Should we pay off our mortgage when on fixed income pensions?
My wife and I are Federal employees who are going to retire early (age 58) and live a quiet life in rural New Mexico. Our combined pensions will be $60,000 a year. After we turn 65 years old, we will collect our Social Security and also start withdrawing from our TSPs which currently are at $200,000 each. We are both military vets and have TriCare, so medical insurance is not a big factor.
I also have $160,000 in stocks and want to know if I should withdraw that and pay off our $140,000 mortgage now? We have no other debts, and I have paid off our vehicle, although we will get a more fuel efficient one next year.
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I generally don't advise clients to aggressively pay down their mortgage unless they have so much money in retirement assets and income that the mortgage money won't make a difference to them. Unlike what many might suggest, your mortgage does not present a risk to you and your wife during retirement. So long as you can afford to pay your monthly payment and other expenses with your retirement income (pensions and social security) having a mortgage doesn't increase your risk.
This is especially true for you, as all of your retirement income is effectively guaranteed by the Federal government. Unless your mortgage interest rate is high, there is no financial benefit to paying off your mortgage. And below I'll go over some of the benefits of not paying off the mortgage.
Keeping the Money for Future Needs
The main reason I am concerned with the idea of you paying off the mortgage with your stock portfolio is it seems your accessible assets are relatively low (about half a million dollars). While your pensions and Social Security will easily cover your normal expenses (including the mortgage) throughout retirement, you may need access to additional money in the future to pay for long-term care or other major unexpected expenses. By taking $140,000 and paying off your mortgage, you will be locking up the money in an asset (your home) that is very illiquid.
Keeping the Money for Current Fun
Another reason to not pay off the mortgage is you may be able to use the money to enjoy life more while you are young. The next decade or two is your best opportunity to enjoy retirement because your health will be at its peak. This is the time to use your money to take family vacations, visit grandchildren, pick up new hobbies, or make a difference in your communities.
Your pension and Social Security checks will easily cover your mortgage and other living expenses throughout retirement. Keeping your mortgage means the older you will pay the mortgage with your pension and Social Security income during a period of retirement when you won't be spending it on fun stuff anyway. This should give the younger you more ability and permission to spend the retirement savings on enjoyment.
Get Advice to Help You Spend: Dieing with a lot of money is losing
If you are concerned about running low on money in the future, a good financial planner can help you feel confident you will have enough to last throughout retirement even as you are spending more on enjoyment now. And a bad financial planner will make you feel you can't spend any of your money in investments for fear of running out.
If you’d like to get a second opinion, I can do a retirement analysis that can show you how your money (including your guaranteed income streams) will last throughout retirement.
Social Security Advice Can Return Hundreds of Thousands
I also suggest you consult with a fee-only and fiduciary financial planner (such as myself) before you begin collecting Social Security. There are literally hundreds of ways to claim Social Security, and the difference in claiming strategies can mean hundreds of thousands of extra dollars from Social Security over your retirement. When you talk with any adviser, however, be careful about advice to roll over the TSP money to an IRA. The TSP is one of the best retirement plans out there, and there is are only a few reasons to roll it over to an IRA. Some of the only legitimate reasons I can think of is you and your wife don't want to deal with managing the TSP portfolio anymore or you want to do multi-decade tax planning with Roth conversions.