Best Practices – Mortgage Payments in Silver Financial Planner

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.

As a result of using the Special Expenses 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.

Steps to best handle mortgage payments:

1. Enter the pre-retirement mortgage payment as part of the “Current annual expenses” amount listed under Living Expenses on the Income/Expenses tab.
2. If any mortgage payments continue into retirement, drop the expense from the “Annual expense during retirement” amount, and enter the remaining payments in the Special Expense Planner on the Income/Expenses tab.
3. 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.

Using this method, the program will not pull from assets pre-retirement to cover the mortgage payments, and using the Special Expense Planner will allow you to control the number of years the expense is included post-retirement.

Example:

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.

If you were to enter the mortgage payment in the Special Expenses 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 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, including the $24,000 mortgage payments, are $78,200 per year.  This is entered as “Current annual expenses.”  Once the client is retired, we drop the $24,000 mortgage payments from the “Annual expenses during retirement”, amounting to expenses of $54,200.  To capture the two remaining years of mortgage payments that continue into retirement, enter those two years in the Special Expense Planner.  The after tax amount is $24,000, increase is 0%, first year of expenses is in 15 years making the year 2027, and number of years is 2.

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.