When looking towards retirement, odds are owning your home free and clear is one of your top goals, and you're definitely not the only one. We've seen so many articles lately about this subject with questions like: can adding an extra $100 dollars a month make a difference? How about $300? 500? And so on… AND IT MAKES SENSE! We don't know anyone that likes paying interest on a credit card, so why would you want to pay interest on your home, especially if you can help it? In a recent article by Reed Karaim from Interest.com entitled, "Should You Pay Extra On Your Mortgage?" Karaim states, "Paying a little extra a month on your home loan is a way to make that dream a reality faster than you thought, and with today's historically low savings rates, it could make more sense than ever."
But how can you afford to make extra payments? You have your first grandchild on the way, an elderly dog on medication, a car that's well on it's way out, and with the state of the stock market?
Enter Lasaii Benefits:
Our SAFE-HARBOR®-Directed IRA™ can be used to accelerate mortgage payments on a primary, secondary or investment property. We can structure the plan to create additional income each month from your IRA to be put towards the loan on your house.
Case Study (Based On Actual Client of Lasaii Benefits):
We just structured a plan for a 64 year old woman, Mary, two years into her retirement. She was on her way to paying off her home by the time she reached retirement, but ended up having to take a second mortgage a few years back and now, into retirement, she still owed about $240,000 dollars on the loan with an interest of 4%. She had a couple nest eggs, social security, and a pension plan after being a teacher for over 30 years (God Bless her), but her one dream and the thing that would bring her the most peace of mind was being able to own her home outright, not only for herself, but also for her children to inherit the home they grew up in.
So, Lasaii Benefits opened a SAFE HARBOR®-Directed IRA™ (SHIRA)™ for Mary with approximately $137,000 dollars. We structured the SHIRA™ to make an additional payment of $1,100 dollars each month (penalty-free as she is age 59.5 and above) to go towards her mortgage payments. Now, Mary will have her home paid off clear and free in less than 8.5 years as opposed to the 20+ years it would have taken if she followed her normal mortgage payment schedule. Because the additional payments are going towards her mortgage loan, Mary was able to qualify for additional tax write-offs associated with interest payments and property taxes up to the amount allowable by law for real estate.
Keep in mind that the SHIRA™ invests your money in a protected account, safe from any downturn of the stock market and upside potential when the market does well. Also, depending on age, you can stop, increase, or decrease your withdrawals whenever you'd like. Let's say you wanted to stop your withdrawal for a while and just let the money accumulate and grow for retirement income? You’re allowed to do that because you have control over your account. (Again, depending on age). Because of these attributes, Mary was very thrilled to see that even after she paid off her mortgage with the accelerated mortgage payments, she will still have money left in her SHIRA™ to let accumulate or use for income. (*Based on a conservative illustration of 3% and 4% potential interest earned).
If there is one thing I couldn’t stand, it was knowing I was paying enough interest on my home to have bought another one! I had another 20 years of payments to go upon retiring and every month I thought, ‘what I could do with that $2,000 a month back in my pocket to enjoy life!’ I was so envious of friends who had planned well and had their homes paid off upon retirement. With this plan, I’ll pay for my home in 8 years and a couple of months and still have a good chunk of my IRA left. I’m so happy about my decision. I wish I had known about this when I first retired. $100,000 less of my hard earned money going down the drain in interest. THAT makes me smile! -Mary, ID- Client
According to the article, owning your home free and clear, "…can be life-changing," says Jonathon Pond, a financial author and advisor from Newton, MA, who believes paying off your mortgage early can be one of the smartest moves you can make, especially as you reach retirement. (Karaim).
The article does warns of 3 things you must do before paying extra on your loan:
1). Pay off high-interest credit card debt
2). Build up your emergency savings (for at least 6 months)
3). Contribute to your retirement plan
It’s important to mention that our client did have these three things in order and for her, making those additional payments and getting her home paid off free and clear was the most valuable option. Regarding the third task in particular, our client had a couple of qualified plans, both were invested in stocks and she was looking to diversify and add value to her home.
You must consider if you are in the midst of building an IRA or other qualified plans and are further from retirement that an investment in the stock market could have a higher gain than that of adding additional payments to your home. But, Kairem goes on to say:
...2016's early wild gyrations reminded us that you must be willing to stick with the market long enough for the inevitable ups and downs to deliver those profits. If that's not for you, or if you already have enough money in stocks and the rest of your finances are in good shape, then this is the time to consider paying down your mortgage. (Kairem 2019).
Kearaim also mentions that, "over the past 40 years, the S&P 500 - a broad measure of stock market performance- has delivered an annualized return of about 11%."
With that being said and with the service that Lasaii Benefits offers: the possible interest earnings of the SHIRA™, the potential appreciation of the real estate, rental income (if you wish), Step-Up in Basis for heirs, tax write-offs (if you qualify), and the intrinsic value of occupancy, the total value and benefits of the SHIRA™ and the real estate could be, and has been, in the double digits as well. It is in fact, the perfect alternative investment.
Pond ends with advice that he uses with his clients, “Almost inevitably with a mortgage, there are going to be financial challenges, while those that retire without a mortgage pretty much have clear sailing ahead.”
Check out the article with the button below and play around with some numbers yourself using their mortgage calculator to see if it makes sense for you and your family to make additional mortgage payments.
Karaim, Reed. “Should You Pay Extra On Your Mortgage?.” Interest.com. 18 Feb 2019