons, what is the plan you should have with a mortgage in retirement?
We want to know what our income sources are going to be and what our cash flow is going to be. And also, doing a bit of an assessment about what other risks you might be exposed to. So thinking through, if I'm in the situation, I'm in retirement, what is going to be different about that than now? If I don't have the money to pay it off now, how can I be certain that I'm going to have it down the road?
So we need to have a plan in place to do that, and you may very well have one. Sometimes we do have these sort of guaranteed windfalls that we know are going to be occurring. Maybe we're selling a business and we're going to be receiving some revenue from that over a longer period of time. Maybe we're going to maybe partially retire and do something that we enjoy, perhaps bringing in a renter for the room. So there are strategies that can be employed to be comfortable with the idea of having a mortgage in retirement. But it has to be part of that plan.
You talk about "comfortable," and I think part of it for a lot of people is just the anxiety of knowing-- so even if there's a plan, I still know that I have this hanging over. So how do you manage that?
Well, again, working with somebody who can talk you down, somebody who can give you that objective perspective. Because a lot of us have a relationship with debt. And it might not be in our best financial interest to indulge our natural inclinations.
And so, yes, wiping out the debt might make me feel good. But if I'm not looking at that other side of the coin, what other money do I have, what other resources do I have? I could be feeling much, much worse down the road. So don't want to sacrifice feeling good today for being secure and feeling good at some time in the future.
Every time we finish an interview, I always know what the last question is, and that's, so what should you do next? It's always talk to somebody.
It is talk to somebody. People know that these are not novel questions. These are questions that planners work with every day. And they have seen people in all sorts of positions.
And they can help you navigate that and ask you the questions to prompt some answers you may not have thought about yourself. So they really can work with you, again, to develop a plan, know what your goals are, know what your cash flow is, know what your income sources are going to be, and ultimately, be confident going into retirement, whether you've paid off your mortgage or not.
[MUSIC PLAYING]
Nicole Ewing, Director of Tax and Estate Planning, is here now to tell us what her thoughts are on that. Everybody is happy when they pay off their mortgage. And, again, you just don't want that hangover of that debt going into retirement. So let's just reiterate why that is a good idea if you can.
If you can, it really does provide that level of certainty for you. So we know that our incomes are likely going to be reduced in retirement. And there might be unexpected things happening. Knowing that your home, that you have that home security, you're not going to be defaulting on a mortgage is a very important aspect of going into retirement feeling confident that you're going to be safe and secure for the long term.
OK. And if we dig in on that a little bit in terms of the specific downsize, you have that feeling of confidence. There's that certainty, you don't have it. Because that can be a bit volatile.
Well, it can. And we've seen that, of course, with interest rates changing. And that's had a significant impact on a lot of people. And so if that's happening to you during retirement when your cash flows are, perhaps, limited or spoken for, that can be a real challenge for people.
And some of the other risks we want to think about is just natural things that happen with a home. So we want maybe to be accessing some of the equity in our home to be paying for things like repairs that might need to be done. Or we might need to be doing some accommodations as our lifestyle changes going into retirement as we're getting older. We might want that flexibility of knowing that we can access that equity without being concerned about losing the home that you're in that is providing that security.
I know a lot of people sometimes think too that, oh, you know I'll be inheriting some money and that will take care of it too.
Oh, gosh, and I've heard this so many times when I'm speaking with people about their retirement plans. And they're including what they expect to be receiving from their parents. And it's a very, very dangerous approach to retirement planning and to debt repayment.
Because as longevity of our lifespans continues to increase, the expenses that your parents are likely going to incur themselves in retirement to fund their own care, it's really not a secure bet to assume that you're going to be getting that money. There, might frankly, not be anything left by the time your parents have passed.
It's like that liability matching, right? If you have a expense that is certain but a revenue that is uncertain, that's a bad match.
Absolutely.
That's coming in. When you think big picture-- when people are thinking about their retirement and their retirement goals, how should they be approaching their mortgage?
Well, we want to, again, always step back and look at what the overall goals are. What are we trying to achieve? When do you want to be retiring?
Is that a fixed-- so in some industries, of course, that is fixed and you're required to retire at a certain time. And others are some flexibility. So having an idea of what your timeline looks like, what your income sources are going to be in retirement, also what other liabilities are you going to have at that time as well? So really stepping back and thinking about what your competing objectives might be and working with somebody-- if need be, if you're finding yourself in this situation, it might be advisable to get some advice.
What if you're 10 years away from retirement, what would be some things that should or could override your mortgage? Because I know some people who are in the minority, but they're like, I need to pay this off. I need to pay this off. And they will sacrifice so much to make that happen.
And that can be quite a risk in and of itself. If you are diverting all of your funds to pay off a mortgage and you are, at the same time, neglecting your retirement savings, perhaps you're carrying other high interest debt that should be paid in priority to a mortgage-- and, ultimately, we want to be thinking about having an emergency fund if something were to go wrong. We don't want, necessarily, to be completely tied up all of our cash. Being house rich and cash poor can be very problematic-- quite problematic.
So we always want to be balancing what our different objectives are. If you're in this situation where you're 10 years out and you want to be thinking about, what do I need to do to ensure that my mortgage is paid off or if I'm carrying it into retirement, that I know what my income sources are going to be to be paying it off, we need a plan. We need to step back and look at the big picture, the overall plan-- how are we going to achieve that?
Well, let's talk about the plan. Ideally, the plan is hopefully pay off your mortgage before you go into retirement. But if you can't and if you choose not to for other reasons, what is the plan you should have with a mortgage in retirement?
We want to know what our income sources are going to be and what our cash flow is going to be. And also, doing a bit of an assessment about what other risks you might be exposed to. So thinking through, if I'm in the situation, I'm in retirement, what is going to be different about that than now? If I don't have the money to pay it off now, how can I be certain that I'm going to have it down the road?
So we need to have a plan in place to do that, and you may very well have one. Sometimes we do have these sort of guaranteed windfalls that we know are going to be occurring. Maybe we're selling a business and we're going to be receiving some revenue from that over a longer period of time. Maybe we're going to maybe partially retire and do something that we enjoy, perhaps bringing in a renter for the room. So there are strategies that can be employed to be comfortable with the idea of having a mortgage in retirement. But it has to be part of that plan.
You talk about "comfortable," and I think part of it for a lot of people is just the anxiety of knowing-- so even if there's a plan, I still know that I have this hanging over. So how do you manage that?
Well, again, working with somebody who can talk you down, somebody who can give you that objective perspective. Because a lot of us have a relationship with debt. And it might not be in our best financial interest to indulge our natural inclinations.
And so, yes, wiping out the debt might make me feel good. But if I'm not looking at that other side of the coin, what other money do I have, what other resources do I have? I could be feeling much, much worse down the road. So don't want to sacrifice feeling good today for being secure and feeling good at some time in the future.
Every time we finish an interview, I always know what the last question is, and that's, so what should you do next? It's always talk to somebody.
It is talk to somebody. People know that these are not novel questions. These are questions that planners work with every day. And they have seen people in all sorts of positions.
And they can help you navigate that and ask you the questions to prompt some answers you may not have thought about yourself. So they really can work with you, again, to develop a plan, know what your goals are, know what your cash flow is, know what your income sources are going to be, and ultimately, be confident going into retirement, whether you've paid off your mortgage or not.
[MUSIC PLAYING]