Should we take out money from our retirement investment fund to pay off our home loan and make improvements? Retirement fund is losing money and home values are going up. The fund is around $85,000-$90000. The balance on our home is $34,000 and we want to make $20,000 in improvements. We are both retired and receive Social Security and small monthly retirement checks. What would you suggest?
This is a good question Bonnie, with a few different aspects to consider. First, you’ll need to determine whether your retirement savings are invested efficiently. Next, decide it’s worth it to use those funds to pay for home improvements. Lastly, you’ll have to explore whether you also want to use that money to pay off your mortgage. We’ll look at each of these questions individually since they each play in your overall decision here. (And if you have additional questions related to retirement, consider speaking with a financial advisor.)
Is Your Retirement Money Invested Efficiently?
It sounds like a big reason for asking this question is the fact that your retirement fund is losing money. To me, that’s a potential red flag and is worth looking into before making any decisions.
On the whole, the market has been up recently. For example, Vanguard’s LifeStrategy Moderate Growth Fund, which has a moderate asset allocation of 60% stocks and 40% bonds, has a year-to-date return of 10.46% as of Dec. 13, 2023, and a one-year return of 6.91%. It is also positive over the past three, five, and 10 years.
Even more conservative asset allocations have produced positive returns recently. Vanguard’s LifeStrategy Conservative Growth Fund, which has an asset allocation of 40% stocks and 60% bonds, has returned 5.15% over the past year. The company’s LifeStrategy Income Fund, which is 20% stocks and 80% bonds, is at 3.29% over the past year.
All of this is to say that a reasonably invested portfolio shouldn’t be losing money. I would double-check to see whether your returns are negative, and if so, you should consider changing your investment strategy. I am personally a big proponent of building a diversified portfolio of index funds.
This is important because it will ensure your money is working for you as efficiently as possible. Having a well-built portfolio may also affect the next two decisions you have to make. (And if you need help building or managing your investment portfolio, consider working with a financial advisor.)
Should You Use Your Retirement Funds for Home Improvements?
When it comes to deciding whether to use your retirement funds to pay for $20,000 in home improvements, the first big question is whether those improvements are necessary or optional.
If they are necessary, the money has to come from somewhere. So the next question to ask is whether there are other sources of money you could use. For example, do you have money in a savings account or brokerage account? If so, it’s possible that those could be a more tax-efficient way to pay for those necessary improvements.
If you don’t have other funds available, pulling the money from your retirement account could make sense. The alternative would likely be some sort of loan, and that is certainly worth exploring. But with interest rates where they are today, a loan may cost more than the tax hit and lost returns you’d pay for taking the money from your retirement fund.
If the home improvements are optional, the big question is how this expense would affect your financial security. If it would make it hard for you to cover your needs, especially if there’s something unexpected like a big medical bill, then you should probably consider smaller improvements or holding off on them altogether.
On the other hand, if you can comfortably pay for those improvements and still cover your expenses with your remaining income and assets, then I would go back to the question above about whether there are other sources of money you could use. If not, then using your retirement funds for those home improvements could certainly be a reasonable decision. (If you’d like to find a financial advisor to help you tackle retirement and money questions, our free tool can match you with one.)
Should You Use Your Retirement Funds to Pay Off Your Mortgage?
Let’s say that you move your assets into an efficient, low-cost and well-diversified investment portfolio that is 60% stocks and 40% bonds. Over the long term, a reasonable return expectation for such a portfolio is probably 5% to 6%.
If your mortgage interest rate is significantly less than that, the math says that you will likely make more money by keeping that money invested instead of paying off your mortgage. If your mortgage interest rate is higher, then the math says you’re likely better off paying down your mortgage.
Of course, there are other considerations as well.
For example, taxes may change the math. Your mortgage interest may be tax deductible, which would reduce the actual cost. Your retirement investment returns are likely tax-deferred but may be taxed upon withdrawal. Getting a better understanding of the after-tax interest rate and investment return will help you make a better comparison.
You might also consider certainty and peace of mind. While you might expect long-term investment returns to be higher, there is no guarantee and there can be plenty of ups and downs in the meantime. Paying off your mortgage provides a guaranteed return and removes a line item from your budget. Even if the math isn’t in your favor, those could be reasons to lean in that direction.
One additional consideration here is that although you mention housing prices in your question, that likely shouldn’t factor into your decision unless you are planning on selling this home or buying a new home shortly. This is simply a question of whether you are likely to get a better return from investing or paying off your mortgage, and how much you value the certainty of being mortgage-free.
If you have questions about the tradeoffs in your own finances, consider speaking with a financial advisor.
There’s no definitive right or wrong answer to your question, Bonnie. Instead, I would think about it like this:
Make sure your retirement funds are invested efficiently.
If home improvements are necessary, consider other sources for that money before withdrawing from your retirement fund.
If home improvements are discretionary, consider your overall financial security before deciding whether to move forward and where to take the money from.
For your mortgage, compare the mortgage interest rate to the expected return of your investments, and weigh that against the peace of mind of having your mortgage paid off.
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Matt Becker, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
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