We have $120,000 left on our mortgage

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Should you prioritize debt or savings? This is one of the most frequently asked questions in household finance, and it comes up especially in the area of ​​retirement savings. For this example, let’s say you have a $650,000 IRA and a $120,000 mortgage. As you approach retirement, should you leave that money invested or pay off the mortgage?

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What are your financial goals?

The first thing to consider is why you want to pay off your mortgage. For example, do you want to eliminate monthly payments from your budget or are you trying to retire with as few commitments as possible? On the other hand, do you want to maximize the value of your money? Maybe this is part of your estate plan and you hope to leave your heirs an unclaimed estate one day? Or is it an emotional decision because you just don’t like the idea of ​​retiring with debt?

Whatever your goals are will ultimately inform your choice of strategy.

Many retirees hope to maximize their flexibility in retirement, allowing them to change their lifestyle and spending as they please. In this case, paying off the mortgage could be a wise personal move. Instead, you could be trying to maximize dollar value by trying to get the most out of your money. As we discuss below, in this case you may want to review the value of this debt relative to the value and risks of your portfolio’s returns.

Interest vs. back

The rule of thumb is to compare your mortgage rate to your IRA’s historical rate of return. More specifically, if your mortgage rate is higher than the average return on your portfolio, you may want to pay down the debt. But if your return is higher than your mortgage rate, you may want to prioritize your savings while continuing to make nominal payments.

For example, let’s say your portfolio currently has an average return of 8% and your mortgage rate is 3%. By investing the money at that potential 8% return, you gain 5% more than you lose paying 3% on your mortgage. This means that the investment is technically giving you more for your dollar than you would save by paying off the mortgage.

Beyond rates, consider your mortgage position. With a newer mortgage, most of your payments are likely going toward interest, and paying it off early will save you more money in the long run. With an older note, each payment will go more toward principal, and you’ll get less value from accelerated payments. A financial advisor can help you evaluate the trade-offs in your situation.

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Other considerations for this decision

Another important issue is cash flow. If you pay off this mortgage early, you will reduce your savings and therefore decrease your portfolio’s ability to produce income. If you don’t repay the mortgage, your portfolio will generate more money, but some of it will go towards this fixed expense.

Review how each version of this plan would work. After you’ve taken your income and paid your bills, how much will you have left? How does each version of these numbers fit into your financial plans for retirement?

Finally, you’ll want to consider how this fits into your overall tax and investment plans.

If you itemize your taxes, your mortgage payments are effectively reduced by deducting the mortgage interest. This probably won’t change the numbers significantly because most households only take the standard deduction. However, it can be especially valuable for a relatively new mortgage with higher interest payments.

Additionally, how do you plan to change your investment strategy as you enter retirement? Many, if not most, households switch to a more conservative approach once they reach retirement. This tends to create more security but lower returns. Consider how this will affect your cash flow and the value of your returns against your mortgage rate.

At the same time, if you’ve decided to pursue income-based investments, think twice before liquidating those assets. An income portfolio depends on strong principal to fuel its relatively low/high security assets. The more savings you spend on debt, the less income you will have later.

Finally, consider your risk tolerance. Prioritizing returns over debt is a strategy that accepts a certain degree of risk. You will always benefit from debt settlement and there is always a chance that safe assets will lose value as well. While you can mitigate this risk by holding safer assets, be sure to consider this.

Mortgage advice

• A financial advisor can help you build a financial plan that takes into account your retirement, a mortgage and more. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool matches you with up to three verified financial advisors serving your area, and you can have a free introductory call with your matched advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help reach your financial goals, get started now.

• Paying off your mortgage early is a potentially beneficial way to manage your wealth. It lowers your interest rates and frees up cash for additional investments. However, if you want to manage your cash flow, here are some ways to lower your mortgage payments.

• Keep an emergency fund handy in case you face unexpected expenses. An emergency fund should be liquid—in an account that isn’t exposed to significant fluctuations, such as the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with prospects and provides marketing automation solutions so you can spend more time converting. Learn more about SmartAsset AMP.

Photo credit: ©iStock.com/Wasan Tita, ©iStock.com/Downrung Thongphasuk

The post We are 65 years old, have $120,000 left on our mortgage and a $650,000 IRA. Should we pay the mortgage? appeared first on SmartReads by SmartAsset.