There are a lot of financial decisions a retiree has to make. How to best fund their retirement, when to begin social security benefits, etc. But once that is settled, there’s a couple of decisions a retiree might have to make that can bug us to no end. How much cash should I keep and should I pay off the mortgage? If you have the funds to even consider these questions then the mental conflict is to just keep the money fully invested in the markets. That way it can possibly provide decent returns. I made these retirement money moves and can attest to one under-reported and powerful aspect to these decisions – The retirement calming effect of increasing cash and being mortgage free.  

My Retirement Calming Decisions of Cash and Mortgage

It’s certainly a first-world problem for those of personal finance success. Even talking or writing about it feels a little dirty knowing the struggles of many underfunded retirees trying to figure out how to pay for retirement when there isn’t enough. I am only able to reign in guilt when I think about where I came from to get here. Just another poor working stiff who used frugal living to feed an early retirement plan.

I never questioned retiring with a mortgage when I retired in 2009. There was about $100K still on the bank’s books and I budgeted for the monthly payment. As to cash, I left my first career with only about $20K available. The rest of my retirement funds were all in recession diminished stocks and bonds within my 401k and IRAs.

The Retirement Calming Effect of Cash

Going To One Year Retirement Funding Cash

I did wish that I had set aside more cash but it didn’t overly disturb me. It was just there in the background of the normal “what ifs” all new retirees go through. I had always planned on living a “retire early and often” lifestyle and after a few months put it to action. With my first stepped down retirement gig I continued to live off of my 72t distributions and I used my salary to increase my cash to around $35K. That represented one year’s retirement funding. I invested the rest of my paychecks into the offered 401K and my IRA.

That simple cash increase gave me my first retirement calming taste of having a bigger cash cushion. It reminded me of how I felt when I became non-mortgage debt free. This small cash jump gave me a feeling of calm knowing I added to my financial strength and it told me something about myself. Not only did I feel more confident about my retirement funding, but I didn’t sweat all the market swings as much during this 2010 through 2011 period of my early retirement.

I was a proud risk taker regarding my ditching a long career for early retirement. But I mentally preferred a bigger cash cushion when it came to my portfolio. Financially rational or not, I simply had less market worry and higher retirement confidence.

Going To Two Years Retirement Funding Cash

Two years into my early retirement I left the stepped down retirement gig and started what I call my encore career. I stuck to living off of my 72t and used the new gig’s larger salary like I had done before. Knowing the retirement calming effect I received with my first cash increase, I decided to increase my cash to cover 2 years retirement funding. It provided even more early retirement confidence. I discovered that I find financial calm in using cash to hedge against market volatility.

Going To Four Years Retirement Funding Cash

Years after my encore career and last paycheck ended I decided to once again increase my cash. The market was at all time highs and when running my numbers I found that I could take some chips off of the table to pump up my retirement cash. There’s no doubt about it, I’m really calm now. I should be able to easily outlast a recession or market downturn when it comes and for me there’s nothing more retirement calming than that.

The Retirement Calming Effect of Being Mortgage Free

As I mentioned above, I had never considered retiring mortgage free. It seemed out of reach without staying on the job I no longer enjoyed a lot longer. My total house payment was reasonable after refinancing to lower interest rates and it made for manageable payments in my retirement. I had already dropped below Federal Tax ‘Schedule A’ filing thresholds and wasn’t getting any mortgage interest tax benefits. It was during my encore career after hitting my 2 years cash goal that I made the decision to focus my salary on the mortgage. It was dispatched just 18 months later and I joined the small ranks of mortgage free homeowners. I was surprised at how eliminating this payment made me feel. No matter what manufactured market crisis occurred, I would own my home. It’s an intangible value that provides long-lasting retirement calm and happiness.    

Why How Much Retirement Cash To Have or Using Funds To Clear A Mortgage Are Tough Questions To Answer

The financial argument against cash is its inability to retain value against inflation. My cash isn’t dead money. I do get a little interest from my savings account and money market accounts. I am getting 2.5% from a 13 month CD and will continue to look at other higher interest earning opportunities. Yes, all pay less in interest than inflation. But the majority of my portfolio is invested in the market and I see the difference between cash’s earnings and inflation as the cost of what I call my retirement calm insurance. I find value in the emotional peace and that makes it worth it.

When it comes to paying off the mortgage the financial argument is about the loan interest percent saved in payments vs. the percentage that could be earned if left invested. I locked into a guaranteed return. No matter what else happens in the markets, I have that locked down. But the other benefit is it takes less to live on. When not working as I am now and living off of my portfolio, I’m able to reduce my taxable income by the payment amount. I not only have a guaranteed return but I now will pay less income taxes too.

The argument against both higher cash savings and mortgage payoff includes the lost opportunity for money left in the market for big market gains if invested right. Especially over the long-term. Depending on your goals, this can not only impact your long-term retirement funding but also any thoughts towards leaving a financial legacy to your family. That’s why it’s important to run your numbers through a good retirement calculator to make sure your portfolio will last at least as long as you do. You also need to have a clear legacy plan in place and make sure you can still meet it.

In the end, we all know markets don’t always go up which must also be considered in the arguments for and against having more cash and using funds to pay off the mortgage in retirement.

The Questions That Need To Be Answered

I’m not some super investor, had no inside secrets, nor received a windfall to retire early as I did. I am just an average Joe who decided that I wanted to be free of the rat race and figured out how to pull it off in a way that worked for me. But now that I’m retired, I prefer to not be looking over my portfolio’s shoulder all the time. I prefer the retirement calm of what the extra cash and mortgage freedom provides me.

The questions I needed to answer before making these retirement calming moves were –   

Is now the best time to pay off the mortgage?

We had considered long before retirement that we would sell our home and move to a smaller home in a less expensive real estate market. That way we could be mortgage fee. But after grand-kids came we nixed that plan. I don’t believe it would have made sense to use taxable retirement funds to payoff a mortgage. In my case I had income coming in and no mortgage interest income tax benefits. Payoff also meant reducing my taxable retirement funding needs in the nearer future. Yes, it was the best time to pay it off.

Do the numbers still work with so much cash on the sideline?

When I increased to one year and two years worth of cash this wasn’t an issue. I was happily in retirement gigs and used the extra income to grow cash. This question came in the jump to four years cash while I was relying 100% on my portfolio. Running the numbers through the FIREcalc retirement calculator was my first step. I then made my proposal to my CFP and they also ran my numbers. Yes, the numbers looked good.

If the numbers work, then why risk unnecessary injury playing in a game already won?  

The same question echoed during my decision to retire or stay on the job longer. Do I have something more to prove or can I be happy and satisfied by making the move. I never regretted giving up the title and salary of my career, I had enough. It was easy to answer this question. I had no doubts. I wouldn’t regret about my higher cash savings missing out on any market runs.

Would I really value this as retirement calm insurance?

History and numbers show that staying at two years cash with a diversified asset allocation would work fine over the long-haul. But what I was going for was gaining even less concern about market volatility and being able to fully enjoy my retirement without thinking about finances all the time. The sting of the last great recession hit me hard. When being truthful about what causes me more distress, either having this sidelined money miss out on a bull market run or not having enough cash to get through a long market downturn, the answer was clear.

Are there any other upsides other than the retirement calming effect of jumping up cash?

Along with the memory of the last great recession’s sting is also the memory of all the opportunities to buy heavily devalued investments if only I had some cash. In 2009 as the markets hit bottom and the years that followed, stocks were a bargain. Having higher cash reserves means being able to take advantage of any future investing opportunities.

Everyone’s risk tolerance is unique to the investor. Finding the perfect formula that meets both necessary funding needs without adding investor distress is the recipe for a retirement calming portfolio. My mentally preferred recipe just happens to love the higher cash allocation and being mortgage free.

Seek that which keeps you calm, Lokah Samastah Sukhino Bhavantu.