We have 8 years left on the mortgage, and we can cut that time in half by paying $8,000 extra each year toward the principal. The rate on the mortgage is 5.125%. About $300 a month of our current payment goes to interest. Is it worth my taking a reduced Social Security amount to pay off the mortgage? -- DW via email
A: This dilemma involves emotional as well as financial issues. But based on the numbers, I think it's better for you to delay taking a Social Security benefit until you turn 66.
Here are the pros and cons to consider:
The true cost of your mortgage is actually less than 5.125% because the interest is tax deductible. But that's a shrinking advantage. You'll get less and less of a tax deduction over the next eight years, says Christine Fahlund, senior financial planner at T. Rowe Price, because the closer you get to paying off the mortgage, the less interest there is in each mortgage payment.
And of course, you'd like to be mortgage-free when you retire.
All in all, paying off the mortgage early is a very attractive idea.
But if you use a discounted Social Security benefit to do it, says Fahlund, you'll be meeting a short-term problem (4 to 8 years of mortgage payments) with a long-term solution (20 to 30 years of Social Security payments).
There's a steep discount for taking Social Security at 64 instead of 66. For every $1,000 in monthly benefits you'd get at age 66, you'll get $866 at age 64, points out Eleanor Blayney, a financial planner who is also the consumer advocate for the Certified Financial Planner Board of Standards. Simple math suggests that taking Social Security at age 64 would cost you more than you'll save by paying off the mortgage four years early: a 6% annual discount in benefits in exchange for saving 5.125% a year on your mortgage.
Blayney did a quick spreadsheet calculation and found you'd save $10,660 over the next eight years with your plan to take early Social Security and pay off the mortgage early. By Year Eight, you'd have sacrificed about $6,190 in Social Security benefits. But of course, the Social Security discount doesn't stop after eight years: When you take a benefit early, it's forever smaller than if you'd waited. If you delay taking Social Security instead, it would take you only about three more years to break even, Blayney says. "So as long as you're healthy and planning to live more than eleven years, I would recommend the delay strategy."
On the other hand, both advisers acknowledge that there's a great psychological benefit in not having a mortgage in retirement. Only you can weigh what those four extra mortgage-free years would mean to you.
Here's an alternative you may want to consider:
If you wait two years, at age 66 you'll have the option of applying only for your spousal benefit. (You don't get that option when you're younger.) And at 66, you'd get the maximum spousal benefit: 50% of your husband's benefit. You could use that towards paying down the mortgage, while letting your own benefit keep growing. There's a big reward for that extra delay: You get an 8% annual bonus for each year you postpone taking your benefit between ages 66 and 70. That bonus permanently increases your benefit, just as a discount permanently reduces it.
Another advantage of this alternative is that at 66 you'd receive your maximum spousal benefit regardless of how much you earn every year. You intend to keep working -- and one drawback of taking Social Security at 64 is that you forfeit $1 of benefit for every two dollars you earn above $14,160. This annual limit changes every year, but it applies only as long as you're under your full retirement age. After that, your benefit isn't reduced no matter how much you earn.
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