Personal Finance: Retire with mortgage paid off

Question: I have several thousand dollars in my savings account and wonder whether I should start buying stocks again or think about my mortgage. My broker is recommending some stocks, but I'm not sure after losing a lot of money on them. I want to retire in a couple of years, and still have about 15 years left on my mortgage.

Answer: Though it sounds like you are wondering whether stocks are a good deal, that's not very relevant to your situation.

Because you are planning to retire soon, you cannot count on stocks to make up for losses in your savings. Predicting what the stock market will do over a couple of years is impossible, even when stocks seem like a sure thing.

But there are two moves that will provide more certainty about how you will survive.

Make sure your savings will match your retirement living expenses. And pay down your mortgage to increase the likelihood that you will be OK in retirement, even if your investments let you down.

The first step is one most people skip because it seems overwhelming. Looking into the future before retirement is not hard if you go to http://go.philly.com/retire2. Under "retirement planning basics," find the "personal cash flow worksheet" to calculate likely expenses during retirement. Then use the "retirement income calculator" to understand how your savings will last into your 90s.

"Seriously consider delaying retirement if you can't retire debt-free," said Denver financial planner Charles Farrell.

If you don't have to pay a mortgage or other debts, you can survive on substantially less in savings than if you have large required expenses. And if the stock market tanks for a long time, you can cut back spending, giving your stocks a chance to recover.

Farrell cautions people about thinking they can count on a part-time job in retirement to cover the mortgage. In this environment, there is no job certainty.

Aside from the calming effect of having your home paid off, financial planners suggest that paying off a mortgage is a good investment now. They compare the value of paying off a mortgage to the value an investor would derive from putting that money in a low-risk investment.

In this environment, it's clear that someone about to retire isn't going to make more money investing safely than paying off a mortgage, Farrell said.

Compare a 5.5 percent mortgage with a five-year bank certificate of deposit yielding less than 3 percent or a 10-year U.S. Treasury bond yielding about 3.5 percent.

Do not compare the 5.5 percent with what you might make in the stock market. Stocks are risky - nothing you can count on in a short time period. For younger investors, it makes sense to divide up money between riskier investments such as stock mutual funds and home payments because over 20 to 30 years, stocks are likely, though not sure, to earn a better return.

Some retirees think they should keep making mortgage payments for the tax deductions. But Park Ridge, Ill., financial planner Gary Bowyer said retirees often were subject to low tax rates, and avoiding mortgage interest is a better deal than the deduction.

Regardless of what they do with their mortgage, Bowyer said, those about to retire should have about four years of emergency savings that are easy to access and safe. For example, if you figured your retirement living expenses would be $4,000 a month and you were getting $3,000 from Social Security and other sources, you would need to know you could get your hands on $1,000 a month without touching stocks in a downturn.

The rest of the investments for a new retiree could be divided roughly 50 percent in stock mutual funds and 50 percent in bonds. Bowyer suggests some Treasury inflation protected securities, or TIPS, among bond holdings to cut inflation risks.