Who in their right mind would argue that being mortgage free is the only way to be if you expect to retire in some traditional way, with a house of your own? That would be me. As they say, “opinions vary” and “results vary.” But, if you pay off the mortgage before you retire, that eliminates a large financial obligation essential for living – someplace to live. That’s one of the big reasons it makes sense to me.
From my vantage point, as an early self-retired individual, I see being 100% debt free as an essential part of having peace of mind when you retire, and I’m up on my soapbox to explain why. Gather ’round my financially fit friends and lend me your ears.
First, let me offer a few examples that I’m personally acquainted with. I know four retirees who own their homes free and clear. They’re able to make it financially on retirement programs because they don’t have a mortgage payment. Three are traditionally retired – work all your life and then retire. One is non-traditionally retired – stop working early to dodge income taxes and enjoy youthful retirement. All are doing just fine because they’re not feeding the banks with a monthly interest payment.
Yes, this is anecdotal evidence at best, and it only goes so far to convince anyone of anything. Most often, we need some hard numbers to sway our view. So, now let me now offer up a mathematical reason why being mortgage free is essential – especially if you’re counting on a traditional retirement funded by Social Security.
Take a look at the amount the Social Security Administration says you’ll get when you retire. You could retire as early as 62 or wait until you’re 70. The choice is yours, and it affects the amount you’ll earn. Let’s say you’ll earn $1,500 a month in benefits after you retire. Now, let’s work our way up from the basics to see how far that money will go. For easy math, let’s divide that money into five equal parts. Here’s how we might allocate this on a monthly basis:
$300 for food, condiments, meals out and the occasional aperitif.
$300 for utilities (electricity, gas, water, sewer, phone and cable).
$300 for health insurance (assuming you’re on Medicare), homeowners insurance, all insurance co-pays, and real estate taxes.
$300 for transportation (fuel, insurance, maintenance, repair and replacement costs).
$300 for clothes, household supplies, home maintenance and repair, entertainment, and a little mad money.
Total: $1,500 a month.
What’s missing from this accounting? It’s housing of course. Remember, that all-important place to live!
Whether you think allocating $300 a month for the above expense categories is adequate or inadequate, we haven’t even factored in housing. According to national averages, we should be allocating about 30% of our income to housing – that’s $500 a month. Take that amount out of the picture, and what would that leave us for the rest of the categories? Worse yet, what would that get us in terms of a place to live?
Yikes! This doesn’t look like such a great financial picture at all. It’s no wonder folks get into their 60’s and realize that they can’t afford to retire. And, that’s why it’s so very important to start thinking this through long before you retire.
As if this picture isn’t sufficiently bleak, let’s add two more factors that many of us don’t think about. Here they are: 1) when you retire, you have about 60 additional hours each week to go out and spend money; and, 2) the cost of health care generally goes way up.
So, my financially fit friends, you best become a “hair on fire” enemy of debt and get rid of that mortgage payment if you have any hope of making it on Social Security (or other single retirement program) while living in your own home in a lifestyle that is largely what you’re used to now. Otherwise, you’ll need another source of income, a big pile of money, or both.
Clair Schwan hosts www.Frugal-Living-Freedom.com where he encourages others to build wealth and achieve financial freedom by becoming debt free. He’s also big on self-reliance and screams that at the top of his lungs as the host of www.Self-Reliance-Works.com a blog dedicated to helping others achieve happiness through a self-directed life filled with personal achievement.