Currently, our mortgage payment (principal and interest only) equals 19% of our after-tax income. If we can eliminate our mortgage debt by or within a few years of retirement, our income needs will be reduced by about 20%. Eliminating our mortgage debt will significantly improve our ability to retire.
We currently have a 30-year fixed mortgage at 5.375%.
Our current plan is to pay the mortgage off in about 15 years by making additional principal payments. One way is to increase the monthly payment by about 50% as described in Paying Off A Home Mortgage Earlier. We have chosen another way of making one annual lump sum payment equal to about 4% of the original mortgage principal. Either way will pay off the mortgage in about 12 more years.
However, I also want to cover the possibility of retiring earlier than 12 years from now. If I get the opportunity to retire in my 40s :-), I might not have paid off the mortgage. Here is how I plan to eliminate the mortgage in less than 12 years, if needed.
- Continue with our current mortgage payoff plan. At this time, I will not pay any more additional funds against the mortgage. Doing so would sacrifice the savings we are putting against our retirement. I would rather keep the money in liquid assets versus illiquid assets such as our house.
- Assign a part of current and future savings to a 50% or greater lump sum mortgage payoff. This money would be used to payoff part of the mortgage, if needed. Otherwise, the fund will remain part of our emergency or retirement funds.
- Identify other potential sources of funds to pay off the remaining balance in lump sum. If I can retire earlier than planned, it will likely be because of a windfall. Windfalls would include the following: excess returns from investments/stock options, or severance pay. Any of these windfalls could be used to payoff the remaining mortgage balance.
In the past, I would have been uncomfortable putting so much money into an illiquid asset such as a house during retirement. However, Retirement Planning - A Staged Approach has convinced me that the value of one's house can be effectively used for retirement income.
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This is not financial advice. Please consult a professional advisor.
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