Retirees wonder if they should burn through their cash reserves to avoid a mortgage

May 30

We are 66 years old and retired and are looking at buying or building a new home. We currently own our home, which we have lived in for 35 years.

Which would be the best bet, financing or paying cash for the next property? We have enough saved to pay cash, but would deplete our savings by three-fourths of what we have saved plus the cash we would make once we close on our current home. We do like being mortgage free, but in reality would this be the best way to go?

You already know the answer to this question. Retirees should never liquidate their entire cash reserves (or anything close to it) because so many things can happen in retirement that will require a cash payment. This is especially true when interest rates are near historic lows.

But we get it. You don’t want to have a huge monthly mortgage payment. Still, having some sort of mortgage payment is going to be a better option than using up all your cash. Now that you’re retired (and pretty young, at age 66), the opportunities to replenish that cash are limited.

You’re far better off getting a small mortgage at super-low interest rates and preserving your cash. You can use the cash to make the mortgage payments, if you can’t afford to do so out of your retirement income. But we’re hoping you can find a balance where you get a small mortgage that’s maybe 10 years in length, in the low 3 percent range, with nearly nothing owed in points and fees.

A 10-year mortgage will put you at age 76, with the mortgage paid off, and most of your cash intact. You’ll have paid very little interest, and hopefully will be set with both a fairly new home and the means to support yourself for the next 10 to 20 years in retirement.

What else could you do? You might think about keeping the home you have now and renting it out. We could see using some of your available retirement cash to pay off that property’s mortgage and then renting it out. Even if you don’t pay off the loan, the property would become a source of additional income for you.

This plan might require a large initial chunk of cash from your retirement kitty (to finance part of the construction for the bank), but the income from the rental could be used to pay down the mortgage, and ultimately it might work out well.

Talk to your real estate attorney (who should help with the construction documents) about this plan and then speak with your accountant or tax planner to discuss the financial consequences.

Ilyce R. Glink ’s latest book is “Buy, Close, Move In! Samuel J. Tamkin is a Chicago-based real estate lawyer. If you have questions, you can call Glink’s radio show (800-972-8255) any Sunday from 11 a.m. to 1 p.m. Contact Glink and Tamkin through the Web site www.thinkglink.com.

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