Sacrificing savings to pay mortgage unwise

I receive questions all the time from readers nearing retirement who are wondering how to manage their investments. And many of them are fortunate enough to be finished with mortgage payments.

Such is not the case for a reader named Phil. He says that, due to a layoff and other factors beyond his control, he faced a drastic drop in income when his family needed him most. He never recovered financially, and he and his wife refinanced their home several times to obtain cash to stay afloat.

"At age 60, I now have a new mortgage of $200,000," Phil wrote in an e-mail. "If I retire soon, at age 62, and take my retirement as a lump sum instead of monthly payments over the years, and if I add to that some stock sales, I could just about raise the $200,000 to pay off the mortgage. But then I would not have a retirement income beyond Social Security, nor any stock holdings.

"But my house would be free and clear, as opposed to a 30-year mortgage that extends to age 90 and feels like a two-ton weight on my shoulders."

However, Phil wrote he is not sure paying off his mortgage this way would be a smart move.

"As an alternative, would it be a wise option to sell all my stocks and pay (the mortgage) down to, say, $100,000 and keep my retirement income intact?" Phil asked. "I feel uneasy about having such a large mortgage when technically there is a way I could pay it off all at once, but also uneasy about depleting all my reserves to do so. What is the best way to go?"

Phil wrote that he has lived in his house for 31 years and never wants to move, "so selling the house and using the leftover equity to buy a condo or some similar move is not on the table for me."

For help with Phil's question, I contacted Denise Smith, certified public accountant and fee-only certified financial planner with Financial Planning Office LLC in Salt Lake City.

In an e-mail response, Denise wrote that Phil's situation is unfortunate, and he may make it worse by retiring early, at age 62.

"If Phil waited to age 65, he would receive full Social Security benefits," Denise wrote. "Until then, he could pay down the mortgage, save additional retirement assets and let his current portfolio grow.

"If Phil is adamant about retiring early, he and his wife should 'practice retirement' for six months first. They should limit their monthly spending to the amount of their estimated Social Security benefits."

Denise also advises against Phil's idea of taking his retirement as a lump sum because of the large tax hit he would face.