When not to go for Debt-Free Retirement

Many people don't take home mortgages because they want a debt-free retirement. 

The flip side is that you lose the tax deduction from paying interest, which can be helpful for higher-income retirees.  A mortgage frees up cash for other investments, allowing you to diversify your holdings and lower your overall financial risk.

Denver financial adviser Paul Jeffery suggested to one client that he dedicate his $2,200 monthly Social Security payment toward the purchase of the $850,000 retirement home he is building.  The client will take out a conventional mortgage with monthly payments roughly equal to the Social Security check.  That will get him a $362,000 mortgage at the current rate of 6.12 %, and he will use proceeds from the sale of his current home to make up the difference.  The rationale for this ploy: Social Security is a reliable stream of income that you know you'll get--and you know when you'll get it.  You can do the same with any regular pension or annuity payment.

Another option is a reverse mortgage if you or your spouse is 62 or older, and you own your home outright or have substantial equity.  The reverse mortgage allows you to convert your home equity into a lump sum or an income stream.

Most people get a reverse mortgage to enable them to continue living in the same home.  But real estate agents say you can get a reverse mortgage, take a lump sum to buy a rental property, and later, convert the rental property into a retirement home.  The reverse mortgage carries closing costs, and you will have to pay the mortgage in full when you leave that residence, so be sure to crunch all the numbers before taking this route.

Source: BusinessWeek, May 1, 2006