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Ask the Experts: Should I pay off my mortgage when I retire?

By Claudia Buck, The Sacramento Bee –

When it comes to managing our money, we’ve all got questions. This week, Walt Romatowski, a certified financial planner with Castellan Financial Advisors in Roseville, Calif., dispenses some advice to “Ask the Experts” readers.

QUESTION: I will be getting around $80,000 in cash from the sale of a property. I have 13 years left on my mortgage, with $70,500 remaining in principal. The house desperately needs a new roof and a new driveway. If I pay off the mortgage now, I will be saving $1,000 per month to use for the repairs. Should I invest the $80,000 or pay off the mortgage?

ANSWER: If your home “desperately” needs a new roof, making that repair should be a priority.

I would use a portion of the cash to repair the roof and, depending on how bad the driveway is, maybe make that repair as well.

You didn’t indicate if any taxes will be due on the $80,000 from the property sale. If so, you need to reserve for that as well.

The decision on whether to use the remaining amount for investing or paying down your mortgage should be based on a number of factors:

—The interest rate on your mortgage;

—Expected investment earnings, based on your risk tolerance and investment horizon;

—Your income tax bracket;

—If any large purchases are needed in the near future;

—The balance in your emergency fund;

—Adequacy of your retirement savings.

Make sure you take all of the above into consideration before using the whole $80,000 to pay down your mortgage.

Not having a mortgage in retirement can be a real comfort, but you need to make sure that you have funds available for more short-term needs, such as an emergency fund, planned large purchases or repairs, and the inevitable unexpected expenses.


Q: I have my 401(k) in an investment management company that has been wonderful through the recent financial crises. They have managed my funds well and diversified as the market fluctuated. I am retiring in six months and will need to move my pension funds from my employer’s account. As pleased as I am with my investment company, I’m reluctant to put my pension in the same “bucket.” Is it safe to do so or would it be better to put my pension into a separate company altogether?

A: In 1970, Congress created the Securities Investor Protection Corporation (SIPC) to protect customers of member broker-dealers that may fail or be liquidated. If any securities or cash are “missing” from customers’ accounts, the SIPC replaces those securities and cash. The protection is limited to $500,000 per customer.

It’s important to note that the SIPC does not protect customers against market risk — i.e., losses resulting from a fall in a security’s value. Most firms offer additional protection beyond the SIPC limit, which is called “excess SIPC.”

Assuming your firm has adequate SIPC coverage, there is no real risk with leaving all your assets with one investment management company. If you are pleased with your current company, by all means, stay the course.

The advantages of staying with your current company:

—You have developed a relationship and are familiar with their services.

—Depending on the amount of assets they are managing, you may get a reduced fee on the additional assets from your pension fund. Typically, the management fees charged by investment companies are based on a sliding scale (i.e., a certain percentage on assets invested up to $1 million and then a lower percentage on amounts above those levels).

On the other hand, you won’t know if another company can provide better service unless you test the waters. Plus, another company’s investment philosophy may be better suited to your needs.

I suggest you ask trusted friends or family if they recommend their investment management companies, and then interview a few to get a feel for their services. You could transfer your pension assets to one of these firms, and after a year or so compare their service and performance to your current firm. If you are not satisfied, you can always transfer the pension assets back to your current firm.

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