The goal of all retirement financial planning is simple—you need to be earning more in passive income than you spend each month. Retirement doesn’t necessarily happen at age 65. For some it happens much earlier in life due to good business decisions, inheritances, etc. For others, it never happens!
One of the best ways to ensure that your passive income covers your living expenses is to focus on eliminating or significantly reducing your monthly expenditures. If most Americans look at their monthly expenditures, the largest ones tend to be mortgage, food, and possibly health insurance.
As a retiree past the age of 65, your health insurance will be covered. And, your monthly food costs will be significantly lower than they were when you were raising a family. The mortgage, however, is typically the largest monthly expense that retirees often carry with them into retirement, and this can cause undue financial stress during a period of time that should be the least stressful of all.
Percentage of Families with Mortgages
Every three years, the Federal Reserve Board publishes a study titled, “Survey of Consumer Finances,” which surveys economic conditions in the U.S. The latest published study available is from 2009, and the data tells this:
- In 1989, only 26.4% of all households with head of household over 65 years old were carrying a mortgage during retirement.
- By 2007, 46.5% of all households with head of household over 65 years old carried mortgages during retirement.
- That is a mind-boggling 76% increase in less than 20 years.
The trend is obviously growing. However, with simple planning and discipline, one can eliminate the mortgage and gain debt relief well before retirement age, which will significantly increase monthly cash flow during retirement.
The Extra Payment
Compound interest is incredibly powerful—both for good and bad. It works against you if you are the borrower. For example, a $200,000 mortgage at 6% for 30 years will result in a monthly mortgage payment of $1,200- without taxes and insurance. At the end of the 30 years, a borrower will pay over $230,000 in interest alone!
However, if a person is able to pay just a few extra dollars each month, it will save thousands of dollars off that total interest payment, and it will reduce years off the mortgage. An additional $100 per month would save nearly $50,000 in interest and shave 5 years off the life of the loan in our example above.
This is probably the most common method of reducing the life of a loan. If you are currently holding a 30 year note on your home, you can refinance at record-low interest rates. Because interest rates are so low right now, you may be able to refinance from a 30 year loan to a 15 year loan, without much of a significant bump in your monthly payment. Similar to the extra payment plan, this will shave tens of thousands of dollars and years off your loan.
Trade It In
If you are nearing retirement and have nearly paid off your current home, consider selling it and using the equity to purchase a smaller home, condo or townhouse that you can afford in cash. This eliminates your monthly payment and gives you financial peace of mind.
Although it is the American Dream to own a home, renting is often the better financial decision. When you rent, your total monthly expenses (taxes and insurance) are much, much lower, and you are not responsible for any large repairs or home improvements that may need to be made.