Should Ailing Husband Pay Down Mortgage?

Dear Dr. Don, I am in failing health. Should we attempt to pay off our mortgage? We have little savings, about $10,000, with another $15,000 in stocks. I have $120,000 in life insurance. My wife's only income after I pass will be the Social Security Survivors Benefits, which are about $1,800 per month net.

We live in a 55-plus community, and our mortgage, with 25 years remaining, is $185,000. Our property taxes are a little more than $350 per year and the HOA fees are $250 per month. Without the mortgage payment of $1,100 per month, my wife feels she can survive on Social Security.

My wife would like to attempt to pay off the mortgage and feels we can do that within five years. My concern is that I may not live long enough and wonder if we should sock away as much money as possible instead. Our monthly income at present is $6,400 from pension income and Social Security. We have managed to pay down a $45,000 credit card debt and now have only three years left on a $27,000 auto loan with a $500 monthly payment. Any advice is welcome.

We fall into the ill-prepared category of retirees, but we've raised six children, sent them to college and paid for three weddings on one salary, so please don't judge us too harshly. -- Tom

Dear Tom, I'm not here to judge, I'm here to help. You've every right to feel proud of your accomplishments in raising and educating your children. I am curious why you didn't choose a joint-and-survivor benefit option for your pension. But I have the advantage of hindsight, and the life insurance policy may have been put in place to cover your wife's need for income after your death.

My rule of thumb in prepaying a mortgage is that you pay down your mortgage when you expect the effective rate on your loan will be higher than the expected after-tax return on your investments.

The more conservatively you invest, the easier it is to justify making additional principal payments on your mortgage. That's especially true if you use the standard deduction on your income taxes or don't fully utilize the mortgage interest deduction on your income taxes. Over a five-year planning horizon, I think you're better off with the sure thing, making additional principal payments on the mortgage.

To pay off the $185,000 mortgage balance in five years would take an additional principal payment of about $2,400 per month over and above your $1,100 monthly mortgage payment. The $3,500 expense each month is about 55% of your $6,400 monthly income. Put a $500 car payment on top of that and you've committed 62.5% of your monthly income to these loans for three of the five years. You'll know better than I whether that's realistic in your monthly budget. My guess is that you can reduce the balance by a lot but won't be able to pay it off in five years. If you should pass, the life insurance benefit could be used to pay off the mortgage.

Alternately, your wife could use the life insurance money to purchase an annuity to supplement her monthly income. The website can provide an estimate of the monthly income generated from the purchase of a fixed annuity.