Money Management

Before retiring, it can be smart to pay off your mortgage so you can drop that big expense. Learn why you might not always want to pay off your home loan. 

Close to half of all homeowners between the ages of 65 and 79 have a mortgage, according to a recent Harvard University study. This is almost double the number of seniors who still had home loans in the 1990s.

There’s no rule that says you have to pay off your mortgage before you retire, so it’s likely that a good number of these older Americans have stopped working while still paying their mortgage lender. But is this a good idea, or should you hold off on leaving the workforce until the last mortgage payment has been made?

Here’s what you need to know to decide.

Paying off your mortgage is a good way to stretch your retirement funds further

There’s one simple and obvious reason why you might want to have your mortgage paid off before retirement. If you don’t have a monthly mortgage payment, your retirement money will go further and you’re more likely to be able to afford necessities.

The average monthly mortgage payment in the U.S. is $2,317, while the average monthly Social Security payment is $1,840.27. This means if you get the typical Social Security benefit and have an average monthly mortgage payment, that entire payment will disappear from your bank account and go toward your home loan — and you’ll still need money beyond that to send to your mortgage lender.

If you’ll need your Social Security and other retirement funds for other things, you’ll likely want to hold off on leaving work until your mortgage has been paid off. Or you’ll need to sell your house to pay off your loan and downsize to a property you can actually afford with your new retirement income.

If your payment is affordable, you don’t have to hold off on retiring

Now, if you happen to have a lot of money saved and your mortgage payment is pretty small relative to your income, then you may not necessarily need to wait to retire until you no longer have mortgage debt.

Since mortgage interest rates are typically pretty low compared to the rates on other debts and investments, you may be better off having more money invested rather than withdrawing a big portion of your savings to pay your mortgage off before leaving work. You could potentially earn a better return on your money with this approach. Say, for example, you have a home loan at 3%. If you could easily afford the payments with your retirement savings, then there’d be no real reason to pay off that low interest loan quickly just to retire.

You’ll want to be sure that your mortgage payment and total housing costs are below 25% or so of the income you’ll have coming in as a retiree before you decide retiring with a mortgage is a smart choice. While some experts say you can spend up to 30% of your income on housing, it’s best for retirees to be conservative, as their income is fixed with fewer opportunities for salary increases than younger home buyers have.

If you’re close to retirement, you can even create a budget that factors in your mortgage and other costs. If you have plenty to cover the essentials and still enjoy your golden years, then retiring with a mortgage may not be the worst thing in the world — or even be a problem at all.

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It’s important to keep your homeowners insurance company informed when you make changes to your home. Read on to see why. 

In 2020, many homeowners were willing to sink money into improving their living spaces. And that made sense.

That year, a lot of us were stuck at home as a result of the pandemic. And a lot of us were also saving money since we had nowhere to go. So it stood to reason that a lot of homeowners would take the money they’d otherwise spend on things like leisure and travel and instead invest in making their living spaces more comfortable.

The home improvement boom has since died down a bit, partly due to the reopening of society and partly due to inflation driving the cost of renovations up. Also, borrowing costs are up as a result of the Federal Reserve’s interest rate hikes, which means homeowners may be less likely to tap their equity to make improvements.

But while the home improvement trend may have cooled off compared to 2020, a survey by Today’s Homeowner conducted earlier this year found that 90% of U.S. homeowners still had renovation projects planned for 2023. If you made improvements this year, there’s one important follow-up move you ought to make.

Keep your homeowners insurance company in the loop

Any time you make changes to your home, it’s important to get in touch with your homeowners insurance company and let it know. It’s especially important to loop in your insurer if you’ve made significant changes that could impact the value of your home.

The reason? Your homeowners insurance policy is designed to cover the cost of damage to your home, as well as cover the cost of rebuilding your home should it get completely destroyed. But if your home is now worth a lot more than it was a year ago in the wake of your improvements, its replacement cost may be higher. That needs to be reflected in your homeowners insurance policy to make sure you have adequate coverage.

Once you contact your insurer, it will probably ask questions about the specifics of your renovation. You’ll need to be prepared to offer up details, which could include the cost of the work that was done.

Will home improvements drive the cost of your insurance up?

In some cases, renovating your home could lead to higher insurance costs. Let’s say you’ve finished your basement and now have an additional 800 square feet of usable living space as a result.

If your home were to be destroyed, it would cost more to rebuild it with a finished basement included than to rebuild it without a finished basement. So in that situation, you may see an uptick in your premium costs.

However, not every renovation is guaranteed to result in an increase. You may not see your costs go up, for example, if you’ve simply swapped out your existing kitchen cabinets for new ones of similar materials that better suit your taste.

Also, you may find that the cost of homeowners insurance goes down following certain improvements. Let’s say you decided to fence in your yard. If you live in an area with a lot of damage-causing wildlife, you can make the argument that a fence offers added protection, which could result in lower insurance costs (though to be clear, this is by no means guaranteed and will depend on your specific insurer).

All told, it’s a good idea to communicate with your insurer when you make changes to your property. So even if you took on a seemingly small home improvement project this year, it’s still smart to share that information with your insurance company and see where that takes you.

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It’s the season of charitable giving. Find out how to use your old car to benefit your favorite organization. 

It might seem a bit more difficult to donate your car than money or other property. And it’s true that there are a few extra steps. After all, you can’t simply drive your old car to your favorite charitable organization, hand your keys over to a staff member, and take a tax deduction.

However, the process isn’t as complicated as you may think, and you might be surprised at how much of a deduction you can get for your old car.

Steps to donate your car and get maximum value

With that in mind, here’s a quick step-by-step guide to the vehicle donation process to help get you started.

Find a qualifying charity

You may have seen or heard commercials from organizations that handle car donations to charity, but it’s important to realize that many of them are for-profit companies that act as intermediaries. On the other hand, if you donate your vehicle directly to a charity, you can make sure that 100% of the proceeds from the car benefit that nonprofit organization.

Many major charities have their own vehicle donation programs, so start your research with some of your favorites. Habitat for Humanity is one example, and it has raised more than $30 million in the past five years alone from vehicle donations. If you have a specific cause you’d like to support, check whether a reputable charity with that focus area will accept a vehicle donation. Many will even pick the vehicle up for free.

Get your paperwork right

There are two major types of paperwork involved with a vehicle donation — the documentation on the vehicle itself and the documentation you’ll use to claim a tax deduction. We’ll go through the latter in a bit.

When it comes to the vehicle’s title, sign the car over to the charity itself. You don’t legally have to do this, but until someone else is listed on the title, the vehicle is your responsibility. Some charities will ask you to leave the name blank, but this isn’t a wise idea.

Use the correct valuation

In most cases, the charity will quickly re-sell your vehicle (usually at auction). Typically, you’ll receive a written receipt that tells you how much the car sold for, and this is the amount you should use as a tax deduction.

On the other hand, there are a few cases where you can use the vehicle’s fair market value (FMV), which you can find in a guide such as Kelley Blue Book. Fair market value is typically more than your car will sell for, especially at an auction. However, be sure that one of these applies before using it:

The charity keeps and uses your vehicle for its own purposes.The charity makes substantial improvements to the car before it sells it.The car is sold at a discount, such as to help a low-income family get a vehicle.The car is worth less than $500.

Keep all of your documentation in order

Donations of non-cash items are highly scrutinized by the IRS, and that’s especially true if they are relatively high compared with your income (which is often the case when you donate a car). While you should absolutely deduct every penny to which you are entitled, it’s very important to make sure you have the proper documentation.

When you donate your car, there are three “tiers” of documentation you could potentially need:

If your car is valued at $250 or more, you’ll need written documentation from the charity acknowledging the receipt of the vehicle.If it is worth more than $500, you’ll need to complete section A of IRS Form 8283 when you file your tax return.If the vehicle is worth more than $5,000, you will need to get an independent appraisal to document it, and will need to complete section B of that IRS form as well.

Should you donate your car?

Donating your car to charity can be a win-win situation. The charity can get a nice payday once it sells your car, and you get a tax deduction that can be significantly higher than the trade-in value of your vehicle and get to support a favorite cause without dipping into your savings account. However, be sure to do it the right way if you opt to donate your car.

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It can be tempting to dip into your savings to pay for holiday gifts. Read on to see why that’s not a good idea. 

If you haven’t finished your holiday shopping by now, you may want to get moving. The December holidays will be here before you know it. And if you’re ordering items online, you might experience some shipping delays. It’s best to get ahead of that by completing your gift list sooner rather than later.

Now, you may be tempted to tap your emergency fund to cover the cost of the gifts you want to buy. And if you have a good amount of money in your savings account, you might think that’s no big deal. But raiding your emergency fund to pay for holiday gifts is a move you might sorely regret.

You don’t want to leave yourself in a tough financial spot

There’s a reason emergency funds are called emergency funds, and not “money for whatever I want or need” funds. Your emergency fund is to help you cover the cost of unanticipated expenses, such as a sudden home or vehicle repair. Your emergency fund is also there to get you through a period of unemployment so you don’t have to resort to debt to cover your bills in the absence of a job.

Holiday gifts, on the other hand, are very much a planned expense. There have been plenty of opportunities to save ahead of time for the December holidays. And if you couldn’t do that due to having higher bills or for another reason, like being out of work, that’s totally understandable. But don’t let that drive you to make a decision that might harm you financially.

If you raid your emergency savings to cover holiday gifts, you might end up with a lot less cash in the bank after all’s said and done. But what happens if you whittle your emergency savings down from $4,000 to $3,000 to pay for holiday gifts, and you end up needing to make a $3,600 home repair in early 2024? Suddenly, you’re looking at taking on debt.

Scale back your gift list to avoid using emergency savings

Data from TransUnion finds that 21% of U.S. consumers expect to spend more than $1,000 on holiday shopping this year. If you’re in that boat, before raiding your emergency savings, think about ways you can whittle down your gift list to keep your costs to a minimum.

It’s nice to want to get a $25 gift for each of your children’s teachers. If you can’t afford that without dipping into your emergency cash reserves, hit up your dollar store for a few cute mugs, buy some inexpensive chocolate to fill them with, and add a nice note. You might, in that case, spend a total of $15 for four teachers instead of $100. You can even do the same for friends and family if you don’t have the money to buy all of the holiday gifts you’d like without hitting up your emergency fund.

The whole purpose of having an emergency fund is to be protected when life throws costly surprises your way. So try to avoid tapping your savings for holiday gifting purposes, and instead, remember that in the context of the holidays, it’s the thought that counts.

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Tipping is an increasingly controversial topic, but service industry workers still depend on it for most of their pay. Learn what you need to know. 

There’s no getting around it: Tipping requests have increased over the past few years. The online payment company Square says that the share of remote transactions that asked for a tip at the beginning of 2020 was just 43.4%, but the percentage has now jumped to 74.5%.

And it’s not just online transactions where consumers are asked to tip more frequently. A survey conducted by software marketplace company Capterra found that 53% of respondents have seen a tip screen at a business in the past year that previously didn’t have one and that 51% of people in the survey have even seen a tip screen at self-serve kiosks.

This increase in asking for tips has collided with high costs for nearly everything over the past few years, making tipping a heated personal finance topic among consumers and service industry workers. And while there’s no perfect answer to the question of how much you should tip and when, there are a few things to know about the impact tipping has on service industry workers.

How tips impact service industry worker income

The federal minimum wage for tipped employees is $2.13, but many states have a higher minimum. This means that for service industry workers who rely on tips for their income — like restaurant servers — the vast majority of their wages are earned from tipping.

According to the Pew Research Center, 92% of Americans leave a tip in a sit-down restaurant (this percentage should be higher!), and data from Statista shows 29% of customers — the largest group — leave a tip in the 16% to 20% range. The second-largest group, with 28%, leaves a tip in the 11% to 15% range.

But even with a high percentage of Americans leaving tips at sit-down restaurants, these employees may not be making as much as you think they’re making. According to Bureau of Labor Statistics data from 2022, the median wage for waiters and waitresses is $14 per hour.

Come up with a tipping system that works for you

Everyone’s personal budget is different, and there’s no one-size-fits-all approach to tipping. Pew Research Center data shows that 49% of Americans say the decision to tip depends upon the situation.

But there are some general guidelines that some experts suggest to help you find the right tipping strategy while also allowing room for generosity. Here are a couple of suggestions:

Dining out: The general rule is to tip 20% when eating at a sit-down restaurant. Some experts suggest using this percentage for food delivery services as well.Fast food, fast casual, and coffee shops: This one may be controversial, but unless you receive stellar service or employees pick up after you or bring out your food, then the general suggestion is that you don’t need to tip. There’s always room for generosity, of course. I frequent coffee shops often and usually leave a tip at places I visit regularly.Takeout orders: While no one is bringing the food to you or cleaning up after your meal, leaving something for the staff is generally a good idea. It doesn’t have to be in the 15% to 20% range you might leave for sit-down service, but adding a few dollars to your total amount is always a nice gesture.

Your views of tipping will likely differ from someone else’s. An old friend of mine used to be a waiter and bartender and is a generous tipper because he knows how much work goes into it. So, if you aren’t sure how much to tip or when, ask a friend who’s done the job how much they think a reasonable amount is.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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