The 'Couv'

The 'Couv'

Tuesday, July 28, 2015

To Own or Owe in Retirement

Many people ponder their financial position as the close in on retirement or sometimes after they begin to adjust to retirement. There is a large contingent of folks that want to have their home free and clear during retirement. At first glance owning a home outright seems like a no-brainer, especially once the homeowner has retired and set on a fixed income.

As with many things in the financial universe the prevailing sentiment is not always the best solution for any one given situation. Generally having a free and clear house is a good thing. The retiree need only be able to make the tax payments and handle maintenance to keep a roof over his head. Regardless of one's financial position, a free and clear home is a good thing. But is it the best thing?

Retirees often find themselves in a bit of an IRS tax challenge. Typically they no longer have tax deductible children, college deductions, etc. They find themselves in a similar position tax wise that they were in decades earlier before the "family". Uncle Sam can dig deep into the pockets of retirees without any shelter. Most retirees do not have enough income to have this "problem". However, retirees that have incomes that approach six figures need to consider the value of having a tax deductible interest payment on their primary residence.

Interest rates are low right now and taking out a 30 year note for half the value of the home during retirement may be a great hedge against the IRS. 50% loan to value protects the homeowner against even the most severe economic downturn but offers up a decade or more of generous tax deductions while the interest payments are still steep early in the loan cycle. Retirees that are drawing on 401k assets can draw less if the taxes are reduced by the deduction against the mortgage. Sometimes the tax benefits outweigh the monthly expense of servicing the note on the mortgage. Additionally the retiree has extra cash in the bank roughly equal to the loan amount at his discretion to use as capital of additional retirement savings.

Retirees are well advised to consult a financial planner and a tax professional to be certain all the possible scenarios are evaluated to ensure the best possible outcome in the future. A house is often a tax shelter as well as a physical shelter, in retirement it may turn out to be the only tax shelter. To owe or own in retirement is a valid question that must be taken under consideration for each
individual situation and always under the advisement of well qualified professionals.

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