Last Week’s Question of the Week: Approximately how many people have to pay income taxes every year on a percentage of their Social Security retirement or disability benefits? Is it 20 million, 35 million or 40 million?
ANSWER: Almost 20 million people pay income taxes every year on a percentage of their Social Security retirement or disability benefits.
HOST: I know every week you talk about retirement planning, but can you tell us a little bit about your firm and what you do on this show every week? How can listeners get help from a firm like yours? Is there any cost for an initial consultation?
KLAAS FINANCIAL: Klaas Financial is 43 years old, we operate as a hybrid firm with two locations — one in the Rockford area, one in the Madison area. Our focus is on retirement planning, utilizing both fee-based planning and fee-for-service for individuals.
We have three divisions to help direct future retirement of individuals (KIP & KLAAS 360) and also assist companies with their 401k plans (KLAAS 401k).
We often work as a “coach” for your retirement — which is different from other firms. We help direct your team, which typically may include your accountant, investment services, insurance agent, estate planning attorney, banker, etc.
Our first meeting is always complimentary and getting a second opinion can’t hurt. It’s always good to make sure that you are on track for your financial goals.
The primary goal for “Money in Motion” is to educate our listeners on how to be better prepared for retirement. We highlight all of the issues surrounding it, such as regularly evaluating future retirement income and what is this picture really going to be comprised of — what items can you put in place today to ensure that you will be in good shape in retirement.
HOST: Today’s topic revolves around whether it makes sense to have a mortgage as we approach retirement? What about purchasing a new home in retirement and taking on a mortgage when perhaps we have been mortgage free for a few years?
KLAAS FINANCIAL: It depends on what kind of retirement each of our listeners want, and where they ultimately desire to live.
Many people argue that there is “good debt” to have in your retirement or early pre-retirement years. For example, if you have an unpaid mortgage, there are some financial experts out there who will suggest that you’re benefiting from a nice tax deduction.
First of all, for most people, we don’t think there is such a thing as “good debt” to have. Debt does two things. First, it increases risk and, second, it robs you of cash flow. Both these things affect your ability to invest and enjoy a worry-free retirement.
It doesn’t make sense to trade prolonged debt and interest payments in return for a little bit of a tax-break. If you pay out $10,000 in interest and you’re in the 25 percent tax bracket, it only saves you $2,500 in taxes.
The fastest growing area of bankruptcy filers are senior citizens, with college-agers are right behind them. So, as the boomers start hitting retirement — keep in mind they are notorious for overspending and under-saving — the statistics aren’t good, and past financial sins have a nasty way of catching up with you.
We would contend that the “Happiest retirees” are those who don’t have a mortgage in retirement!
HOST: How common is it for people heading in retirement to still have a mortgage today?
KLAAS FINANCIAL: There was survey back in March of 2018 by the national mortgage banker, American Financing which found 44 percent of Americans between the ages of 60 and 70 have a mortgage when they retire, and as many as 17 percent of those surveyed say they may never pay it off.
But at least if we discuss this today, as we move closer to retirement, we can plan either to be debt free, or understand the costs of bringing a mortgage with them. First of all, if you have a mortgage:
- Ask yourself if it is at a competitive rate? Are you a candidate for refinancing?
- Does it make sense to pay off your mortgage with after-tax funds versus pre-tax funds?
- Is your current house the right house for retirement? Two-story vs. one level? Is it in the right state? Is it too much to care for if someone passes away?
- Are you intending to sell your local home and buy a similar priced one elsewhere, or will this require a new or bigger mortgage?
HOST: What if you have paid off your house? What are the other expenses to consider?
KLAAS FINANCIAL: Yes, there are other expenses, but usually manageable. But remember in retirement you are no longer working to offset some of the expenses.
What about your property taxes? Are there states or cities that have better tax rates? According to Tax Rates.ORG, in 2017, the median property tax in Wisconsin is $3,007.00 per year for a home worth a median value of $170,800.00. Counties in Wisconsin collect an average of 1.76% of a property’s assessed fair market value as property tax per year.
So looking at the numbers, if the average person is retired about 18 years, just property tax alone would cost $54,000!
There can be mechanical issues, roofs, driveways, snow removal, grass cutting etc. so yes, owning a home does create a lot of OTHER expenses.
How much space do you really need? And do these things change over time…growing family, or empty nesters? Don’t try to keep up with the Joneses… they are probably consumed in debt. Talk this through, and BE PRUDENT.
Happiest retirees tend to be those who don’t have a mortgage in retirement!
HOST: What about the idea of renting in retirement?
KLAAS FINANCIAL: This is a very good question. And honestly, we are starting to hear it more often as a possibility to consider.
Do you know for sure where you may wish to live in retirement? 3 kids, 3 different directions? Renting may offer a solution. Reasons you might want to rent instead (more “renter in retirement” info here):
- 1. Home ownership is not a great investment. According to Nobel Prize-winning economist Robert Shiller, over the past hundred years the average home in America has appreciated less than 1 percent per year over the rate of inflation. That’s far less than most people earn investing in the stock market or even bonds.
- 2. Home ownership may not be less expensive. Renters complain they throw away their rent every month, with nothing to show for it. But homeowners know that mortgage payments, real estate taxes, maintenance costs and utility bills all add up. An apartment building spreads these costs over more units, so your share tends to be less. And while owners do benefit from certain tax breaks, these savings have been shaved down by the new tax law.
- 3. Less maintenance, more free time. As a homeowner you spend weekends cutting the grass, trimming the bushes, fixing the roof and repairing broken fixtures. As a renter you spend your time playing golf or tennis, going to a museum or arts festival or visiting the grandchildren. And if you want to be a snowbird in Florida or Arizona, it’s easy to pick up and move there. You don’t have to worry about selling or renting out your home.
- 4. Less space and more amenities. You don’t drive a big minivan if you’re single or a couple with no kids. So why would you buy a 2,000 or 3,000-square-foot house with a big lawn when it’s just one or two of you? As a retiree you don’t need a third or fourth bedroom. You’re more likely to want a doorman who can receive packages, a super who will fix a leak and a pool or gym somewhere on the property.
- 5. Better location. Many baby boomers moved out to the suburbs where they could afford to buy a home. But then they found out they had to drive five miles just to buy a carton of milk. Rental units in apartment buildings or condominium complexes tend to be closer to town. You can walk to the coffee shop on the corner or the bus stop a block away. Maybe you will be closer to your kids, because millennials want to live in the city as well.
Clearly, there are a lot of tradeoffs between renting and owning. There’s no right answer for everyone. But these days more baby boomers are deciding that the convenience of a rental outweighs the pride of ownership.
Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.