Should I Carry a Mortgage in Retirement?

If you’re like most retirees or retirees-to-be, being debt free is a prerequisite to your retirement application. Here are four reasons to reconsider this once foregone conclusion.

  1. Mortgage qualification – post financial crisis era legislation has all but done away with mortgage qualification without W-2 or salary income. Reverse mortgages are excluded from this generality, but we’ll discuss those in a different post.
  2. Liquidity access – dovetailed with mortgage qualification is access to liquidity. In this case we are talking about the liquidity tied up in the equity of your home. A sound financial plan never includes “spending the house” but adding this liquidity to your retirement nest egg sure can lend some peace of mind
  3. Net mortgage cost – even with the tax plan passed in 2017, most individuals still expect to claim a deduction for mortgage interest, effectively reducing the net carrying cost of a mortgage. As of the date this article is written, 30 year mortgage rates are in the 4.0-4.5% range. This equates to a net cost of 3.0-4.0% depending on your effective tax rate. This cost of capital is at or near historically low levels.
  4. Return on equity – after decades of falling rates, we may be in for a period of rising interest rates. Those who can lock into a long-term fixed rate may be able to a higher return with fixed income investments in the future. Even a 1% higher return over your net mortgage cost on a mortgage spanning the length of your retirement can return greenbacks to your ledger and not the banks’!

While individuals are not permitted to utilize cash out home financing to deliberately make capital market investment purposes, there are no stipulations requiring you to pay cash for your retirement home.

For your retirement’s sake, consider carrying some debt in retirement and allowing it to work for you. As always, be sure to consult with your tax advisor and financial professional for insight into how this strategy might work for your specific situation.

Family Owned Small Business Succession Planning

Small businesses make up 99.7% of all U.S. employer firms according to the Small Business Administration. Greater than 80% of all enterprise in the U.S. is family-owned. Of the Fortune 500, 35% is family-controlled.

When surveyed, the vast majority of all small business owners believe they will transfer control and ownership of their business within their family (siblings, children, or extended family) when the time comes. According to the Harvard Business Review, there is a 70% failure rate when transitioning to the second generation. Successful second generation businesses are statistically worse off – as the failure rate rises to 88% when transitioning from the second to third generation.

The odds of success are compounded against you as time progresses – which makes firms like S.C. Johnson Wax that much more impressive as they are currently in their fifth successful generation.

Here are three best practices thriving successful multi-generational businesses are employing:

1. “Experience before Entitlement” – the majority of successful next-generation business transitions push children to get outside experience before coming home to roost in the family business. Real-world experience and accountability to a non-family boss are difficult, if not impossible, to fabricate inside the business

2. “Bloodline Blind Beneficiaries” – Many small businesses have multiple members of the next generation coming up through the ranks. Siblings and cousins frequently vie for the same position. Often, the controlling member will select and promote according to their direct bloodline, ignoring more qualified or better suited indirect family members. Successful family businesses instead hire outside coaches, mentors and consultants for a qualified unbiased opinion.

3. “Growth Game” – family-owned businesses often employ family members first and generate revenue second. As families and their subsequent workforce grows, this can create a cash flow dilemma of epic proportions. Having family members step into defined roles and adhering to a system of accountability is vital to success.