Sometimes paying off mortgage isn’t the best thing to do

Q: I’m retiring from federal law enforcement at age 50, with 30 years of government service.

I have $325,000 in the Thrift Savings Plan. I also have $45,000 in savings and no credit-card debt. Car loans have been paid off. My house is appraised for $280,000, with a mortgage balance of $32,000. There are three years left on the 15-year mortgage. I would like to avoid touching my TSP money during retirement.

Would it be prudent to withdraw $32,000 from my TSP and pay off the mortgage?

A: Most of what you are paying on the mortgage these days is principal, not interest. So your mortgage payment is basically a forced savings plan. If you made payments for 12 years so far, you can probably hang in and make another three years of payments. So i would tell you to hang in there and make the payments.

Withdrawing from your TSP plan would subject you to two hazards. You’d pay the penalty for withdrawal before age 59 ½. You would also face the possibility of paying income taxes at a higher rate because the withdrawal would be added to your pension income.

Yes, I know that paying the mortgage off would feel really good. But think about it this way: You have the resources to pay it off “at will.” You should feel good about that. If the itch really gets to you, take the money from your savings.

One other point is that you other funds are much more liquid. If something were to happen you can get to that money. If you put into the house they only way you would probably get it out again it to sell the home which could take months. Cash out refinance are much harder now.

For your TSP, let it ride. Remember, you’ll have a substantial pension at retirement, so you can afford more risk than most people.

Q: I turned 63 earlier recently. I was laid off through a reduction in force effective Oct. 1, 2010, and received a severance package.

Due to previous layoffs and extended job searches, we have virtually depleted our retirement savings. I am in good health and have no interest in early retirement. Our cars are paid for. We have no credit-card debt. Our COBRA benefits cost $1,400 a month. The cost of homeowners insurance, car insurance and property taxes is $900 a month. Our monthly mortgage and second mortgage payments are another $1,200. We owe a total of $49,000 on the house.

We have about $110,000 in a 401(k) and about $85,000 in other investments, plus $10,000 cash on hand. Starting in 2011, we will start living off the cash on hand and then our investments (until I find a new job). During this time I will also be making the mortgage payments from our investments. With the uncertainty of the job market, wouldn’t it be a good idea to pay my home off now?

A: I know you are looking for some kind of certainty, but paying off the mortgage is exactly the wrong thing to do. Your security depends on what you have in financial assets to support your ongoing expenses. Once you put the money into the house you will not be able to get it back without a job and sufficient income. It’s better to be liquid than have a bunch of assets that you can not raise cash from.

My suggestion: Keep as much of your powder dry as possible. Do everything you can to avoid the forced sale of assets, including your house.

If finding a new job is really difficult, consider putting the house on the market.