Affluent retirees may need mortgage

Many near-retirees pay extra on the mortgage each month, avidly working toward having it paid off before leaving the job.

Is that necessary to have a secure retirement?

It really depends on how you did during your career.

In general, lower-income households with total investable assets of less than $1 million are best served working to pay off the mortgage by retirement.

Higher-income households with more than $1 million of invested financial assets may want to think about debt more strategically — in much the way a corporation would. Companies use debt to fuel growth. Households can take this approach too, and do it in a way that does not expose them to excessive risk.

“You are a lot better off if you can bring more money to the table through the strategic use of debt and then target a lower, less-volatile return,” says Thomas J. Anderson in his book, “The Value of Debt in Building Wealth,” which discusses the appropriate use of debt for high net worth households.

What kind of returns would you need? About 6 percent. Obviously, the cost of the debt would need to be less than this.

There are two types of debt where that is feasible in today’s low-rate environment: mortgage debt on a primary residence, and a pledged asset line of credit that can be established with a portfolio of invested assets as collateral.

Pledged asset loans only work if you have investments in nonretirement accounts — IRA, 401(k) and other tax-deferred accounts can’t serve as collateral for loans.

Taxes are also part of the equation. If you itemize deductions, mortgage debt can help reduce taxable income in retirement. And in many cases, the interest on a pledged asset line can be used to offset other types of investment income.

What about the cases where I advise people to pay off the mortgage? Most are households with less than a million in financial assets, but not all have been. Peace of mind plays a role, and some people sleep better at night knowing they are mortgage-free.

In my more than 20 years of helping folks plan for retirement, I’ve advised many to pay off the mortgage, and many not to.