I am 56 with very little retirement built up.Should I pay off my mortgage when I receive an inheritance?

Answer 1

The answer is maybe.

Any outstanding debt you have is the same thing as a negative rate of return.

Lets say your mortgage is at 6%. If you are in the 25% tax bracket, the rate would be about 4.5% after taxes (while not exact, multiply the interest rate being charged by (1-tax bracket), in this case (1-0.25) or 0.75. This will be close enough).

What you need to do is look at what debt you do have. Credit cards are usually the highest. If you are paying 18% on your unsecured debt, paying that off would be the same as making 18% on your money (an excellent rate of return anywhere). If you have a car payment at 7%, then you'd be making a 7% ROR, which is satisfactory.

When it comes to your mortgage, it really turns grey. Paying off a mortgage will only earn you 4.5% on your money (on a 6% loan after taxes). You can put your money in a money market account with Vanguard right now and get about 5%. If you invest the money in bonds, you can probably get 6%. If you want to take a little risk, you might be able to get around 10% by investing in stocks.

On paper, it would make more sense to invest the inheritance and keep paying your mortgage as usual. In reality, paying off your mortgage frees up a huge chunk of change for most people.

What would I recommend? Personally, I would pay off my debts starting with the highest interest rates (remember to factor in tax refunds on deductible interest). I would pay off my mortgage last. I would then take my monthly payments from my mortgage and invest it. At age 56, I'd probably opt for 60% bonds and 40% stocks (or 80% bonds, 20% stocks if you plan in retiring really soon or are not very tolerant of risk). I'd opt for mutual funds that focus on providing dividend income (especially as dividends are taxes at a low rate now...I think this lasts until 2012 but I am not sure on that). With the stocks of large companies being pretty devalued compared to historical p/e ratios, I would opt to invest in a fund that concentrates on large cap stocks (growth or value) or an S&P 500 index fund for the next 5 years (but that is just me...).

One thing to keep in mind is that credit card companies still offer killer deals on balance transfers. I recently got a 1.9% rate on my balance transfers with a one time fee of $75 (or 3% up to a max of $75). It may make sence to refinance a high interest card with a low interest rate with another card. Personally, I have the cash to pay it off, but I am paying off higher interest rate loans first.

Good Luck! Remember, an inheritance is a bad way to get money. It is the last thing someone you loved gave you. However, treat it like any other income you have. Don't get attached to the money or the funds you buy with it; treat it like money you got from work. If the person left you financial instruments, don't be afraid to sell them if it doesn't make sense to hold onto them.

It is late in the game to save for retirement, but it is never too late to start. If your employer has a matching 401K plan, put enough in there to take advantage of the match. After that, I'd put as much as you can in a ROTH IRA (the money is put in post-tax, but any gains are tax free when you retire. A Roth is a good place to invest in REITs or mutual funds that have a high turnover of its holdings. You will avoind any cap gains taxes on either). After maxing out your Roth contribution, max out your 401K. If you max out the 401K, I'd opt for investing in mutual funds on your own or with the help of an advisor. You can opt to invest in an Annuity, but this can lock up your money until a certain age where with a mutual fund, you can get it when you want.

Answer 2

Not neccessarily. Dave Ramsey is a well known financial guru (best selling books and call in show) and he's said that he's seen more people with no retirement have to mortgage their house to get money than he'd like to aknowledge.

Examine what your interest rate is, vs what the average interest rate is in mutual funds.

Consider whether or not you'll be strict with a budget and put alteast the same amoutn as your mortgage payment was away every single month into a retirement account. If you think you might spend more and only put a way a little, socking away the inheritance for retirement might be a smarter way to go-- especially if the house would be paid off by retirement anyways. Atleast the interest is tax deductible!

Answer 3

You need to examine whether you think you could get a better rate of return on another investment than the rate your morgage is at.

If it was me, I would pay off my mortgage and start saving the money each month im saving by not having mortgage payments.

Answer 4

Slider`s answer is very good, at 56 I would shoot for debt free as possible, and realize that you won`t be retiring at 62. However, as the others said 'it`s never too late.' Good Luck.

Answer 5

definately. with the way government is spending social security these days...and how tricky they are about whether you are even eligible to collect it or not is very sketchy. start saving yourself...forget about SS.

Answer 6

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Answer 7

Yes i would.