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 (30)

Trackback URL | Comments RSS Feed

  1. Rudolph says:

    “In 2011, the first of some 78 million baby boomers began retirement.”

    Not as many as we need to have retire.

  2. Mark says:

    “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.”

    The generational start of living beyond our means.

  3. Jackson says:

    “living in New Jersey”

    How horrible.

  4. Kevin says:

    “who plans on moving to Texas”

    Going from one of the worst to the best.

  5. Wilbur says:

    “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.”

    It shouldn’t be surprising that living modestly makes you more money.

  6. Jackson says:

    “If they move to Florida”

    With the other retirees…

  7. Billy says:

    The best advice here is to buy a home outright instead of mortgaging it.

  8. Trent says:

    “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.”


  9. Lucas says:

    How else could we speed them up?

  10. Earl says:

    The writer also fails to mention that a person living in NJ can purchase a bigger house for less money in Fl. Then they can pay cash, have a nice house, no debt, and greater disposable income. Win/win/win. Oh, yeah and no state income tax! And the FL gov. is preparing to lower property taxes. They have a budget surplus. Not to mention much better weather!!!

  11. Jeff says:

    The monthly principal and interest payment for a $50,000 mortgage for 20 years @ 5% is $329.98, which is $3,959.73 per year. The first year interest would be $2,466.08. How do you calculate the $5,405 of annual discretionary income in your example of the person who moves to Texas and does not take out a mortgage?

    • Pam says:

      Because the state tax calculator factors in other differences between the 2 states, such as property taxes and state income taxes. So the additional $5,405 is not just the absence of an interest payment is also the variation in tax burden.

  12. Jeff says:

    The tax burden between New Jersey and Texas should have already been factored into the $242 calculation. Purchasing a $250K home without a mortgage will not result in a savings or increase in discretionary income of
    $5,405 annually, when compared to purchasing a $300K home with a $50K mortgage.

  13. Cathryn says:

    Thanks for sharing your thoughts about retirement planning.

  14. There are lot of Sydney events which take place like party organizing, seminars, promotions
    of events, marketing, advertising, copy writing and many respective
    events keep the planners running and always on their toes.
    When the number of invitees is limited to a certain extent, it is
    easy to make the arrangements yourself, but when the event is
    organized on a large platform and there is a long list of invitees,
    you must not take risk. These are usually held at either the entertainment company premises or an outdoor venue.

  15. Looking at this overall picture I don’t think that the use of the word
    epidemic is misplaced. S, both the BBB (Better Business Bureau) and the FTC (Federal Trade Commission) are paid
    to track down complaints and consumer unhappiness on businesses.
    This makes it easier to enroll new people and help get them trained as well.

  16. If you are moving to a new country, hiring cross country movers to help
    you relocate is a sensible idea. JVK are on Krungthep Kreetha Road in Bangkok, and you can call
    them at 038-491-588. Atlas reported revenues of almost $950 Million in 2005.

  17. Body Jewelry says:

    Fences use a pulse of energy to ‘zap’ any animal or human that touches it, causing discomfort and discouraging
    them from touching it again. She’s wounded and
    won’t be at full strength for awhile. Blast a few mutants until you can find the staircase to the hospital.

  18. There are many products available inthe market for cleaning floors, one such product available today is the – Floor cleaning robot.
    A     prevalent characteristic of this robot is the capacity to clean different     types of floor surfaces, be it hardwood floors, tiles, or even overlay     ground surface.
    Pre inspection is the one of the main tasks undertaken by
    the company as it gets the customer’s address.

  19. All the information is accessible through landing page,
    be it offers, special deals, bio date of company, contact info, receiving inquiry
    and a lot more. Having an overarching employment contract means you anticipate working on multiple assignments when working via an umbrella company.
    There are many more to name but these are the most
    distinct style to recognize.

  20. NMAC Login says:

    On the technology front, the Masdar Institute of Science and Technology is
    partnering with the Massachusetts Institute of Technology to develop forward-looking renewable energy technology.
    When you ask for referrals, you don’t want too much unsolicited advice from family members and friends.
    A lot of people make the mistake of hiring the wrong attorney to represent
    them during their divorce.

  21. According to the Centers for Disease Control and Prevention, nearly one third of the children in the
    US are either overweight or obese. The Hard Rock Club has bars in Boston and Florida with
    the Cavern Club name. In summary the future of medical testing and diagnostics will probably be based on use
    of DNA testing for genetic health risks.

  22. The staff on hand consisted of the owner and another young woman. It had
    a large indoor and outdoor area, and was very clean. s probably one of the most important decisions you will make, making the wrong
    choice for your child could amount to a inconvenience or a life
    threatening disaster.

  23. Square motif design shapes offer the element of stability and usually the
    numbers play a significant part in explaining the Celtic
    lore, like for example the number five represents the four directions and the center point.
    However, with Wedding Bands Scotland you will be able to choose the perfect performer for
    your special day. It ought to be tough enough to
    not simply break when dented.

  24. vitamin c serum says:

    See here for the top anti aging skin care currently in stock around and at the best price.

Leave a Reply

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