Mortgages Carried Later In Life a Disturbing Trend
By Tim Grant, Pittsburgh Post-Gazette
Owning a home free and clear has been an enduring part of the American dream, but in recent years more people are waking to the reality that they will be retiring still owing money on their mortgages.
“It's a bad trend,” said P.J. DiNuzzo, president of DiNuzzo Investment Advisors in Beaver. “One piece of advice I can give is to pay off your house and then retire.”
Rather than cutting back on debt, people approaching retirement appear to be increasing the amount of debt backed by their primary residence, a complete shift from what retirees in past generations did. The number of families headed by people 55 or older with housing debt has increased steadily from 24 percent in 1992 to 36 percent in 2004, according to the Employee Benefit Research Institute in Washington, D.C.
The rising numbers are traced to homeowners refinancing mortgages, cashing out equity in their home or buying homes during the housing boom at the beginning of the decade. “People age 50 plus in America have lived through an era when home equity loans, refinancing homes and reverse mortgages gained popularity," said Jim Toedtman, an editor at AARP Bulletin in Washington, D.C. “So, we shouldn't be surprised that if the wheels are going off the tracks, it's those people who used those vehicles who are the ones who are finding themselves in particular trouble.”
People who lived through the Great Depression have painful memories of banks foreclosing on mortgages. Many of them naturally adopted the belief that mortgages are bad and should be eliminated as quickly as possible. But attitudes are different now. Tax laws have changed and investment opportunities are broader. In the age of easy credit and soaring home values, a growing number of investment advisers caution their clients against tying up too much of their nest egg in the walls of their house.
“Mortgages are not debt, but instead an asset class," said Ric Edelman, a Fairfax, Va., investment adviser and author of the book Lies About Money, being released Tuesday by Simon & Schuster. "If you have a mortgage it means you have money you didn't give the bank. By investing that money you give yourself an opportunity to generate profit. Many people enter retirement with a house fully paid for and no money and that's dangerous. It is much safer to have a lot of money readily at your disposal and a mortgage enables you to do that."
Brett Hammond, managing director and chief investment strategist for TIAA-CREF Asset Management, which has a Pittsburgh office, said if a person's taxable income is high enough -- 25 percent to 35 percent -- having a mortgage during retirement could be useful. But a mortgage could be a drain on retirees with low taxable income -- 15 percent -- because there's no tax benefit.
"Like everything else in personal finance, giving a simple answer like “yes” or “no” is bad because everyone's circumstance is a little different," Mr. Hammond said.
David Esielionis, a wealth manager at Renaissance Mortgage in Salem, N.H., said people who accelerate paying off mortgages do so at the expense of saving. “The bottom line is [a paid for house] is not liquid,” Mr. Esielionis said. “It's a false sense of security because if there's a crisis all your money is locked up and you've got to make a panic move like selling the house.”
Leveraging a mortgage in retirement could work fine for people who can afford it. But debt equals risk and many financial advisers suggest eliminating mortgage debt before retirement to reduce risk.
Financial talk show host Dave Ramsey is one of them. “Someone who suggests you take a $300,000 paid-for house and borrow a mortgage on it, I'd call them an idiot,” said Mr. Ramsey, who is based in Nashville. “This is the first generation to have mortgage debt at retirement. The baby boomers have a different way of looking at life than people from the Depression Era did," Mr. Ramsey said. “The frequency and aggression that we are marketed to has increased dramatically in the last two decades.”
Mr. DiNuzzo in Beaver said he recently had a 62-year-old man come to him for financial advice who had 17 years left to pay on his mortgage. “We really couldn't help him,” Mr. DiNuzzo said. “There's no magic out there. We've seen folks come to us for retirement planning and realize they have to go back into the work force. There's only 100 pennies in a dollar.” Most of the people who have mortgage debt when they are ready to retire have high credit card debt, too, he said. Those who come to him with their house paid off usually don't have credit card debt.
“The tendency for Americans is to live beyond their means,” said Charlie Massimo, president and founder of CJM Fiscal Management in Garden City, N.J. “Homes have been appreciating so much people feel it's an asset they can borrow against.”
“Shelter is one of the basic needs of life and I don't want to see people take chances with that,” said Carrie Coghill-Kuntz, president of DB Root in Downtown. “If they go into retirement with mortgage debt, their nest egg will have to be larger to pay it. As financial advisers, it's our job to help people have secure retirements. ... I don't ever want to be in a position where I have to tell a 70-year-old person they have to get a job to pay their mortgage."
First published on September 28, 2007 at 12:00 am
Tim Grant can be reached at tgrant@post-gazette.com.
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