Retiring Soon? Pay off the House First

houseIn 2011, the first of some 78 million baby boomers began retirement.  By the year 2031, the last year of the boomer generation will reach their full retirement age (67).  Many will consider moving to a less costly, low-tax state in an effort to reduce their living expenses.  However, more than half of those on the verge of retirement —  55 to 64 year olds —  are still carrying mortgage debt, and some households will carry it into retirement for many years to come.  How will this affect their lifetime wealth?

Using the NCPA’s State Tax Calculator, I compared the tax burden from state to state, as measured by the amount of lifetime spendable income after taxes and housing or rental expense.  Our calculator accounts for federal and state income taxes, median property taxes, and state and local average sales taxes for each state.  But regardless of where retirees choose to spend their golden years, mortgage debt could significantly reduce lifetime wealth.

Consider the example of a 64-year-old individual living in New Jersey, with one of the highest tax burdens, who plans on moving to Texas (a state with one of the lowest tax burdens) and retiring at age 65.  He currently earns $75,000 a year, and has a home valued in New Jersey at $300,000 with $50,000 left on his mortgage.

  • If he moves to Texas, purchases a home for $300,000 and assumes a $50,000 mortgage for 20 years, his monthly payments will be low ($642 a month at a 5 percent fixed rate) but he will gain only $242 a year in annual discretionary income for the rest of his life.  Assuming he lives to age 100, his lifetime gain will total only $12,026.
  • If he instead purchases a $250,000 home and pays it in full at the time of purchase (using the proceeds from his previous home), he will gain an additional $5,405 in annual discretionary income, resulting in an additional accumulation in lifetime wealth of $239,226!

There are two factors at play here.  First, despite Texas’ overall low tax burden, the state’s median property tax rate is about the same as New Jersey.  Even though property taxes and interest payments are both tax deductible, they are not enough to reduce his federal tax burden and increase his wealth.  However, purchasing a slightly less expensive home and paying it in full, as in the second example, increases his wealth by reducing property taxes and interest payments.

Does more housing mean more wealth?  Consider a couple earning $200,000 a year considering a move from New York to the lower tax state of Florida.  One spouse, who is 64, will retire in a year.  They own a $400,000 home in New York with a $169,000 mortgage balance left to pay over 15 years.

  • If they move to Florida, where tax rates are lower, and purchase a home for the same price as their home in New York (with a $250,000 down payment and a 15-year mortgage), they will have an additional $3,300 to spend each year during their lifetime.
  • However, they can triple their additional discretionary income each year in Florida to more than $9,000 by simply “downsizing” to a $250,000 home and purchasing it outright.

When considering a move for their senior years, whether to another state or another home in the same state, retirees should look at the pros and cons of carrying a mortgage.  While paying down higher-interest debt, such as credit cards, should take first priority, those who have only mortgage debt should think carefully before taking on another mortgage or extending their existing one.

Comments (63)

Trackback URL | Comments RSS Feed

  1. Marlon says:

    You need lipid burning potential and activation of the metabolism so that it works the most efficiently.
    The 1000-calorie diet menu plan is not that easy;
    hence consult your dietitian or doctor before starting it.
    Grilled Meats – The grilled fish and meat are
    work best with regards to fat burning.

    Here is my web page – best hcg drops gnc

  2. Lawerence says:

    Cynthia Minnaar is a full-time internet marketer and owner
    of She invites you to visit her internet marketing training website
    for more link building tips. You need to know which ones can rank, and what
    the competition is like for each one. The last thing to consider in regards to the
    idea of seo tools is that there is an algorithm
    that is continually changing.

    Feel free to visit my site :: social media marketing guide

  3. Benjamin says:

    All you have to do is transport the items from point A
    to point B. But also, the comments have affirmed that many
    are where I was before; in a place where they are putting on the happy face and
    hiding their fears from those around them. It must be active in the moving
    industry for more than ten years.

    Stop by my homepage … moving services in charlotte nc

  4. Ashely says:

    Yesterday, while I was at work, my sister stole my iphone and tested to see if it can survive a 25 foot drop, just so she can be a youtube sensation. My apple ipad
    is now destroyed and she has 83 views. I know this is completely off topic but I
    had to share it with someone!

    Review my homepage – Where To Buy Whiteboards [Ashely]

  5. Magda says:

    Great delivery. Great arguments. Keep up the great work.

    Feel free to surf to my website does hypnosis work for weight loss pasadena ca

  6. Henry says:

    The amount of calories from fat should be no more than 30% of the
    total calories you eat per day. These supplements,
    accompanied by some determination and discipline, will truly make the difference in your life that you are looking to gain. However,
    after as little as ten minutes, occasionally a line appears in this area.

    my web page; best hcg drops nz

  7. Mable says:

    This is all good, but in the end only you can make decisions about your kitchen renovation. There are some quick and easy tips
    that will help avoid a visit from a professional plumber.
    An update sink fixture with great looking knobs can instantly update a plain and outdated kitchen counter and sink area.

    Feel free to surf to my web site – tankless water heater pompano beach club

Leave a Reply



If you want a picture to show with your comment, go get a Gravatar.