The question of how to handle mortgage payments in Silver comes up fairly often so this post is being updated to properly reflect the program as of July of 2018. Handling mortgage payments incorrectly can lead to unintended consequences for a client's financial plan. Find out what those consequences are and how to avoid them by following our tips to handle mortgages correctly in the post below.
We often receive questions about the best way to handle mortgage payments in Silver Financial Planner.
Users are tempted to enter mortgage payments in the Special Expenses Planner for two reasons:
- The payment will end after a set number of years.
- The payment is fixed, not subject to inflation.
- Expenses entered in the special expense planner prior to retirement is pulled directly from assets.
- Income entered in the special income planner prior to retirement is assumed to be saved and reinvested to the client’s assets.
- Once the client is retired, you can use the special income and expense planners freely because the program will account for every inflow and outflow of cash. However, this is still unnecessary.
As a result of using the Special Expense Planner to capture mortgage payments prior to retirement, the payments are pulled directly from the clients assets, depleting the asset values.
For most clients that are not yet retired, they cover their mortgage payment with their regular cash flow, rather than pulling from assets to cover the mortgage payment.
Users may also be tempted to account for mortgage payment in both personal expenses and debts:
- For the pre-retirement years, this keeps the mortgage from being paid for through assets.
- Many clients factor in their mortgage payments in their annual expenses
However, there are some factors to keep in mind:
- The mortgage payments in personal expenses will increase each by the entered inflation rate for personal expenses.
- If the users choose to include debt payments in expenses, the mortgage can be double counted.
- Users do not have control when the expense ends beyond possibly their retirement age.
Silver was updated in 2017 to include a checkbox in the debts inputs so that the debt payments can be included with personal expenses.
That option allows users to model the debt, maintain the level payments and once the debt is paid off it will automatically be removed from their personal expenses.
Steps to best handle mortgage payments:
- Model the entire mortgage in the debts section of the program and check the box to include the payments to expenses.
- Note that the monthly payments are only applied to the balance and interest; if the monthly payment includes property taxes, this can adversely affect the calculated years remaining.
- If any mortgage payments are modeled or accounted for in personal expenses or special expenses, remove those amounts.
Using this method, the program will not pull from assets pre-retirement to cover the mortgage payments, and the payments will automatically roll off of the clients' personal expense totals once the debts are paid off.
Let’s look at a client who is 50 now and is retiring at 65. The mortgage is scheduled to be paid off when the client is 67, two years after retirement. The mortgage payment is $2,000 per month, or $24,000 per year. The mortgage has a balance $295,000 and an interest rate of 4%, so that the debt will be paid off in 17 years.
If you were to enter the mortgage payment in the Special Expense Planner, starting today, we would find the assets are being depleted prior to retirement.
Here is the Retirement Capital Analysis with the mortgage payments all entered under the Special Expense Planner. You can see the mortgage payments are treated as a shortage prior to retirement, which is pulled from the client’s assets. It is not always obvious that the mortgage is actually pulling from the investments when you only look at the Retirement Capital column, because the accounts could be continuing to grow due to scheduled additions and rates of return. The client runs out of money by age 84.
Here is how we would suggest entering the mortgage payments for this example. The client’s current expenses, excluding the $24,000 mortgage payments, are $54,200 per year. This $54,200 is entered as “Current annual expenses” and "Annual Expenses During Retirement." To capture the mortgage payments that continue into retirement, model the mortgage in the debts section and check the box to include the payments in expenses. The monthly payment, not including taxes, is $2,000, a balance of $295,000, and an interest rate of 4%. The program should automatically calculate the debt to have 17 years remaining.
In Personal Expenses:
In Debts or Additional Assets/Debts:
Here is the Retirement Capital Analysis with the mortgage payments entered in this fashion. No shortages occur prior to retirement. Upon retirement, you can see the two years of remaining mortgage payments under the Education & Other Inc/Exp column. The client now is projected to have money throughout his retirement, with over $700,000 at life expectancy.
This model for handling mortgage payments can also be used to reflect any other debts, like car payments or credit card debt. Just be sure that whenever that box is checked that the expense is not also being accounted for in the clients' personal expenses.
This article was originally written and published in September of 2013 and was a re-post of an article written in June of 2012 by Carolyn Rothwell. It has been updated to reflect the software as of July of 2018.