Dear MarketWatch,
I am 57, single and have a $113,000 mortgage with a 3.75% rate. I have $240,000 in a Roth IRA, $120,000 in deferred-compensation plan and $270,000 in a savings account. The savings give me very little in interest.
At 62, I will receive a pension of $35,0000 a year. I plan on taking Social Security at 67. Should I transfer my savings to a high-yield savings account like Vanguard or put it in an ETF like SCHD so I can reap the dividends?
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Also, should I attempt to pay off the mortgage?
Thank you for the advice.
Readying to Retire
Dear Readying,
You ask an age-old but important question about mortgages and retirement, which I will deal with separately. There are a lot of factors that go into where your savings should be parked, and those include your retirement goals and needs, your expected spending in retirement, estimated inflation and interest rates, and so on.
I don’t recommend specific funds in this column, but I will caution you not to put all of your eggs in the same basket. Having investments that produce dividends are great, of course, but you should still always aim to diversify your assets, which is a much healthier way of investing, especially as you near retirement age.
Think about having a separate savings account that houses six months’ to a year’s worth of expenses as an emergency fund. The typical guideline is three to six month’s worth of expenses, leaning closer to six months for people with one income. If you’re close to retirement, it never hurts to throw a little bit more into that account though.
Categorize your savings into short-, mid- and long-term goals. Keep your short-term money in easily liquidated assets like high-yield savings accounts, which currently offer rates of up to 5.3%. If you invest money, make sure that you have enough time to recover in the event there is a downturn in the market.
Paying off your mortgage
If you can afford to continue paying the mortgage in retirement, it does not hurt to keep it, particularly if the alternative is to drain some of your savings to pay it off. You want to have as much in savings as you can to rely on after you stop working. I gave similar advice to a 67-year-old reader with $57,000 left on her mortgage and $600,000 in savings.
The interest rate on your mortgage is relatively low, especially in today’s environment where rates are hovering at over 7%. What’s more, home loans aren’t considered “bad” debt like credit cards, at least not if you can afford it and you haven’t taken on more than you can afford to pay off.
Emotions play an important role in your decision, of course. You don’t want to get to retirement and be so stressed about a home loan that it’s affecting your quality of life. But if it doesn’t necessarily bother you — and you have the income in retirement to pay it off as part of your other necessary expenses — it’s not the “wrong” move.
One option is to try and pay extra toward your principal. This might still leave you with a mortgage when you retire, but you’ll have lightened the load. And when you get to retirement and pay your final mortgage payment, you’ll have extra money to play with in your golden years — and that’s a goal worth aiming for.
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