The Financial Request Line: Homes & College Funds

Every week on “The Financial Symphony,” John Stillman answers your retirement planning questions on the request line to help you make sure that all of the instruments in your financial orchestra are playing in tune. Submit your financial question below, and you could have it answered by the maestro himself! 

 

I have two rental properties, and both properties have mortgages. I have enough money in investments that I could pay off both those properties, but I’m getting enough in rent to cover the mortgages. So, do you think I even need to pay them off.
— Al in Durham

It doesn’t sound like you need to pay them off, but in situations like this, I’m more inclined to look at the tax planning aspect of the decision than the investment return aspect.

If you’re just thinking about investment return, you can always make an argument that you’re better off to keep the mortgages (presumably at a relatively low interest rate) because you can earn more money on your money by having it invested. That debate has a lot of gray area.

But the tax planning discussion is more black and white. First, let’s think about the tax implications of paying the mortgages off. If you have money in after-tax investments, you’ve probably experienced a lot of growth on those assets over the last decade. That means that if you liquidate those investments now to pay off the properties, you’re going to incur some capital gains taxes. That doesn’t necessarily mean that you shouldn’t do it, you just need to be aware of how much of a tax bill you’d create for yourself by making that move.

But let’s also consider the tax implications of not paying the properties off. Let’s suppose you’re retired and you need a certain amount of income every year to maintain your lifestyle. If you have mortgages on these properties, your need for income might be high enough that you end up in a higher tax bracket than you need to be. But with the mortgages paid off, you can maintain the same lifestyle with a lower income, putting you in a lower tax bracket.

Bottom line: Don’t get caught up in trying to measure return on investment as the only metric that matters. Adverse tax implications can cancel out those returns in a heartbeat.

 

I had kids later in life than most people, so I’m almost 60 now, and my twin boys will be heading off to college in a few months. I really want them to be able to finish college without having any huge student loans, but I’m not sure that I can pay for both of them to go through school without hurting myself financially. I’d like to retire eventually after all, and I’m 60 years old. Which things should I place a higher priority on: their education or my retirement?

— Maggie in Stem

Maggie, this is a question we can look at from two different angles. The personal angle, where we assess values and what’s more important to you as a family. And then there’s the mathematical question of deciding whether it makes sense for you to help them out if it means  adversely affecting your own retirement plans.

For some people, paying for college is a non-negotiable. I have a client who sent all four of her kids to Ivy League schools, even at a time when she really couldn’t afford to do it. But she told them not to expect any inheritance from her. Her legacy was passed on to them between the ages of 18-22. She knew that she’d set them up well in life and she wasn’t going to worry for a minute about spending her money in retirement to be sure there was something left to pass on.

For others—and I don’t know if this is true in your case or not, Maggie—it’s just not a financially sound decision to pay for your kids’ college because of the harm it will do to your own retirement plan. But if paying for college is important to you, you might still do it even if it’s financially unsound.

I’m not going to tell you the right or wrong way to decide on the values conversation as you determine what’s important to you from an emotional standpoint. But on the mathematical side, it’s crucial that you at least understand the consequences of your decision? If you want to retire at 65, but paying for college means you won’t be able to retire until 72, that’s a big decision. If you still want to pay for college, that’s your call, but at least you know that it means working an extra seven years.

Or maybe it just means retiring at 66 instead of 65. That’s an easier decision to make. Either way, you need to understand the exact mathematical consequences of the college decision so that you know exactly what you’re getting yourself into. I won’t tell you which life to choose for yourself, but I’d really like for you to know what you’re choosing before you do it.

 

 

Hosted by John Stillman of Rosewood Wealth Management, Financial Symphony equips you with the tools and knowledge needed to successfully orchestrate your way to and through retirement. You can listen to the full show here, and tune in every weekend 97.9 The Hill. The shows airs Saturday at 11am, with a repeat airing on Sunday at 10am.