Modern Retirement: Mortgage and Kids Still at Home

Boomers are reshaping retirement by doing it with a mortgage and adult kids at home. This isn't the way it's supposed to work.

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The two biggest pay raises you’ll ever get come the day your last child finishes college and moves out of the house, and the day you pay off your mortgage. Plow the extra money into savings and soon after that you can retire.

This is traditional thinking, and for years it made a lot of sense. But boomers, in particular, are abandoning this formula quicker than they trashed their neckties on summer Fridays. Increasingly, they are inviting struggling adult children to boomerang home while carrying a mortgage deep into their 60s.

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In other words, those two game-changing raises are being watered down and pushed back so far that full retirement remains an elusive goal for many even in their 70s.

To a degree, retirement-minded boomers are simply victims of the lean times. Unemployment is a huge problem for young adults starting their career. Certainly, Mom and Dad want to help. Thus, according to a study by Pew Research:

“13% of parents with grown children say one of their adult sons or daughters has moved back home in the past year…This recession has produced a bumper crop. Census Bureau data confirm that proportionately fewer young adults are living solo now than before the recession.”

Meanwhile, the housing bust means that a lot of folks cannot sell their home and downsize to get out from beneath their mortgage. That along with some spendthrift years funded through home-equity borrowing have left retirement-aged folks saddled with debt. According to the Wall Street Journal:

“All kinds of debt held by this age group have risen, but the big problem is mortgages. Thirty-nine percent of households with heads aged 60 through 64 had primary mortgages in 2010 and 20% had secondary mortgages, including home-equity lines, according to research group Strategic Business Insights’ MacroMonitor. That was up from just 22% and 12%, respectively, in 1994.”

In rare cases, having a mortgage in your retirement years makes sense. It may be smarter to keep your cash liquid than raid savings to payoff housing debt, especially if you itemize on your tax return and can deduct the mortgage interest. The critical calculus is whether you can safely earn more by investing your savings than you can save by retiring your mortgage. Most folks cannot, at least not on a risk-adjusted basis. A 10-year Treasury bond yields around 2%. Paying off a mortgage where the interest rate is 5% equates to more than double the return.

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In the old days this calculus generally did not come into play. Most homeowners stayed put and dutifully paid down their mortgage so that it was gone by age 55 or so with no big final payoff. That’s when the Herculean pay-raise landed. And things would still work like that — if only we didn’t take the kids back in and fritter away our home equity on bigger homes and BMWs.