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Spending In Retirement:  Why You Should Focus on Paying Off Your Mortgage Before You Retire Thumbnail

Spending In Retirement: Why You Should Focus on Paying Off Your Mortgage Before You Retire

Insights Retirement Planning Investing Financial Planning

One of the most important elements of any retirement plan is what you spend.  As you reach your fifties, one important goal to focus on is paying off your mortgage and other debt before you retire.  Let's look at how the average American spends in retirement, and why not having those big debt payments can improve your chances for success.

Watch Now: Spending In Retirement:  Why You Should Focus on Paying Off Your Mortgage Before You Retire


0:00 - Intro
 0:36 - How the average American spends their money in retirement
 1:06 - Focusing on paying off your mortgage before you retire
 1:57 - What do we mean when we say, "Within reason?"
 3:22 - Look at the car loans too.
 4:16 - Planning now to reduce taxes later
 5:42 - Spending often decreases as you get older
 6:43 - Final Thoughts
 7:18 - Outro

Spending Matters!

When we are helping people plan for retirement, We try to focus on spending levels.  Your spending level drives the long-term risk you face in your golden years.  Let’s take a look at how the “average” person 65 and older, spends their dollars in retirement.

Mortgage payments and car payments account for roughly 30 cents of every dollar spent by Americans aged 65 and older.  Nationwide, mortgage payments impact 52% of people over 65.  The average mortgage payment is $762 per month or $9,144 per year.  

Are you 50 or older? It may be time to focus on being debt-free...

If you are on pace to pay off your mortgage before you retire, you are generally on a good path.  If not, you may want to see what can be done—within reason—to eliminate that debt before you stop working.  The same can be said for car payments, which can also be a bigger expense.  Not having that debt means a few things:

  • You may be able to retire earlier.
  • You may not need as much in savings to retire the way you desire.
  • You can spend more on "fun"
  • You reduce your risk.

Figuring out a way to eliminate that debt can be a significant step in a good direction for retirement success.

What do we mean by, "Within Reason?"

Some methods you can use to retire the debt are better than others.  Here is what we mean.

  1.  Pay extra each month and apply it to the principal.
  2. Use excess savings to apply toward the loan balance.

What isn't reasonable is drawing large sums of money from a traditional IRA or 401(k) plan.  The tax cost of taking large distributions could be larger than you expect.  A big distribution could push your taxable income into higher tax brackets leading to a bigger expense than you expect. 

Other opportunities to manage your spending...

Looking at the chart, we see nearly 30 cents of every dollar is going towards housing costs and transportation.  And while a smaller amount of the total picture, you also have an opportunity to impact the income tax portion of your spending in retirement.  On average income taxes amount to about 6 cents of every dollar spent.  And you might find that amount to be more. 

Here is a common example we see every day.  You need to spend $1,000 per month, and your only resource is your 401(k) or IRA.  If you want to figure taxes into your distribution, you might need to take $1,250.  The net deposit you receive will be $1,000, $250 will go to taxes.  If you are taking distributions from a Roth IRA, you only need to withdraw $1,000.  

By using the Roth IRA, you can better manage your overall tax situation in retirement, having more money to spend on the things you want!

Your Spending Goes Down as You Get Older

The data also shows a lower average spending amount for people 75 and older.  This often rhymes with what we see in real life.  Often times when we build plans, we consider inflation in our assumptions.  After all, every year everything you buy costs more.  But we don't always see people drawing more from their nest egg each year.  What people do buy costs more, they oftentimes buy fewer goods and services.  

Spending in Retirement Matters!

It is the dominant risk factor we see with retirees.  Overspending is the primary stressor on your retirement nest egg.  This is why guidelines like the 4% rule exist.   It provides a framework to help us point you in a good direction, especially when there are so many unknowns.  When you're thinking about your retirement, focus your attention on what you plan to spend.  It will make many of the other decisions easier.  And if you need help, we are here.  You can fill out the form below and we will reach out to you.

Appearing in this Video

Nikki Lude, CFP®

Nikki is a Certified Financial Planner ™ Professional and leads our Woodsfield, Ohio office.

Neal Watson, CFP®

Neal is a Certified Financial Planner­™ Professional and leads our Marietta, Ohio office.