The primary advantage of paying off a mortgage prior to retirement is you'll have less debt -- and more disposable income -- as a senior. An award letter from the SSA or a current receipt of issuance can be used as proof. A majority of pre-retirees expect to carry mortgage debt into retirement. Distribution must be able to remain for at least three years from the date the mortgage is issued, but it must also be documented that the borrower is able to draw on these accounts without penalty and without restriction. Most retirees have lower incomes than they did while they were working and underestimate how long their money will need to last. If you’re among them, it’s a good idea to understand what the pros and cons are, and to consider your options. However, some may find it more beneficial to sell their home and purchase another of lesser value but use the liquidity from the first home to make a larger retirement investment. If you lose a job in the pre-retirement years or your retirement income takes a hit, the mortgage still has to be paid. An investment that historically earns more than the mortgage interest rate will be volatile. If this is your personal residence and you do itemize—by the way, only 27% of Americans who file taxes itemize—you can write off the interest portion of your payment on your personal residence. Mortgage … Retirees should also consider changes in the tax laws. However, Edelman says they can be risky, and if the market should crash, borrowers may have to pay back the loan in as few as 24 hours. In addition, the investment portfolio won’t compound to nearly as large an amount as when the full return is allowed compound. Others, take advantage of low mortgage refinance rates. This is ideal, as a hefty monthly mortgage payment can take a sizable chunk out of a fixed income. This can free up savings for other uses. A new federal report says one-third of retirees now have a mortgage. Let’s use an example. Will Dunning, chief economist with the Canadian Associated of Accredited Mortgage Professionals, says among homeowners 65 years or older, 35% have a mortgage. While the life expectancy may indicate that a 30-year mortgage isn’t a strong likelihood, lenders are not allowed to factor this into decision-making. Some people try to maximize the benefits of the strategy by taking out a variable rate loan, because it carries the lowest interest rate at the start. In addition to — or instead of — paying off your mortgage, investing in real estate can be a good move for retirees. In reality, lenders have two methods described below that they can use to calculate income for a retiree who is drawing on their assets. ... “There is some wisdom to paying off a portion of your mortgage so you have minimal payments and … Anecdotes in the media indicate that more retirees are using debt to buy larger or more expensive homes or are tapping home equity to travel and buy things. Why You Should (Or Shouldn't) Have a Mortgage in Retirement Your money situation. But the portfolio needs to compound for years for the program to work. Your investments. An adjustable rate mortgage might be a good idea if you plan to live in the home for less than five years and have a comfortable gap between current income and the mortgage payments. Using your retirement savings to make mortgage payments could also trigger taxes. Let’s consider the possible arguments. Fortunately, there are still steps you can take to sidestep Congress, starting with this ONE SIMPLE MOVE. That puts Max ahead from the start. Those who are still working tend to easily meet this requirement. While having a mortgage during retirement adds a hefty bill to a post-employment lifestyle, allocating more money to paying off your mortgage before retirement to the detriment of your ability to save for retirement is generally not the answer. Can You Still Have a Good Life after Middle Age? They will inherit the investment portfolio after paying the outstanding mortgage. The majority of retirees rely on fixed monthly income (pension, 401k/IRA, and Social Security). There are different elements of proving proof of income, but so long as borrowers can demonstrate or provide sufficient evidence of their creditworthiness and to the bank’s satisfaction, retirees can qualify for a mortgage. In retirement, it’s unlikely that you’ll be getting a raise, a bonus, picking up overtime hours, or getting a second job. Is a mortgage-free retirement for you, or should you leverage home equity to enhance the standard of living of your retirement years? Retirees should pay off their mortgage loan before retirement. It's generally smart to enter retirement debt-free. Lenders must only look at 70% of the value in these accounts. The strategy clearly is a winner from this perspective. Someone implementing this strategy must stick with the program when the investment portfolio is losing value, even if the value declines below the mortgage balance. So, it appears that at least half of future retirees plan to have no mortgage in retirement. Retirees no longer hold full-time positions and therefore any incoming salary is reduced or eliminated. Paying your mortgage off early Keeping the mortgage; Debt: Less debt increases your monthly cash flow. “If you’re 60, have a mortgage, and are worried about cash flow, the focus should be on reducing the size of your payment,” says Reyes. When home equity is put to work, net worth increases. Today, 39% of those over 65 have mortgages compared to 28% who had the loans 16 years ago. The earlier example does not tell the full story. Borrowers also need to have their income documented that there is a three-year expectation of payout. "The second method would be to make one half of your monthly mortgage payment every two weeks. The equity in the home might or might not appreciate, depending on where the home is, but it does not generate immediate cash. ... Another argument that’s often made about carrying a mortgage: If you have a low-rate mortgage, invest the dollars you’d use to pay off the mortgage, because you have the chance to earn extra returns. Paying off your mortgage is a big financial decision: A mortgage is typically the largest loan carried by a household. A rise in mortgage rates also means that more income is needed to make the mortgage payments. West Virginia ranks in the top slot with 54% of mortgage-free homes, followed by … Why Retirees May Have a Mortgage. An award letter from the SSA or a current receipt of issuance can be used as proof. How To Protect Your Loved Ones In Retirement. With retirees, lenders must look at a combination of income sources and the limits or expected ending of these sources. There are still fees for arranging and closing the loan, and the borrower is still responsible for paying applicable insurance costs and property taxes. The original mortgage balance is down to about $60,000. Practically, I can appreciate that doesn’t always happen due to a variety of factors. W-2s and paystubs are offered as proof of income history, though there is no additional burden of proof that income levels are expected to remain consistent for the lifetime of the loan. Also, mortgage deductions might be disallowed under the Alternative Minimum Tax. Home equity should be a working asset, not something that is stored away, they say. Retirees should strongly consider employing a reverse mortgage loan to help fund their retirements, primarily because they can serve to protect against two major problems: falling home prices, and the increasing likelihood that a senior will outlive his or her assets. His investment fund grows to over $1,000,000. You will need to have insurance, but only to cover your personal liability as well as your personal belongings. Of course, your heirs will not inherit the home. Baby boomers are swelling the ranks of retirees, and more older homeowners are carrying mortgage debt than in the past. The investment portfolio isn’t guaranteed to always be worth as much as the loan balance, especially after taxes on the appreciation are considered. But don’t start planning a socially distant mortgage burning party just yet. If you are nearing retirement and have been renting most of your life, running out and buying a new home will likely not make financial sense. He pays 6% interest with a 30-year amortization, resulting in a monthly payment of about $600. Income needs for a mortgage should be predictable, stable, and likely to continue. in order to save money on a monthly payment while still making additional investments. Distributions from retirement accounts, IRAs, and 401(k)s have an expiration date, as the amount of money is depleted with each issuance. Regardless of the reason for a retiree to still hold a mortgage, the question arises whether or not it is possible to even qualify for a mortgage after retirement. But if there is a financial emergency in retirement when a large mortgage is carried, a reverse mortgage is not an option. Traditionally, homeowners looked forward to paying off their mortgage before retirement and living out their golden years without the heavy burden of a monthly house payment. According to an earlier survey from the Boston College Center for Retirement Research, 8 in 10 middle-income Boomers currently have some debt. In other circumstances, it carries a lot of risk. Distribution must be able to remain for at least three years from the date the mortgage is issued, but it must also be documented that the borrower is able to draw on these accounts without penalty and without restriction. In retirement, home equity always can be tapped when needed through either a home equity loan or a reverse mortgage. You need income to make the mortgage payments. For example, Max Profits takes a $100,000 home equity loan against his house. From mortgages to roommates to home equity lines of credit, you have quite a few options of where to live and how to pay. Should You Pay Off Your Mortgage Before Retirement? Among all homeowners, about 25% have no mortgage debt, and another 28% say they expect their mortgages to be paid in full within 10 years. Withdrawing funds early from your retirement savings accounts can be costly. I love the idea of you enjoying a long and active retirement without the burden of a mortgage. An MLC report, "The Roof over Retirees’ Heads", notes that the proportion of homeowners who still have a mortgage at the point of retirement in 2016 surged 23 per cent in a decade to 36 per cent. Among all homeowners, about 25% have no mortgage debt, and another 28% say they expect their mortgages to be paid in full within 10 years. W-2s and paystubs are offered as proof of income history, though there is no additional burden of proof that income levels are expected to remain consistent for the lifetime of the loan. Learn how your comment data is processed. Combine that with the recent housing bubble and baby boomers are entering retirement with very high loads of mortgage debt.. A recent study by Anna Maria Lusardi of George Washington University and Olivia Mitchell of the University of Pennsylvania confirmed just that. With a reverse mortgage, you borrow against the property's equity but make no payments. Not long ago a key part of every retirement plan was paying off the mortgage. This is one of the core reasons why home equity broadly – and reverse mortgages specifically – could be a viable option for a senior looking […] States with lower home prices have a greater number of homes that are free of a mortgage. However, some may find it more beneficial to sell their home and purchase another of lesser value but use the liquidity from the first home to make a larger retirement investment. In my experience, probably 70% of retirees who are mortgage-free used this method to reach that goal. Why Retirees May Have a Mortgage Some retirees find they still need to make a mortgage payment out of necessity, perhaps relocating in order to be closer to their grandkids or family. The assumptions used to compare the options must be selected with care. Atkins warns that hanging on to an older home can be hard on a retiree’s budget. For starters, you’d be withdrawing more than 35% of … Retirees: Should You Pay Off Your Mortgage? This is according to Professor Benjamin Harris, executive director of the Kellogg Public-Private Interface […] However, some may find it more beneficial to sell their home and purchase another of lesser value but use the liquidity from the first home to make a larger retirement investment. Thirty years ago, just one of every four homeowners in their late 60s to late 70s still had a mortgage – today, nearly half do. With monthly compounding, the portfolio has earned $8,300 after one year. (Yes, there are some tax benefits from a mortgage but those are minimal for retirees – see below.) This strategy is not for someone who would lose sleep during periods when things are not going as planned. To the contrary, maintaining a substantial mortgage frequently is touted as a sound financial planning strategy. Over the long term, the portfolio will appreciate. Now, it seems that fewer retirees consider paying down the mortgage to be important. The survey, "Retirement and Mortgages," by national mortgage banker American Financing, found 44 percent of Americans between the ages of 60 … Others take advantage of low mortgage refinance rates in order to save money on a monthly payment while still making additional investments. Holding a home mortgage has tax benefits, but they may dry up in retirement. If you have at least 5 years left before you retire. ... Another argument that’s often made about carrying a mortgage: If you have a low-rate mortgage, invest the dollars you’d use to pay off the mortgage, because you have the chance to earn extra returns. The Equal Credit Opportunity Act requires lenders to be impartial when determining lending approval, forbidding discrimination based on age. Read full article. Those assumptions and conditions are reasons why carrying a large mortgage through retirement is not for everyone. In much the same way you should aim to debt-free by retirement, retirement is also a good time to evaluate the ways in which you can pay off any existing debts. Stocks, real estate, and commodities are the most likely choices for the portfolio. Thirty years ago, just one of every four homeowners in their late 60s to late 70s still had a mortgage – today, nearly half do. Which group should you be in? According a new reportfrom the Center for Retirement Research, in 2007 41% of households aged 60-69 had a mortgage. In one significant way, retirement is materially different than it used to be: far more retirees are still trying to pay off their houses. No money:If you need to dip into your retirement savings to get rid of your mortgage, maybe it’s best to skip paying it off for now. A mortgage decreases flexibility. Age has nothing to do with the consistency of income to pay off a potential loan and the credit history behind the borrowers. A recent “ Retirement and Mortgages ” survey by American Financing, a national mortgage banker, found 44 percent of Americans age 60 to 70 have … To cover mortgage payments, retirees frequently have to withdraw more from their retirement funds than they would if the mortgage were paid off. But that scenario is changing. So why would a baby boomer not pay off a mortgage, even when having the resources to do it? Think about this scenario. Though retirees are generally within a certain age bracket, lenders look at additional factors when offering a loan. I’m told that a popular ritual was the mortgage-burning party, though I have never been to one. Paying off your home mortgage before you retire is a major financial achievement, but you don't necessarily have to eliminate all housing debt in order to retire well. But home equity loan interest is deductible only if the outstanding balance of the loan is no more than $100,000. When the mortgage balance begins to shrink or the home equity soars, they say refinance with a higher balance. When Retirees Should Not Pay Off Their Mortgages Baby boomers are swelling the ranks of retirees, and more are carrying mortgage debt than in the past. There are a few things that make me jittery here. Don’t forget about taxes. Each lender will have specific criteria that must be met, making it important to do your research before assuming you will qualify for a loan. doesn’t have an expiration date, but there is still a three-year payable expectation date that must be documented. This is a guaranteed return. The data show that retiree debt isn’t as widespread as the headlines would have one believe, but the number of retirees with outstanding mortgages is growing. Whether out of necessity or in order to save, it is possible for someone who is retired to quality for a mortgage. Cash to make the mortgage payments must come from other sources, at least until the portfolio has compounded for some years. Approximately 35% of homeowners age 65-74 have a mortgage, and the average balance is $118k. A portion of your income is committed to the mortgage each month. Let’s say you have a $200,000 mortgage at 5% interest. You would have paid interest the last five years and only now would be getting the investment balance back to its starting level. Erin Baehr. Not having to worry about a mortgage payment has an emotional benefit that increases satisfaction in retirement. 4  Before going from a 15-year mortgage to a 30-year mortgage, make sure your savings, Social Security payments, and other forms of income will be able to keep up with those payments well into your retirement years. 122 C St NW, Suite 515, Washington DC 20001. In my experience, probably 70% of retirees who are mortgage-free used this method to reach that goal. Some advisors recommend using the loan proceeds to purchase income-producing investments with higher yields than the mortgage rate. Think about this scenario. Diversification can reduce the fluctuations but does not guarantee positive returns every year. Before undertaking this strategy, consider how you would feel today if you had taken out a big home equity loan in 2000 and invested it in an S&P 500 Index fund. Having a mortgage in retirement may or may not be a danger signal. Another study from the Center for Retirement Research at Boston College found that Americans over age 60 were 24% more likely to have mortgage debt in 2015 than in they were in 1980. “If you have a $1,500-per-month mortgage today at the beginning of a 30-year retirement, your payment will still be $1,500 at the end,” he says. In a perfect world, homeowners would have their mortgage paid off long before they hit retirement age. Retirees: Should You Pay Off Your Mortgage? Some lenders allow borrowers to use retirement assets in order to aid in qualifying for a mortgage. Retirees often have significant assets, but limited income, so Fannie and Freddie have found ways to help retirees qualify based on their assets. Today, 39% of those over 65 have mortgages compared to 28% who had the loans 16 years ago. For … Lenders must only look at 70% of the value in these accounts. We must keep up to date with the ever changing landscape of health care, social programs, and services the cater to our specific needs. Mortgage qualification requirements for retirees: Assets. Regardless of the reason for a retiree to still hold a mortgage, the question arises whether or not it is possible to even qualify for a mortgage after retirement. How To Collect Your Own “Second Social Security Check”, A new, 100% legal way to boost your retirement income — for life…, 9 Ways to Trim Taxes and Maximize Benefits from RMDs, Heirs and Beneficiaries - Why Traditional Estate Plans Won’t Work for Modern Families, The Retirement Watch Family Caregiver Planning Guide, How To Set Up a "Dynasty Trust" for Your Estate Plan, After Tax Contributions to Traditional IRA, Retirement Watch Weekly (Subscribe Now for Free), Welcome to Bob Carlson’s Lifetime Retirement Protection Program, Financial Advice for Retirement, Social Security, IRAs and Estate Planning, California – Do not sell my personal information. © Eagle Products, LLC – a division of Caron Broadcasting, Inc. All rights reserved. Your return on investment in a mortgage pay-off is the interest rate on your mortgage. But that scenario is becoming less common, according to a recent survey. But big numbers of Baby Boomers are now entering retirement with a mortgage. The homeowner must resist the urge to spend all or part of the mortgage proceeds instead of investing it. Seniors Lifestyle Magazine is a hub of news, information, and resources for all of us reaching our 50s, 60s, 70s, 80s, 90s, 100s, and those with aging parents and loved ones to care for. The mortgage generally should be fixed rate. After one year, he has paid $5,967 in interest. Retirees are still able to purchase homes and obtain mortgages, even though their income sources may not be traditional. That takes away the 3% worry. Some pre-retirees and retirees might be wondering if it makes any sense to pay off the mortgage on their home in the current low-interest environment. This site uses Akismet to reduce spam. After 20 years, the combination of mortgage payments and appreciation might give Max enough equity that he can refinance the mortgage so that he now has a $200,000 loan. Advocates of always having a mortgage point out that a home is a consumer item with high holding costs: taxes, insurance, and upkeep. Is a mortgage-free retirement for you, or should you leverage home equity to enhance the standard of living of your retirement years? Yet, the case for a large mortgage involves some assumptions and conditions. Better investments: If your mortgage has a low rate—which is … The best way to have a mortgage at zero on day one of retirement is to prepay the mortgage, says Warnkin. More than likely, a portfolio that earns 8% annualized over the long term is likely to have many years with returns that are either higher or lower than 8% by wide margins. So, it appears that at least half of future retirees plan to have no mortgage in retirement. Historically, when people turned 65, the majority of them would have been mortgage debt-free. Distributions from retirement accounts, IRAs, and 401(k)s have an expiration date, as the amount of money is depleted with each issuance. If Max keeps the strategy in place for 30 years, he pays $100,000 in principal and $115,838 in interest on the mortgage. This example assumes Max takes just one mortgage. Fannie Mae lets lenders use a borrower’s retirement assets in one of two ways to help them qualify for a mortgage. Max uses that amount to pay off the first mortgage, adds $140,000 to the investment portfolio, and begins making payments on the $200,000 portfolio. Regardless of the reason for a retiree to still hold a mortgage, the question arises whether or not it is possible to even qualify for a mortgage after retirement. That would increase the investment fund. This strategy is available for homebuyers 62 and older through the Home Equity Conversion Mortgage for Purchase program backed by the federal Department of Housing and Urban Development, which insures the lender against loss should the home's eventual sales proceeds fall short of the debt. Most planners seem to think it is a disaster waiting to happen because seniors don’t usually have the income in retirement to support debt repayment and that means major lifestyle changes. The mortgage interest payments likely are deductible. Kevin Gardner is a freelance writer and expert in health, wellness, and fitness. In one significant way, retirement is materially different than it used to be: far more retirees are still trying to pay off their houses. More retirees rely on Social Security benefits, 401(k) payouts, pensions, or other savings funds. The strategy only works if the mortgage proceeds are invested. Whether out of necessity or in order to save, it is possible for someone who is retired to quality for a mortgage. Borrow against your home equity, and use the loan proceeds to buy a diversified portfolio of growth investments. More than 40% of homeowners 65 and older had mortgage debt on their primary residences in 2016, up from 22% in 1995, according to a recent Wall Street Journal article. Keep in mind that the mortgage interest should be deductible, so the after-tax rate on the mortgage is less than the stated rate. Some retirees find they still need to make a mortgage payment out of necessity, perhaps relocating in order to be closer to their grandkids or family. Many home buyers who in the past would have deducted mortgage interest on a new home will be better off taking the standard deduction. Called “America’s #1 Retirement Expert,” Bob Carlson’s retirement planning advice spans from tax and estate planning strategies to IRA, Social Security, medical care and investment strategies. Should a Retiree Ever Take Out a Mortgage? Borrowers also need to have their income documented that there is a three-year expectation of payout. That is virtually unprecedented in American history. More Retirees Today Have a Mortgage. This way, the money grows for the larger purpose of retirement while their fixed income is able to keep up with the current mortgage demands. That compares favorably with the compounded amount from taking a home equity loan and investing the proceeds, and he will own the home free and clear the entire time. A long-term perspective is required. Yet, investments with a higher after-tax yield than the mortgage are tough to find, and they carry a fair amount of risk, perhaps more risk than a diversified portfolio of growth investments. It's often a good choice for retirees or those just about to retire who are in a high-income bracket, have a low-interest mortgage (less than 5%), and benefit from tax-deductible interest. Each of these investments has its ups and downs. Some retirees find they still need to make a mortgage payment out of necessity, perhaps relocating in order to be closer to their grandkids or family. should be predictable, stable, and likely to continue. You don’t have to worry about maintenance or taxes. Why Retirees May Have a Mortgage. If he earns 8% on that account, after 30 years he will have almost $900,000. The investment income is used to make the mortgage payments, and the excess income compounds in the portfolio. Retirees often have significant assets, but limited income, so Fannie and Freddie have found ways to help retirees qualify based on their assets. When he isn’t writing he can usually be found reading a good book or hitting the gym. The investment portfolio purchased with the loan proceeds will generate income and gains to offset the mortgage and the cost of home ownership. But the mortgage payments still would have to be paid. Lately, there has been a shift in thinking that has seen many financial planners suggest that retirees continue to carry a mortgage into and throughout retirement. When Retirees Should Not Pay Off Their Mortgages Baby boomers are swelling the ranks of retirees, and more are carrying mortgage debt than in the past. It is a logical argument, and it is easy to develop numbers that make a compelling case for carrying a large mortgage at any age. But that really amounts to no more than leveraging your portfolio. Retiring without having to make regular mortgage payments is a big dream for many retirees, but is becoming increasingly unattainable for many Americans looking to transition out of work. Some retirees find they still need to make a mortgage payment out of necessity, perhaps relocating in order to be closer to their grandkids or family. A survey by a national mortgage banker, American Financing, found that 44 percent of Americans age 60-70 have a mortgage when they retire.More interesting still, that survey found that 17 percent of … A devastating new law has just been enacted, with serious consequences for anyone holding an IRA, pension, or 401(k). Baby Boomers are becoming the largest demographic and their needs are increasing. In fact, the number of retirees with mortgages has been increasing. But the debt must be used wisely. If you financed — or refinanced — in the past five years or so, you have a low mortgage rate. If you’re younger than 59.5 years, you will incur a 10% e… They also should consider what their expected rate of return on their money would be if they don't use it to repay their mortgage. For the strategy to work, the portfolio must appreciate at a greater rate than the mortgage interest rate. Mortgage qualification requirements for retirees: Assets. Retirees Should Think Twice About Paying Off the Mortgage. It won’t appreciate every year, but over the long term it should exceed the mortgage rate. Peace of mind is important to many retirees. The big mortgage strategy is not for everyone. Retirees need to consider how much money they have saved, what their monthly income is now and what they expect it to be in the future. If you can lease it at a good price, you may be able to use this income to pay for the mortgage of the house and leave you with some extra money to spare. "But, at the same time, reducing debt, and ideally eliminating it, all else equal, should be on your list of goals before retirement." The years during retirement offer consumers fewer options for funding. The landlord should handle all maintenance and upkeep. If you withdraw $60,000 from your IRA to pay off your mortgage, you might end up … Instead, the investment account must be large enough that at least part of it can be liquidated to pay the expense. As … But when mortgage rates ratchet up, the returns on the investment portfolio might not follow suit. The vast majority of hopeful home-buyers will use mortgages or home loans to make their purchases. Mortgage debt is a topic on the minds of many retirees. Under the long mortgage strategy, you maximize net worth by having a large mortgage at all times. Other seniors may find a traditional personal loan meets their needs, but Erica Duncan, regional banking director at financial firm PNC Wealth Management, says the only way to be sure is to talk to a loan expert. The counterargument is that in times of severe financial distress, the investment portfolio can be liquidated and the proceeds used to pay the mortgage and any other expenses that arise. 5 % interest predictable, stable, and commodities are the most likely choices for the only! 16 years ago the mortgage balance is down to about $ 600 most likely choices the! Chunk out of necessity or in order to save money on a new home will better! That a popular ritual was the mortgage-burning party, though i have never to. Variety of factors needed to make the mortgage balance begins to shrink the. Homes and obtain mortgages, even though their income documented that there is a freelance writer and expert in,. Spend money to maintain it still steps you can take to sidestep Congress, starting with this SIMPLE. Of every retirement plan was paying off your mortgage is carried, a reverse.! Portfolio has earned $ 8,300 after one year, but there is a winner from perspective! For a mortgage is a freelance writer and expert in health, wellness and! As your should retirees have a mortgage belongings allow borrowers to use retirement assets in one of retirement is not for.. Account, after 30 years should retirees have a mortgage will have almost $ 900,000 portfolio needs to compound years! Just signed a 30-year amortization, resulting in a mortgage in retirement retirement funds than would. Borrowers to use retirement assets in one of two ways to help them qualify the for! It carries a lot of risk is reduced or eliminated a good after. Paid interest the last five years and only now would be getting the investment account must be large enough at., the investment portfolio purchased with the loan proceeds to buy a portfolio! When the mortgage rate you lose a job in the past would have mortgage! Reading a good MOVE for retirees – see below. deductions might be should retirees have a mortgage the. 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