We have, for the last several years, stayed close to home during our summer vacations. This usually involves a lot of porch sitting, catching up on reading and entertaining the occasional neighbor who visits this outdoor living room. Yesterday was one of those days. George is retired several years now and at age 63 has settled into a rhythm of travel and woodworking. He is also in the process of refinancing his home.
Aside from everything you know about banks or thought you did, they apparently are not actuaries. He was offered a 30-year mortgage, but like most people his age and generation, the thought of carrying debt that long into the future galls him. He wants it paid for in 10-years. His lender must have felt a sigh of relief. Until he talked to me about how he can make money with his home, something I hadn’t considered in the past.
Inflation is an awful drain on the income of older people who rely on a fixed amount each year. In many instances those fixed amounts come from sources like Social Security, pensions or perhaps annuities purchased at retirement. While the last to income sources are fixed, Social Security is not. There are small increases awarded each year based on the Consumer Price Index (which excludes fuel and food as too volatile and would, if included, increase those cost-of-living-adjustments) but they lag behind the real rate of inflation.
The best wisdom in this particular case is to wait to draw on your Social Security. This is a way to ladder your income in retirement to increase as you get older. But more than one study has shown that the need for the highest income draw during retirement are those initial years. It is the decade following retirement when folks tend to settle down more. But perhaps the best wisdom advice to wait is not the most cost effective?
If you are able to live on your retirement investments, built up over the years of dutifully putting money away for this very moment, and you don’t need your Social Security to finance that first decade, you could still take your Social Security and save it. True, you receive far less taking the money as early as possible. But keep in mind, if you don’t need it (but are unsure whether you might need it), drawing it, saving or investing it conservatively until you reach the year when the highest benefit is paid, and then paying it all back, you get the higher benefit when you need it the most.
The common wisdom is to enter retirement without any debt. What it should mean, when we are talking about inflation, is manageable debt, the fixed kind such as a mortgage, may actually prove to be an inflation friendly way to fight the effects of a diminishing dollar. For most of us, credit is still relatively elusive and this is no different for those who are retired or about to retire with a mortgage. Yet, each payment, under the pressures of inflation actually creates a smaller payment. While credit card and other unsecured debt offers no such inflationary protect, the fixed nature of a mortgage does.
That neighbor told us about his process for refinancing, qualifying for a 10-year mortgage at 3.8%. While he found the payment on the high side, he was focused on the eventual ownership of the property. But had he bought the longest loan possible, he would have done a better job from an inflationary standpoint. Consider it this way: Each year inflation will rise. Each year, his house payment will remain the same. Inflation will eventually increase the worth of his home. George will actually be paying less in real dollars while inflation inflates the value of his home.
Surprisingly, at age 63, the bank is willing to offer a 30-year mortgage. He can still accelerate his payoff by pushing extra money towards the principal. Each additional month’s payment in a given year can shave six years from the life of loan or more, without locking his fixed income into a higher payment. This also has the net effect of paying far less interest for the loan, gives him increased flexibility and because inflation is also at work, cost him less to do so.
Both of these techniques require a certain amount of discipline. Saving (early) Social Security payments and investing them wisely and safely will offset your tax bill to some degree. (Treasury Inflation Protection Securities or TIPS is a good option for this short-term inflation play or even a municipal bond.) And both can help his taxes.
If Social Security is the sole income, the benefits are not taxed. If there is other income, up to 50% of the benefit received from SS can be taxed, too much income can force an 85% of benefit tax rate. But then there is the mortgage interest, which is still deductible which may effectively wipe the cost of taxed SS benefits away. The taxable threshold for s ingle man like George is $25,000 while a married couple is allowed $32,000 in benefit payments before taxation kicks in.
But you do need to talk with a tax person before making these decisions. You may find that in this instance, inflation is working with you instead of against you.
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