I was forced to retire early. Should I pay off my mortgage?

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Q. I’m 63. My goal is to delay Social Security until 66.5 years and I want to pay off my $69,000 mortgage. I lost my job in February 2019 so I’m surviving on two pensions totaling $700 and the mortgage is $576 per month. I also have $110,000 in cash. Should I access my 401(k) plans to pay off the mortgage? Does the stimulus plan help?
— Retired too early

A. It sounds like you were forced into an earlier-than-planned retirement.

It also sounds like you have some options.

You really need to do a cash flow/retirement income analysis that can outline the optimal tax efficient strategy to use your assets and income sources, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.

But here are some things to consider.

“I would not recommend cashing out a 401(k) during a stock market correction — especially a historic one like the bear market we are in now — to pay off your mortgage balance, DeFelice said.

There are several reasons.

First, you would be selling low.

“While I do not know your asset allocation or what percentage of your invested 401(k) funds are in stock funds, we always want to try and avoid forced selling during bear markets,” he said.

You also have to ask what opportunity cost you are giving up by cashing out, he said.

“What happens if/when someone develops a vaccine for COVID-19 over the next year and the market comes roaring back?” DeFelice said. “Not only did you cash out at a low point if this happens, but you miss out on the rebound/future growth by taking a large sum out now.”

You will still need to pay the taxes on a withdrawal, he said. To do that, you would have to withdraw more than the $69,000 mortgage balance to pay it off.
At a 25% federal and New Jersey tax bracket, you’ll need to withdraw about $90,000 to cover the tax bill, he said.

“The CARES Act has a provision that will allow you to take up to a $100,000 distribution from your 401(k) plan and spread the tax liability over the next three years,” he said. “However, you need to have either contracted COVID-19 or have been affected financially — such as being laid off due to the pandemic — in order to take advantage of that.”

Because you were already out of work before this started, DeFelice isn’t sure that could help you.

Also keep in mind that when you pay off your mortgage, you will lose the mortgage interest tax deduction. Without knowing specifics, this may or may not apply to you because your standard deduction may be larger than your remaining mortgage interest, he said.

DeFelice said if you have $700 per month coming from your pensions, you should be able to cover your mortgage payment. And with $110,000 in cash, that should hopefully provide you enough liquidity to cover your other expenses for now.

“I would then supplement any additional needs with withdrawals from your retirement accounts, only taking minimal distributions as needed,” DeFelice said. “If you can manage this way for the next 3 ½ years, you should be able to delay taking Social Security until you hit full retirement age.”

But given that we don’t know all the details of your finances, we recommend you meet with a financial planner who can perform a thorough analysis for you, especially if your employment situation remains unclear.

You need to be able to make what you’ve saved to last you the rest of your life, DeFelice said.

“The `accumulation’ phase when you are working, paying your bills, saving for retirement, raising a family, etc. is actually the easy part, though it may not feel like it at the time,” he said. “Once you retire, the `distribution’ phase is measurably more difficult, and it is important that you get these next steps right.”

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This story was originally published on May 13, 2020.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.