As the Baby Boomer generation starts retiring, it has become increasingly more visible that many of them are retiring with some form of debt.
This may seem startling on the surface -- all of that planning for retirement, including an aggressive savings program, debt repayment, asset accumulation and so on -- but in many cases, the debt that a lot Boomers are carrying in retirement is mortgage debt.
Overall, mortgage debt is not always considered "bad debt.
" That is because a mortgage is normally supported by an asset that has considerably more value than the debt itself, especially by the time one is ready to retire.
The one exception worth noting is that the recent housing collapse has pushed real estate asset values down, meaning that some mortgage borrowers owed more on their mortgage than what their property was worth.
Even with a mortgage in a positive equity position, the retired mortgagor would continue to make regular mortgage payments.
Although this would normally seem tedious to the borrower, especially in retirement, amortizing the (usually smaller) balance over a longer period of time will mean that the payments on the mortgage will typically be lower than equivalent rent payments.
There are reasons why someone in retirement might find this arrangement advantageous.
The first is that the family home is often an asset with sentimental value that that the retired homeowner wants to hold on to for as long as physically possible.
Family gatherings are often hosted at the house, familiarity with the neighborhood, area and so on, as well as pride of ownership are among the top reasons why retired people will remain in their home and, of course, pay a mortgage while remaining there.
The second is the family home is also an asset.
Depending on market conditions, selling the house might not make for a good business decision.
And even if market conditions are agreeable to selling the home, this larger asset may be among the retired mortgagor's greatest investments, meaning it may be the biggest driver of gains in one's net worth.
To illustrate, consider that even at a moderate 3%, real estate valued at $500,000 will return $15,000, whereas an investment portfolio of $200,000 would need to return 7.
5% to achieve the same gains.
Of course, if the payments are prohibitive and there are other assets or income to allow for a better standard of life, carrying a mortgage in retirement is not always a wise thing to do.
For that reason, retired mortgage borrowers are smart to obtain the advice of a qualified financial planner or at least run the numbers themselves before deciding on keeping a mortgage and family home.
This may seem startling on the surface -- all of that planning for retirement, including an aggressive savings program, debt repayment, asset accumulation and so on -- but in many cases, the debt that a lot Boomers are carrying in retirement is mortgage debt.
Overall, mortgage debt is not always considered "bad debt.
" That is because a mortgage is normally supported by an asset that has considerably more value than the debt itself, especially by the time one is ready to retire.
The one exception worth noting is that the recent housing collapse has pushed real estate asset values down, meaning that some mortgage borrowers owed more on their mortgage than what their property was worth.
Even with a mortgage in a positive equity position, the retired mortgagor would continue to make regular mortgage payments.
Although this would normally seem tedious to the borrower, especially in retirement, amortizing the (usually smaller) balance over a longer period of time will mean that the payments on the mortgage will typically be lower than equivalent rent payments.
There are reasons why someone in retirement might find this arrangement advantageous.
The first is that the family home is often an asset with sentimental value that that the retired homeowner wants to hold on to for as long as physically possible.
Family gatherings are often hosted at the house, familiarity with the neighborhood, area and so on, as well as pride of ownership are among the top reasons why retired people will remain in their home and, of course, pay a mortgage while remaining there.
The second is the family home is also an asset.
Depending on market conditions, selling the house might not make for a good business decision.
And even if market conditions are agreeable to selling the home, this larger asset may be among the retired mortgagor's greatest investments, meaning it may be the biggest driver of gains in one's net worth.
To illustrate, consider that even at a moderate 3%, real estate valued at $500,000 will return $15,000, whereas an investment portfolio of $200,000 would need to return 7.
5% to achieve the same gains.
Of course, if the payments are prohibitive and there are other assets or income to allow for a better standard of life, carrying a mortgage in retirement is not always a wise thing to do.
For that reason, retired mortgage borrowers are smart to obtain the advice of a qualified financial planner or at least run the numbers themselves before deciding on keeping a mortgage and family home.
Source...