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Should I pay off my mortgage in retirement? Benz book tackles money questions

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Older Americans have significant equity

As current and prospective retirees consider how to handle their assets, their homes are one area where they may have a lot of equity tied up, prompting the question, “Should I pay off my mortgage?”

Homeowners ages 65 and over had a median home equity of $250,000 as of 2022, up 47% from 2019, according to the Joint Center for Housing Studies of Harvard University.

As some retirees relocate, they are turning to that equity in lieu of taking on a new mortgage.

“We are seeing more all-cash buyers,” said Jessica Lautz, deputy chief economist at the National Association of Realtors.

In its 2023 annual report on home buyers and sellers, the trade association found about a third of younger baby boomers ages 59 to 68 who had recently purchased homes with all cash. For older baby boomers ages 69 to 77, that goes up to 43%, and for the silent generation, that rises to about half.

You're Retired! Now What?

Legacy homeowners may also benefit from knocking down their mortgage debt balances, which can free up more monthly income, some experts argue.

“If you can reduce your ongoing spending, that can provide a lot of peace of mind and give you a lot more wiggle room to be flexible with your portfolio withdrawals,” Benz said.

Mortgage rates may affect payoff calculus

The mortgage payoff calculus may change based on whether people can outearn their mortgage rates with safe, guaranteed investments, Benz said.

Benz and her husband paid off their mortgage more than a decade ago. But what was the right answer then might not be today, she said.

Whether or not to pay off your own mortgage — if you’re retired or not — comes down to both whether it makes sense financially and how it feels emotionally, JL Collins, a financial blogger and bestselling author, tells Benz in her book.

For mortgages that are 3% or less, it doesn’t make sense to pay off, since better returns are available in the stock market, Collins said. For mortgage rates that are 6% or more, paying that balance off will provide a guaranteed return. And for rates between 3% and 6%, it depends on what makes borrowers most comfortable, he said.

Benz said she recently saw the other side of the debate when she suggested a friend use their inheritance to pay off her mortgage. Her friend was completely averse to the idea, she said.

“It’s like, ‘Well, why not get rid of this regular monthly bill?'” Benz said. “And her point was, ‘No, seeing my portfolio shrink by that much would feel terrible.”

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Ted Jenkin, a certified financial planner and the CEO and founder of oXYGen Financial, a financial advisory and wealth management firm based in Atlanta, tells CNBC that he typically recommends clients pay off their mortgages when it makes sense, even if they are not retired.

“There are a lot of people that I help pay off mortgages that say, ‘It’s so great to drive home and to know that I own that property; nobody can take it away from me,'” said Jenkin, who is also a member of the CNBC FA Council.

Getting rid of mortgage debt can also provide career flexibility to start a business or pursue other goals, he said.

Admittedly, the argument over whether to pay off mortgages is “much more emotional and psychological than it is financial,” Jenkin said.

In other words, there is no one right answer. The same goes for other topics Benz touches on in her book.

Emotional questions to prepare for retirement

Notably, the book’s content is split about evenly between financial and non-financial content. The big money questions people ask themselves to prepare for retirement are just as important as the emotional ones.

What brought you joy while you were working may change in retirement, Michael Finke, a professor of wealth management at The American College of Financial Services, tells Benz. As such, you shouldn’t just think of retirement as relaxation, because you need something to relax from.

While goals such as playing golf or visiting your children may take up a few days, ask yourself what the whole 365 days of a year in retirement will look like, Jamie Hopkins, chief wealth officer at WSFS Bank, tells Benz.

Ultimately, retirement offers individuals a new chance at reinvention.

It’s a chance to ask yourself, “What would I regret?” Often, it’s the chances we don’t take that end up haunting us on our death beds, Jordan Grumet, a hospice doctor, author and podcast host, tells Benz.

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Personal Finance

Will you have a lower tax rate in retirement? Maybe not, advisors say

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Most Americans will have a lower tax burden in retirement than during their working years.

However, that may not be the case for some retirees, especially for higher earners and big savers, which could have a significant impact on their financial plans, according to financial advisors.

“Substantial evidence” suggests retirees have lower tax rates than during their working years, according to a 2024 paper published by the Center for Retirement Research at Boston College.

There are a few general reasons for this, according to a joint 2017 research paper by the Internal Revenue Service and Investment Company Institute: People who leave the workforce no longer pay payroll taxes. Their household income often drops, generally meaning less income is taxed. And Social Security recipients only pay tax on a portion of their benefits.

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The “overwhelming majority” of people will have a lower tax rate in retirement, “hands down,” said Jeffrey Levine, a certified financial planner and certified public accountant based in St. Louis and chief planning officer at Buckingham Wealth Partners.

But that’s not always the case.

Required minimum distributions may be large

Those who’ve built up a sizable nest egg, perhaps with disciplined saving in a 401(k) plan or individual retirement accounts, may have large required minimum distributions, Levine said.

For example, the IRS requires that older investors take minimum withdrawals annually from “traditional” (i.e., pre-tax) retirement accounts when they reach a certain age. (It’s age 73 for those who turned 72 after Dec. 31, 2022.)

The total amount is based on an IRS formula. A bigger nest egg generally corresponds to a larger RMD.

This matters because RMDs from pre-tax accounts add to a household’s taxable income, thereby raising its total tax bill. By contrast, distributions from Roth accounts aren’t taxable, with some exceptions.

Investors held $11.4 trillion in traditional IRAs in 2023, about eight times more than the $1.4 trillion in Roth IRAs, according to the Investment Company Institute.

Additionally, investors who inherited a retirement account, perhaps from a parent, may have to empty the account within 10 years of the owner’s death, Levine said. Such withdrawals from a pre-tax account would further add to taxable income.  

Retirees may not want to shrink their lifestyle

What Financial Advising Looks Like Now

“Most clients we sit down with today don’t want to see a diminished amount of income when they retire,” Jenkin said. “They still want to take the same level of trips, level of going out to concerts and dining, taking care of grandchildren, and many are still carrying a mortgage into retirement.”

In the first three to five years of retirement, Jenkin actually finds clients generally spend more than they do during their working years due to what he calls “a period of jubilation.”

“A lot of people just don’t want to shrink their lifestyle,” he said.

Consider your income tax assumptions

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Personal Finance

Higher capital gains taxes unlikely under Trump, Republican Congress

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Former U.S. President and Republican presidential candidate Donald Trump speaks during an election night event at the West Palm Beach Convention Center on Nov. 6, 2024.

Jim Watson | Afp | Getty Images

President-elect Donald Trump‘s victory means higher individual taxes, including levies on investments, are less likely for top earners, experts say.

Vice President Kamala Harris proposed higher long-term capital gains tax rates during her campaign — raising the top rate to 28% from 20% — for those making more than $1 million annually. Long-term capital gains rates apply to assets owned for more than one year.

Harris’ plan veered from President Joe Biden‘s 2025 fiscal year budget, which called for 39.6% long-term capital gains taxes on the same top earners. 

Higher capital gains tax rates, however, are “entirely off the table,” under a Trump presidency and Republican-controlled Congress, said Erica York, senior economist and research manager with the Tax Foundation’s Center for Federal Tax Policy. 

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Republicans secured control of the Senate on Tuesday and could maintain a narrow majority in the House of Representatives, which creates a “trifecta” in the White House and both chambers of Congress.

Even with partial Republican control, “it’s most likely that capital gains tax policy just stays put where it is,” York explained.

For 2024, investors pay long-term capital gains rates of 0%, 15% or 20%, depending on taxable income. Assets owned for one year or less are subject to regular income taxes.

You calculate taxable income by subtracting the greater of the standard or itemized deductions from your adjusted gross income. The taxable income thresholds will increase in 2025.

Changes to ‘net investment income tax’

Preventing election anxiety from driving your financial decisions

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Personal Finance

Federal Reserve cuts rates after election. What that means for you

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The Federal Reserve Building in Washington, D.C.

Joshua Roberts | Reuters

The Federal Reserve announced it will lower its benchmark rate by a quarter point, or 25 basis points, days after President-elect Donald Trump won the 2024 election.

Economic uncertainty was a prevailing mood heading into Election Day after a prolonged period of high inflation left many Americans struggling to afford the cost of living.

But recent economic data indicates that inflation is falling back toward the Fed’s 2% target, which paved the way for the central bank to trim rates this fall. Thursday’s cut is the second, following a half point reduction on Sept. 18.

The federal funds rate sets overnight borrowing costs for banks but also influences consumer borrowing costs.

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Since the central bank last met, the personal consumption expenditures price index — the Fed’s preferred inflation gauge — showed a rise of just 2.1% year over year

Even though the central bank operates independently of the White House, Trump has been lobbying for the Fed to bring rates down.

For consumers struggling under the weight of high borrowing costs after a string of 11 rate increases between March 2022 and July 2023, this move comes as good news — although it may still be a while before lower rates noticeably impact household budgets.

“The Fed raised rates from the equivalent of the ground floor to the 53rd floor of a skyscraper, now they are on the 47th floor and another rate cut will take us to the 45th floor — the view is not a whole lot different,” said Greg McBride, chief financial analyst at Bankrate.com.

From credit cards and mortgage rates to auto loans and savings accounts, here’s a look at how a Fed rate cut could begin to impact your finances in the months ahead.

Credit cards

Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. Because of the central bank’s rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to more than 20% today — near an all-time high.

Annual percentage rates have already started to come down with the Fed’s first rate cut, but not by much.

“Still, these are sky-high rates,” said Matt Schulz, LendingTree’s credit analyst. “While they’ll almost certainly continue to fall in coming months, no one should expect dramatically reduced credit card bills anytime soon.”

Rather than wait for small APR adjustments in the months ahead, the best move for those with credit card debt is to shop around for a better rate, ask your issuer for a lower rate on your current card or snag to a 0% balance transfer offer, he said.

“Another rate cut doesn’t change the fact that the best thing people can do to lower interest rates is to take matters into their own hands.”

On the campaign trail, Trump proposed capping credit card interest rates at 10%, but that type of measure would also have to get through Congress and survive challenges from the banking industry.

Auto loans

Even though auto loans are fixed, higher vehicle prices and high borrowing costs have become “increasingly difficult to manage,” according to Jessica Caldwell, Edmunds’ head of insights.

“Amid this economic strain, it’s clear that President Trump’s promises of financial relief resonated with voters across the country,” she said.

The average rate on a five-year new car loan is now around 7%, up from 4% when the Fed started raising rates, according to Edmunds. However, rate cuts from the Fed will take some of the edge off the rising cost of financing a car — likely bringing rates below 7% — helped in part by competition between lenders and more incentives in the market.

“As Americans seek a reprieve from the relentless pressures on their wallets, even a modest federal rate cut would be seen as a positive step in the right direction,” Caldwell said.

Trump has supported making the interest paid on car loans fully tax deductible, which would also have to go through Congress.

Mortgage rates

Housing affordability has been a major issue due in part to a sharp rise in mortgage rates since the pandemic.

Trump has said he’ll bring down mortgage rates — even though 15- and 30-year mortgage rates are fixed, and tied to Treasury yields and the economy. Trump’s victory even spurred a rise in in the U.S. 10-year Treasury yield, sending mortgage rates higher.

Cuts in the Fed’s target interest rate could, however, provide some downward pressure.

“Continued rate cuts could begin to drive down mortgage rates which have remained stubbornly high,” said Michele Raneri, vice president of U.S. research and consulting at TransUnion. As of the week ending Nov. 1, the average rate for a 30-year, fixed-rate mortgage is 6.81%, according to the Mortgage Bankers Association.

Mortgage rates are unlikely to fall significantly, given the current climate, explained Jacob Channel, senior economist at LendingTree.

“As long as investors remain worried about what the future may bring, Treasury yields, and, by extension, mortgage rates are going to have a tough time falling and staying down,” Channel said.

Student loans

Student loan borrowers will get less relief from rate cuts. Federal student loan rates are fixed, so most borrowers won’t be immediately affected. (Efforts to forgive student debt are now likely off the table.)

However, if you have a private loan, those loans may be fixed or have a variable rate tied to the Treasury bill or other rates. As the Fed cuts interest rates, the rates on those private student loans will come down over a one- or three-month period, depending on the benchmark, according to higher education expert Mark Kantrowitz.

Still, a quarter-point cut will only cut monthly payments on variable-rate loans by “about $1 to $1.25 a month for each $10,000 in debt,” Kantrowitz calculated.

Eventually, borrowers with existing variable-rate private student loans may be able to refinance into a less expensive fixed-rate loan, he said. But refinancing a federal loan into a private student loan will forgo the safety nets that come with federal loans, such as deferments, forbearances, income-driven repayment and loan forgiveness and discharge options.

Additionally, extending the term of the loan means you ultimately will pay more interest on the balance.

Savings rates

While the central bank has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate.

As a result of Fed rate hikes, top-yielding online savings account rates have made significant moves and are still paying more than 5% — the most savers have been able to earn in nearly two decades — up from around 1% in 2022, according to Bankrate.

“Yes, interest earnings on savings accounts, money markets, and certificates of deposit will come down, but the most competitive yields still handily outpace inflation,” McBride said.

One-year CDs are now averaging 1.76% but top-yielding CD rates pay more than 4.5%, according to Bankrate, nearly as good as a high-yield savings account.

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