Dear Debt Adviser,

My husband is due to retire in about nine months. He has about $52,000 vested in his employer's retirement plan. We were discussing the pros and cons of taking this money to pay off a portion of our mortgage, which is currently $103,000 at an interest rate of 4.5%. We refinanced two years ago, and it is a 30-year fixed-rate loan. Is there an advantage to doing this?

Refinancing seems silly, and we could shorten the span of the loan by making a sizable payment like this. Or do you think it is better to roll this money over to an individual retirement account, or IRA, with a local bank for a paltry interest rate or put it in a mutual fund, perhaps, for the time being? Personally, I would like to pay off some of the outstanding mortgage, but my husband is reluctant to do this. Please give me your thoughts. Thanks!

- Doris

Dear Doris,

I'm very glad you wrote to me in advance of your husband's retirement. Mistakes are much harder to recover from once you quit your day job and have less new income showing up each month. To reduce the likelihood of mistakes, I strongly suggest you two get yourselves to a financial planner before doing anything else. Your financial decisions will be much clearer if you are making them as a part of a plan and not as stand-alone decisions. Will you need the money down the road? Is there a better use of the money? How does your mortgage fit in with your long-range plans? These questions and more will become obvious to you once you have a detailed written financial plan. You will be better prepared for your retirement years if you have a road map to follow.

Here are a few things you may want to consider as you look down the retirement road:

Taxes: If you take money from a retirement plan or IRA to pay down your mortgage, you'll incur additional taxes and may be pushed into a higher tax bracket. Additionally, you will be losing a tax deduction with less of your mortgage payment going to interest and more to principal. This isn't a bad thing necessarily, but it is worth considering. Unless you roll over the retirement plan money into another retirement account, such as an IRA, the $52,000 or whatever portion you don't roll over would be considered taxable income on top of your current earnings for the year. So, rolling into an IRA can save you a bunch regardless of what you earn on the money.

Goals: Once you deplete the retirement account, you will have less money to invest or to supplement your fixed retirement income. When you are retired, any amount of saved retirement funds you spend will not be easily replaced. Your pile of money tends to just get smaller over time unless you have more investment income than you'll need to cover your new spending. As to that "spending," be sure you do a post-retirement budget to estimate what your income needs will be. Goals and a spending plan will help your financial planner come up with a customized plan for you as well as give you a good place to begin discussing what your retirement will look like and what you want to do with the resources you have available after essentials are covered.

Mortgage: Lastly, don't forget you may have the option in your retirement years to convert your conventional mortgage to a reverse mortgage. As you pay down your conventional mortgage, each year you owe less and gain more equity. If you find in later years that you need additional income more than you need additional equity (which isn't exactly risk-free), you can gain it by eliminating your mortgage payment with a reverse mortgage and redirecting the mortgage payment money elsewhere. Plus, you would have several options for receiving any remaining equity in your home. How much you can borrow with a reverse mortgage depends on your age, the value of your home and the current interest rate. Learn more about these mortgages at the Department of Housing and Urban Development, or HUD, website.

A good financial planner can tie all this and more together for you. Good luck!

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