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Pay off mortgage as part of retirement plan

| Sunday, April 21, 2013, 9:00 p.m.

Conventional wisdom says you need 70 percent of pre-retirement income to keep the same lifestyle when you stop working.

That makes sense if you've been putting away more than 20 percent of your income in your final working years. With those savings, and no more work-related expenses for commuting and dry cleaning, you'd probably get away with a lower income.

But if you weren't saving heavily until the end, it's hard to see how you'll reduce expenses 30 percent instantly upon retiring — unless you've paid off the mortgage.

In 2010, the most recent data available from the Federal Reserve Survey of Consumer Finances, 40.5 percent of households nationwide where the head was between 65 and 74 years old were paying a mortgage. While that's down slightly from 2007 (42.9 percent), it's up from 2004 (32.1 percent) and substantially higher than a generation ago.

“It really started to uptick around '95, and it's gone pretty much consistently upward since then,” said Craig Copeland, an economist at Employee Benefit Research Institute in Washington.

Why, then, don't more people make paying off the mortgage before retirement a priority?

Copeland said a lot of things changed. Housing values went up and credit loosened at a time when many baby boomers were in their 50s. Many families did cash-out refinancings to help pay for kids' college tuitions, or renovations.

“You see a lot of people in their 50s buying bigger houses, new houses, as their incomes went up,” he said.

Copeland said it's possible someone in his 50s could build assets faster in his 401(k) if he made the right investments than he would putting money toward mortgage principal. But, he said, “Even if you think you're investing properly, it's impossible to predict (the outcome).”

He said anyone who has a 401(k) employer match should be putting enough in to get that match.

But once that's done, he said, the wisest thing for a person who's 55, who has just $30,000 in a 401(k) but has 17 years left on a mortgage, would be to try to reduce the remaining years. If someone had a $130,000 balance at 55, at 4 percent interest, and paid an extra $175 a month, the mortgage would be paid off in 13 years and three months.

Jim and Sallie Cappadora are among the people who planned to own their home free and clear before retirement.

Jim, 63, and Sallie, 60, paid off their Ellington, Conn., house eight years ago. If they had let their 30-year mortgage run its standard course on the house they bought in 1986, they'd have three years left to pay.

“From the very first mortgage payment, we paid an extra $50 a month toward our mortgage, and after five years, we had paid off 10 years of principal,” she said.

In 1986, they sold the first house for $104,000, and bought a $158,000 house, with a $90,000 mortgage.

Sallie stayed home with their kids for eight years, but later, once she started working full time as a real estate agent, she and her husband started putting $100 a month toward the principal.

Then, in 2003, her husband lost his manufacturing job, when they had two kids in college. He had covered the family with benefits, so they had to pay $1,360 a month for insurance.

“Believe me, it wasn't easy when he was laid off,” she said. Before he lost his job, their annual earnings were roughly equal. He was out of work for several years.

The kids borrowed some of the money it cost to go to University of Connecticut, but Cappadora said she only missed five months of putting extra toward the principal in the 29 years they had a mortgage.

The last years of the mortgage, when it was $800 a month, Cappadora put far more than $100 extra in a month. Some months she would pay $2,200 toward the mortgage.

Over the years, they have done a kitchen remodeling and other interior upgrades, but when asked if they paid for the projects with a home equity loan, she replied, “Oh, no, no, no. It's always been: If you don't have the money, then don't spend it. It's the same thing with credit cards.”

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