Dear Carrie: I'm 54 and my husband is 61. We have differing opinions on whether to use some of our savings to pay off our $200,000 mortgage. With an interest rate of 5.75 percent, our monthly payment is $1,167. We have about $750,000 in retirement accounts and roughly $250,000 in a taxable account.
My husband feels we're close enough to retirement that it makes sense to reduce our expenses. I feel like we'd be smarter to keep growing our savings, especially since the market seems to be picking up. What do you think? -- A Reader
Dear Reader: I've been getting a lot of mortgage-related questions lately as people grapple with the issue of whether it's wiser to reduce a debt or hang on to their lower-earning savings. The answer usually revolves around comparing the after-tax cost of your mortgage with your expectations for what you think you could earn on your savings. And then deciding which is most advantageous in the long run.
Your situation is a bit more complex. You and your husband not only have differing opinions, you're also at different points in your working life. At your age, it makes sense that you feel you have time to keep your assets growing. At your husband's age, it may make sense to be more conservative. So to me, the question is less about your mortgage and more about your combined long-term goals and plans for retirement.
But let's start by looking at your mortgage.
PUT YOUR MORTGAGE IN PERSPECTIVE
A mortgage fits into your financial picture differently at different times in your life.
Early on, when you're paying mostly interest (which is tax-deductible), it can be a valuable part of your tax strategy. For example, let's say you're in the 28 percent tax bracket and your mortgage is fully deductible. In this case, you'd really only be paying about 3.75 percent in interest. However, as you approach the end of the term, most of the monthly payment goes to principle -- so tax deductibility becomes less of an issue.
Also, how big a burden is your mortgage payment in terms of your other debts and financial obligations? If it's not a problem now while you're both still earning, you might just as easily pay your mortgage off over time and keep your assets invested. This is especially true if you think you can earn at least as much as the mortgage is costing you after taxes.
But above and beyond the number crunching of mortgage cost versus potential earnings, there are the bigger questions of when you want to retire, how much income you'll have, and how important it is for both of you to be debt-free.
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