Q. My husband and I have discussed using a substantial amount from our retirement accounts to either pay off our home or the SUV. I’m retired with a pension from the state but not eligible for Social Security for another two years, and my husband is 62 and still working. He wants to retire, but fear that if we don’t pay either the house or the truck, we may face financial problems later on.
— Unsure

A. Your situation is one faced by many retirees.

As with most financial decisions there is both a numbers component and an emotional component.

“On one hand, you are concerned that taking from your retirement savings earlier than expected may hurt your retirement savings because it removes the earning potential of a sizeable portion of your nest egg,” said Bryan Smalley, a certified financial planner with RegentAtlantic in Morristown. “On the other hand, you may be looking to reduce your monthly expenses in retirement and have the peace of mind many experience with being debt free.”

Smalley said there is validity to both sides of this decision.

Let’s focus on the numbers.

Smalley said you should compare the current interest rate on your mortgage with a reasonable rate of return you could expect on the investments in your retirement accounts.

If you believe that over the length of your remaining mortgage you can consistently achieve a higher rate of return on your investments, then holding onto your mortgage may be the better choice, Smalley said.

“Do not forget to factor in that you may be able to deduct the mortgage interest on your taxes which makes the mortgage interest rate you are trying to beat with your investment return actually lower,” he said.

But, if the interest rate on your mortgage is higher than the return you would expect on your investments, paying off the mortgage may be the better choice.

If that is the case, Smalley said, then you would next want to calculate how much in taxes will you have to pay to pull the money out of your retirement accounts to pay off the mortgage — assuming your retirement accounts are tax-deferred accounts such as an IRA or employer 401(k).

If you are to get hit with a large tax bill by using your retirement accounts, it may be better to pay the mortgage off at a slower pace in order to avoid an unnecessarily high tax bill, Smalley said.

If the tax bill proves to be a bigger bite then you are comfortable with, you may look at refinancing your current mortgage to a lower rate, he said.

“Refinancing to a lower rate should save you money on interest costs as well as potentially lower your monthly payments, which would be a double win,” he said. “Plus, it will be easier to refinance now with your husband working then trying to do so after he retires. Mortgage lenders are paying more attention to income sources — e.g. employment income — than asset totals in today’s lending market.”

Smalley recommends you go through the same process when evaluating whether or not to pay off your truck.

Ask yourself: Is the rate you are paying on your auto loan greater than what you would expect to earn on the investments in your retirement accounts? What would be the tax consequences of taking money out of your retirement accounts in order to pay off the auto loan?

Another thing to consider is that if you believe the auto loan is too much for the two of you to handle, you could consider selling the car, paying off your current car loan, and then going out to buy a less expensive car. That could give you a lower payment or perhaps even you could pay cash for the less expensive car.

Smalley said all of these questions should be carefully thought through by you and your husband.

He suggests you consider working with a team of trusted advisors to guide you through the process.

“I highly recommend working with your accountant to evaluate the tax consequences of your choices as well as work with a certified financial planner to help you further evaluate these decisions and how they fit into your overall financial plan,” Smalley said.

Email your questions to ask@njmoneyhelp.com.

Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter

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