Q: We’ve just received $250,000 from an inheritance. This is enough to pay off our mortgage and home equity line of credit. I’m planning to retire in 2 years; my wife had to retire last year due to health problems. We don’t have any retirement savings, and we’ll be living on a modest pension along with Canada Pension and Old Age Security Benefits. When we asked our bank for the payout balance on our mortgage, they said we should invest the money instead. We’re not sure what to do, any suggestions?
A: With retirement just around the corner, it would be very difficult to invest your inheritance and earn an after-tax rate of return that is higher than the interest you are paying on your mortgage and line of credit, without taking on some risk. At this stage in your life, you will be further ahead by paying off debt, reducing your monthly expenses and positioning yourself for retirement.
Without knowing your complete financial situation, I would encourage you to work through the following:
Check Your Mortgage Agreement for Prepayment Privileges & Penalties
Confirm that there is no penalty for paying off your mortgage early. If there is, review your mortgage agreement to see how much you are able to prepay and how much you can increase your payments without penalty.
Prepayment privileges vary; some are based on your original amount borrowed while others are based on the current principle outstanding. With some mortgage lenders, you can prepay a lump sum at any time throughout the year and with others you must adhere to a specific schedule.
If you can prepay a lump sum as well as increase your payments (many lenders allow you to double each payment) you’ll pay off as much of your mortgage as early as possible. This will reduce your interest costs until you are able to pay off your mortgage on the renewal date.
Reduce Temptation Spending – Pay Off and Close Your Line of Credit
Pay off your home equity line of credit and close it. Many people save it for a rainy day, but the temptation is too great to use it for unexpected expenses if you keep it open.
Related article: Why Save When Borrowing is Cheap?
Pay Off Debt Before You Retire
With the elimination of your mortgage and line of credit, pay off all other debt (credit cards, car loans, etc.) before you retire. Reducing your monthly expenses is an important part of retirement planning.
This may also be a good time to mention your plans to family or friends. Helping them understand how you’re planning ahead will give them the opportunity to support the choices you’re making and learn from your situation themselves.
Related article: Avoid Freedom 85 - Tips to Retire Debt Free
Open Savings Accounts
Having money to spend when you need it is an important part of securing your financial future. Establish Tax Free Savings Accounts (TFSA) for you and your wife.
The monthly income you were using to pay your mortgage and line of credit can now go into your TFSAs and towards building up funds that won’t accrue any income tax. Savings will help you manage unexpected expenses and large ticket items once you retire.
Create a Household Budget Based on Lower Retirement Income
Review your monthly expenses and work towards establishing a realistic budget based upon your retirement income. Don’t forget to include savings for seasonal/annual expenses. If you don’t, you will be tempted to manage these costs with credit.
Enjoy Your Golden Years Debt Free
With proper planning, you can look forward to a debt free retirement with time and money to spend on the activities you enjoy.