People are often advised to try to eliminate debt ahead of retirement. The logic is that once you retire, you may be looking at a smaller income. So the fewer expenses you have, the easier it becomes to stretch your monthly retirement paycheck.
It’s a good idea to try to pay off credit card balances, personal loans and other debts ahead of retirement. But you actually may not want to pay off your mortgage.
Here’s why paying off a mortgage before retiring can be a bad financial move.
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1. You’ll Lose Liquidity
There’s something to be said for not having a mortgage payment hanging over your head in retirement. But Aaron Brask, principal at Aaron Brask Capital, says it’s not necessarily a good idea to take a large chunk of money out of a savings or retirement account to pay off a mortgage balance.
“Paying off a mortgage effectively converts liquid cash into an illiquid asset,” Brask says.
Homes are far less liquid than stocks and similar assets that can be sold on a whim. And they’re certainly a lot less liquid than actual cash.
When you’re not earning a paycheck, you need easy access to money in case unplanned expenses arise, Brask says. If you take money that’s easily accessible and turn it into money that isn’t accessible by tying it up in your home, you could run into issues. “I regularly come across clients who want to extract liquidity from their homes, but are left with few attractive options,” Brask says. “If you just need a little bit of money, you can’t just sell off a bathroom. It’s not as liquid as having the money in investments or assets you can access more readily.”
Eric Croak, a certified financial planner and president at Croak Capital, agrees. “I am not anti-payoff. I am anti-rigidity,” he says.
“If someone hates debt and cannot sleep knowing they owe $150,000 on their house, fine. But from a planning perspective, I would rather see a retiree enter that phase with $500,000 in high-quality income-producing assets and a small mortgage than zero debt and no liquidity. That structure holds up better over time,” Croak adds.
Brask concedes that there is, as he calls it, “a behavioral side of economics.” If paying off your mortgage ahead of retirement gives you more peace of mind and you have other liquid assets, then it’s not automatically a bad idea. However, he says, “you have to balance the peace of mind you get from paying a mortgage off versus its economic benefits.”
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2. You May Get Better Returns Elsewhere
In 2020 and 2021, mortgage rates plunged to record lows, and many homeowners seized the opportunity to refinance their home loans. If you were among them, then it may not make financial sense to pay off your mortgage ahead of retirement, Croak says.
“Cash flow is more valuable than a paid-off home when you are on a fixed income,” Croak says. “A $400,000 house paid off early gives you zero monthly debt, sure. But it also traps equity that could have been working for you.”
One thing to remember is that if you’re sitting on a mortgage rate around 3% or lower, you may be able to earn a higher rate of return in a basic high-yield savings account or CD ladder. These are risk-free options. And if you’re willing to invest the money you would use to pay off your mortgage, the financial upside could be even more substantial, Croak says.
“If you kept a 3.5% mortgage and invested that $400,000 in a mix of private credit and tax-advantaged assets earning 7% (or more), you could be pulling in $28,000 a year while still covering the mortgage cost,” Croak says.
Of course, the numbers look different if you are paying a high interest rate on your mortgage. But if your rate is on the lower side, carrying that mortgage may be the better deal, financially speaking.
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3. You Could Lose Out on a Big Tax Deduction
Although carrying a mortgage into retirement might seem like a drag, Croak says there’s an often overlooked benefit of owing money on a home: the mortgage interest deduction.
“While fewer retirees itemize now, some still get real tax mileage from mortgage interest, especially if they are giving to charity or deducting medical expenses,” Croak says. “Every $1,000 of interest could knock off $200 or more in taxes depending on your bracket. That is easy money to keep in your court.”
Think Twice Before Paying Off Your Mortgage Before Retirement
It may feel nice to shed a huge debt like a mortgage ahead of retirement and have one less large bill to pay. But before you dip into your savings or cash out investments to pay off your home, think about the benefits of having more flexibility and more opportunities to keep your money invested.
“Paying off your mortgage before retirement might feel responsible, but it often handcuffs flexibility and weakens your long-game strategy,” says Croak. “Keeping liquidity lets you pivot, adapt or invest in opportunities.”
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Retiring Soon? Here’s Why You Shouldn’t Pay Off Your Mortgage First originally appeared on usnews.com
