Last Week’s Question of the Week: What is the maximum amount a 55-year-old can contribute into a Roth 401k in 2020? Is it $19,500? Or is it $26,000?
ANSWER: $26,000 ($19,500 + $6500 Catch-up over 50).
HOST: Your topic today surrounds whether it makes sense to have a mortgage as we approach retirement, and whether you should consider renting vs owning?
KLAAS FINANCIAL: This really depends on what kind of retirement you want and what kind you can afford!
First of all, we do not believe in debt. 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. So, a couple of facts:
- The fastest growing area of bankruptcy filers are unfortunately senior citizens.
- According to data from the Federal Reserve Bank of New York: The total debt burden for Americans over age 70 increased 543% from 1999 through 2019, to $1.1 trillion. Similarly, those in their 60s saw debt, such as mortgages and auto loans, balloon by 471% to $2.14 trillion.
- So, it stands to reason that we don’t prefer our clients to have debt in retirement, and ideally don’t prefer for them to carry a mortgage.
- Many people say that at least you get a tax break by carrying a mortgage. It doesn’t usually make sense to trade prolonged debt and interest payments in return for a little bit of a tax-break. And for many people since the raising of the standard deduction to $24,800 for MFJ, this is a non-issue since many people are no longer itemizing.
- We would contend that the “happiest retirees” are those who don’t have too much debt or a mortgage in retirement!
HOST: How common is it for people heading into retirement to still have a mortgage today?
KLAAS FINANCIAL: The Urban Institute analyzed data showing that over 9 million homeowners, age 65 and over currently have mortgage debt. That number is up nearly 60% from 5.82 million a decade ago. (4/2020) Our hope is that as we move closer to retirement, we can either plan to be debt free, or truly understand the costs of bringing a mortgage with you.
If you have a mortgage:
- Ask yourself if it is at a competitive rate? Are you a candidate for refinancing? Rates are touching around 2.7% currently.
- Does it make sense to pay off your mortgage with after-tax funds versus pre-tax funds? Look at this closely with your financial planner or accountant. Paying off a house with IRA money may land you in a tax bracket that crushes you.
- Is your current house the right house for retirement? One level vs. two?
- Is your house in the location/state you wish to live in? Is it too much to care for if one of you 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: 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, 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.
HOST: So, 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. Other reasons you may wish to consider renting in retirement:
- Less to maintain equals more freedom. While conventional advice says that mortgage-free homeownership is important to retirement, many American retirees are finding that renting better fits their more active lifestyle and their finances. Some find that selling many of their possessions and renting a smaller place in a different location of the country gives them more freedom that owning a big house with continuous upkeep to manage. As a homeowner you spend weekends cutting the grass, trimming the bushes, fixing the roof and repairing broken fixtures. As a renter you can choose to spend your time doing activities beyond the house such as recreational ones.
- Not an investment. Remember that owning a home is not really an investment because its primary purpose is providing shelter. One of the basic factors that makes an investment an investment is that you have some ability to control the timing of your ownership. You can choose to buy an investment and choose to sell it when you are most likely to have a positive investment return. But with your house, your likely to keep it as long as you need it to be your shelter, and then choose to sell it when it no longer serves that purpose. Before the 2008 crisis, we saw situations where people had purchased homes at the top of the market, and then were forced to sell after the market collapse due to negative financial situations.
- 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.
- Better locations. Many rental units tend to be closer to town, so you may be able to actually walk more to the market, to your local barista or to attend local cultural events.
Clearly, there are a lot of tradeoffs between renting and owning. There’s no right answer for everyone. But these days more and more retirees are deciding that the convenience of a rental outweighs the pride of ownership.
HOST: Marcus from our Money in Motion Listener Corner asks: “Exactly what is a Roth IRA?”
KLAAS FINANCIAL: Great question! Listen to our show last week and you will learn more about this very topic! In a nutshell, A Roth IRA is a special type of individual retirement account. Unlike traditional IRAs, there is no tax break for making contributions, but the money enjoys tax-deferred growth and tax-free withdrawals in the future. You do pay taxes now.
They have the same contribution limits as traditional IRAs. In 2020, the total amount you can put into All IRAs, traditional or Roth is $6000 if you are under 50 years old; $7000 if you are over 50 which includes the catch-up contribution of $1000.
Just like with traditional IRAs you need earned income to make contributions. If you earn less than the maximum contribution limit, you can only contribute as much as you have earned for the year within the contribution limits.
This Week’s Question of the Week: How many homeowners over the age of 65 currently carry mortgages in the United States? Is it 9 million or 19 million?
Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.