Some 44% of homeowners ages 60 to 70 carry a mortgage with them into retirement, according to mortgage banker American Financing.
Is that a smart financial move? The decision of whether to pay off your mortgage before retirement should hinge on how much you’ve saved for retirement, your cash flow and how your investment accounts are performing.
Here’s a look at some considerations as you decide whether to continue making mortgage payments during your retirement years. First, read about three reasons to pay it off — then, consider two reasons not to.
[Related:How to Retire at 55 on $1 Million]
1. People Who Are Mortgage-Free Are Happy Retirees
Morgan Hill, CEO and founder of Hill & Hill Financial in Woodstock, Georgia, says it makes “all kinds of sense” to pay off the mortgage before retiring.
“Economically it makes sense from a cash flow standpoint,” he says. “What I find is that the people who are most at peace in retirement owe very few people any money, and paying off that mortgage is a big, big, big part.”
Hill says the exception is the handful of clients he’s come across in his years in the business who have low-interest mortgages and very low mortgage payments. Most have owned their homes for years.
“I can pick on one hand a few that got the deal of the century, low fixed-rate interest with principal, interest, tax and insurance, $650. That’s almost a car payment,” he says.
[Read: How to Pay Off Your Mortgage Faster]
2. The Cash Flow You Save Will Be Important as You Age
Hill says we’re so focused on the go-go years in early retirement when we want to have fun that we don’t think about what happens with expenses as we age.
“A lot of folks haven’t really thought about what happens when you’re in your late 70s and and 80s,” he says.
“Those people have things like long-term care insurance or other provisions. But that’s the income planning part two, and the cash flow that you save by not having a mortgage payment could help with other types of expenses that you don’t have in your 60s, maybe not your early 70s, but in you late 70s into your early to mid 80s,” he adds.
3. Don’t Carry a Mortgage Just Because You Have a Low Interest Rate
Hill says the interest rate is not the only consideration, but the value of the mortgage payment. It’s part of the multifaceted nature of income planning. It’s based on the income plan he puts together for clients, he says.
“You might take a pay cut (in retirement). You might have a pension and there might be a survivor benefit. When are you going to take Social Security? When might the spouse take Social Security? How much is in your 401(k)? What’s in your IRA? Do you have dividend funds? We look at all of these pieces, map it out and graphically look at it and then look at how the mortgage fit in,” Hill says.
“Does, all of a sudden, the mortgage make this harder later, even if (the interest rate is) 3%? If it’s half a million dollars, that might be a big fat payment,” he adds.
[READ: Essential Sources of Retirement Income]
4. Don’t Pay Off Your Mortgage if You Have Other Higher-Interest Debt
Consider paying off the debt with the highest interest rate first.
“If you have high interest-rate student loans and credit cards, you are better off prioritizing reducing that high-interest debt versus a low interest-rate mortgage,” says Bryson Roof, a financial advisor at Roof Advisory Group, a division of Fort Pitt Capital Group, in Harrisburg, Pennsylvania.
5. Don’t Pay It Off if You Have to Use Your Savings
Nicolas Abrams, president and CEO of Opulentia LLC in Hunt Valley, Maryland, also recommends trying to pay off your mortgage by retirement.
“Now, what I mean by that is not going into their 401(k) or any investment account to pay it off, but using their cash flow while they are working to make extra payments to try to pay the house off,” he says.
One option: Abrams says people over 50 can put $30,000 into their 401(k) or other retirement plan (which includes catch-up contributions). But “instead of putting that whole $30,000 in there, if they don’t have the cash flow, they could use part of that money to help pay down the mortgage early so that once they go into retirement, they do not have that extra expense,” he says.
“By not having the mortgage, it really frees up a lot of cash flow for clients. And it just helps them have a better, more fulfilling retirement for a lot less stress because a mortgage is basically one of the major expenses that you have in retirement,” he adds.
Also, 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.
“If you pay your mortgage off and don’t have 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,” Roof says.
An emergency expense could force you to take on higher-interest debt, which would eliminate the benefit of paying off your mortgage.
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Should You Pay Off Your Mortgage Before You Retire? originally appeared on usnews.com
Update 09/11/23: This story was previously published at an earlier date and has been updated with new information.
