We’re in our 70s, retired, with $450K in IRAs, $400K in home equity, and just received $200K tax-free — should we pay off our mortgage, invest, or take dream trips before it’s too late?
If you happen to receive a windfall late in life, deciding what to do with that money can be a tough decision.
Let’s say you’re a retiree in your 70s with $450,000 in IRAs and $400,000 in home equity, which you share with your spouse. The two of you have just received a $200,000 windfall and you’re trying to figure out the best course of action with this money.
Investing the money and boosting your retirement savings is always an option. As of 2022, the median retirement savings balance among workers aged 65 to 74 was $200,000, according to the Federal Reserve. Among those 75 and older, it was $130,000.
With $450,000 in IRAs, you’re already doing better, financially, than the average American in your age demo. And with $400,000 in home equity on top of that, you and your spouse are well ahead of the game — the National Council on Aging reports that U.S. homeowners aged 65 and over have a median $250,000 in home equity.
That said, while home equity can be used as an income source (by using a home equity loan, HELOC or reverse mortgage), that requires you to borrow money. So, it may be best not to count that equity as income, which would leave you with your $450,000 in savings and whatever your monthly Social Security benefit pays you.
That may be a decent amount of money, but it also means you’re probably not living large. So if a tax-free $200,000 just came your way, it’s important to put that money to good use. Here are three options you may be considering — and the benefits and drawbacks of each.
Roughly 30% of U.S. homeowners aged 75 and older had a mortgage in 2022, according to the Urban Institute.
The benefit of paying off your mortgage is eliminating one potentially large monthly expense. As a retiree on a fixed income, that could give you a lot more breathing room in your budget. Also, paying off your mortgage could result in some interest-related savings.
On the flipside, paying off your mortgage means tying up your newfound windfall in your home – a fairly illiquid asset. So unless you have a higher-than-average mortgage rate, it probably pays to hang onto that cash and keep paying your mortgage every month.
About 14 million U.S. homeowners refinanced their mortgages when rates fell to record lows during the pandemic, according to Liberty Street. If you were one of them, then you may be able to earn a higher interest rate on your $200,000 windfall by keeping it in a high-yield savings account than what you’re paying on your mortgage.
Even if you’re paying 5% or more on your mortgage, if you can afford your monthly payments, it could be a better idea to hang onto the cash.
Say you put it all into your home to become mortgage-free and a few months later, you find yourself with a $20,000 home repair on your hands. At that point, you might need to borrow the money to cover it in the absence of having the cash. And then you risk getting stuck with a high interest rate because that’s the borrowing environment we’re in right now.
Read more: Home prices in America could fly through the roof in 2025 — here’s the big reason why and how to take full advantage (with as little as $10)
Investing a $200,000 windfall gives you the opportunity to grow that money into a larger sum. You can also put that money into assets like dividend stocks, real estate investment trusts (REITs), and bonds that produce ongoing income.
That said, any time you invest money, you take on a degree of risk. Bonds are typically a less risky asset category than stocks, but that doesn’t make them risk-free. Bonds can lose value based on factors that include interest rate trends and issuer finances. And if a bond issuer defaults, you may not get to collect the interest you’re promised.
That said, you can lower your risk even more by choosing municipal bonds over corporate bonds. Though they typically offer lower yields, municipal bonds have a historically low default rate.
Plus, municipal bonds offer the benefit of tax-free interest at the federal level. And if you buy municipal bonds issued by your state of residence, you’ll avoid state and local taxes, too.
You should know, though, that dividend stocks and REITs tend to be more liquid than municipal bonds. So that’s something to consider if you’re going to invest your windfall.
Municipal bond ETFs, on the other hand, are more liquid and may be a better fit for you. However, it’s a good idea to consult a financial advisor if you’re not a seasoned investor and want customized guidance.
A recent Transamerica survey found that 59% of current retirees dreamed of traveling during their senior years.
Since you’re already in your 70s, you may have a limited number of years left where your health and mobility are conducive to taking a big trip. With this in mind, spending the windfall on an amazing vacation, like a trip around the world, could hardly be seen as a waste of money.
But on the flipside, a dream vacation won’t improve your financial situation, and you don’t know what the rest of your retirement has in store.
An estimated 70% of U.S. adults at the age of 65 will end up needing some type of long-term care. And if you don’t have family members who can provide that hands-on care, you could face exorbitant costs in the absence of having long-term care insurance.
You may want to consider a compromise where you spend some of your windfall on travel, but reserve a good chunk of it for future healthcare expenses.
Even without long-term care, the average 65-year-old is expected to spend $165,000 on healthcare throughout retirement, says Fidelity. It never hurts to have extra money on hand to tackle whatever surprises are thrown at you later in life.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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