Q. We are trying to figure out the safest, smartest way to lower debts in retirement. My husband had two unexpected surgeries last year and he stopped working. He took Social Security early but now he is back at work. We owe $119,000 on our mortgage and $100,000 in parent college loans. We have $580,000 in retirement accounts and I’m thinking of taking $30,000 to $50,000 to pay down the debt. What do you think?
— Wanting to pay it off
A. We’re glad to hear your husband’s health is better and that he’s able to be back at work.
Medical issues can cause huge disruptions to any family’s finances.
One key point to consider is the tax implication and the long-term effect on your retirement if you removed money from a retirement account as you suggested, said Ken Van Leeuwen, a certified financial planner with Van Leeuwen & Company in Princeton.
“Typically, IRA money is one of the best assets to have because it grows tax-deferred,” he said. “If you used IRA money to pay down more of your mortgage or the parent loans, then you will have less money growing for you later in retirement as well as a large tax bill to pay in the year you remove funds.”
One option would be to explore a home equity line of credit (HELOC) to consolidate the student loan debt, Van Leeuwen said.
With interest rates very low, currently, you can probably consolidate the parent loans into much lower interest rates and make lower payments per month, he said. This would hopefully help with cash flow going forward, he said, and you would pay down the HELOC over time along with making your regular mortgage payment.
Paying off the mortgage is an option, but when considering using retirement funds, it does not seem so great, Van Leeuwen said.
“Unless you are committed to selling your home and downsizing, keeping your mortgage might not be a bad idea,” he said. “You are still able to deduct the mortgage interest and you are right around the state and local tax deduction cap.”
He said the parent loans should be a higher priority than the mortgage.
“Start with the parent loans first. You can get them down to a lower interest and free up some cash flow,” he said. “Once the parent loans are taken care of, work on the mortgage.”
