As we enter the final 10-20 years before retirement, the equity we have in our home often represents a large part of our retirement savings. To make the most of this hard-earned asset, it’s important to make thoughtful decisions about our mortgage and home ownership in general. We may also need to challenge common assumptions – what’s right for one homeowner approaching retirement may not be right for another.
- Ask yourself: Should you downsize?
Streamlining your living expenses in preparation for retirement is a good move, and for many of us, this means moving to a smaller home, with a smaller mortgage. With some time left before retirement, take the opportunity to reexamine your assumptions about your needs – you may realize that you need far less than you thought.If downsizing your home turns out to be right for you, you’ll be swapping extra space for additional security and comfort. It’s a smart trade: the beneficial effect on your financial stress can be tremendous.
- Keep or pay off your mortgage? It depends.
Conventional wisdom tells us to pay off our home mortgage before retiring, but if your rate is less than 5% and you can afford to make your mortgage payments from guaranteed-income sources in retirement, you may be better off investing the money you would have put toward the loan.On the other hand, paying off your mortgage may make a lot of sense if it will give you peace of mind and help you sleep better at night. It’s okay to take your emotional needs into consideration when making decisions about your money. When you balance emotional factors against rational considerations, you are likelier to arrive at a decision that’s right for you.
- Don’t put all your retirement eggs in one basket. When we think of saving for retirement, most of us automatically think of our 401(k) or IRA. But the truth is, there are many different ways to patch together the assets and investments to provide for a secure retirement. Your home and other real estate holdings are also an important part of this picture.
As you assess your readiness to retire, don’t forget to consider all the parts of your retirement savings picture, including retirement savings accounts, your investment portfolio, real estate, art and collectibles, and businesses that you may own. When you look at the big picture, you may discover that you have more saved for retirement than you realize – or that you are overbalanced in one area, and need to make adjustments. Now is the perfect time to do it!
- Is your home a potential source of retirement income?
There are many ways to generate the income you need in retirement—it does not all have to come from your investment portfolio. For instance, with 10 or more years to plan creatively, you can set yourself up to receive solid rental income by converting part of your home into a rental or investing in a multifamily residence.
In general, the income you receive from a rental property is greater than the interest income from investing the same amount in the stock market over the next few years. Bottom line, the steady stream of income from the rental will have a bigger impact on your quality of life in retirement. It’s particularly smart to have a rental property that is also your primary residence. That’s because a portion of your primary home mortgage is tax deductible, a benefit that wouldn’t apply to a separate rental property. This makes the investment more attractive overall.
Plan to put some or all of the rental income into mortgage prepayments now, before retirement, and you could have little or no mortgage to worry about when you do retire.