Should I Pay Off My Mortgage Before I Retire?
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. Low mortgage interest rates mean it can make financial sense to continue to make mortgage payments during your retirement years.
Here are five major scenarios where you can come out ahead by keeping your mortgage going into retirement:
- You are earning a better rate on your investments than you pay on your mortgage.
- You would be paying off your mortgage with savings.
- You have other higher-interest debt.
- You can qualify for a tax deduction by saving elsewhere.
- You’re making an emotional rather than a financial decision.
Deciding whether to pay off your mortgage before retirement depends on how much you’ve saved for retirement, your cash flow and how your investment accounts are doing. Here’s a look at when it makes sense to continue making mortgage payments during your retirement years.
1. You Earn a Better Rate on Your Investments Than You Pay on Your Mortgage
A mortgage can help you come out ahead if you earn more on your investment portfolio than you are paying for mortgage interest. If for example, your mortgage is 3.25%, and you earn 6% on your portfolio, you are better off letting your portfolio grow. Sometimes it may not make sense to pay off the loan, but it could be beneficial to refinance to a new lower interest rate.
2. You Would Be Paying Off Your Mortgage With Savings
You don’t want to use all of your savings to pay off your mortgage and then be unable to cope with other expenses in retirement. Think about the money set aside for emergencies, now you have to get a loan or home equity line of credit to put on a new roof or get a new car, using that savings might force you to take on higher interest debt, which would eliminate the benefit of paying off your mortgage.
Using your retirement savings to make mortgage payments could also trigger taxes. If you withdraw $60,000 from your IRA to pay off your mortgage, you might end up with less than $50,000 after taxes. It might not make sense to pay off your mortgage from your retirement accounts. Sometimes paying off a mortgage can also impact other retirement objectives, such as requiring you to work longer. Have a conversation with a CPA before you make a move.
3. You Have Other Higher-Interest Debt
Consider paying off the debt with the highest interest rate (cost of money) first.
4. You Can Qualify for a Tax Deduction by Saving Elsewhere
Remember to consider taxes when deciding whether to pay down your mortgage or maintain investments. The 2017 Tax Cuts and Jobs Act changed the rules for the mortgage interest tax deduction. Due to the new tax law, many people can’t necessarily deduct mortgage interest because of the higher standard deduction, and if you don’t have enough deductions, you can’t itemize.
However, you may be able to qualify for a tax deduction by putting money into retirement accounts. While it can be emotionally gratifying to pay off your mortgage, sometimes you can come out ahead by saving elsewhere instead of paying off your house.
5. You’re Making an Emotional Rather Than Financial Decision
There are some people who want to pay off their mortgage just for peace of mind in retirement. Some people want to pay down their mortgage, even when mortgage rates are low and their portfolio is earning more. If you are just not comfortable having debt in retirement, do the math, it will make the decision less emotional.