Should I Pay Off My Mortgage Before Retirement?

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Older couple in front of a house
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Heading into retirement without debt can make your golden years gleam. So, should you pay off your mortgage before retiring?

Money Talks News reader Sara sent us that question:

“I’ve always heard you shouldn’t retire if you still have a mortgage. But if I wait till my mortgage is paid off to retire, I’ll die at my desk. What should I do?”

OK, Sara, let’s discuss.

Federal Reserve statistics show that in 2019, 37.6% of households headed by people age 65 to 74 had a mortgage on their primary residence, as did 27.7% of those 75 and older. Those numbers have been growing for years, which isn’t surprising considering homes have gotten more expensive while inflation-adjusted wages haven’t changed much.

So, the first thing you need to know, Sara, is that if you have to retire with a mortgage because you have no choice, do it. You’re not the only one.

But for those of you who do have a choice — you either have the savings or the income to pay off your mortgage before you retire — let’s look at the pros and cons.

Mortgage payoff pros

One advantage to getting rid of that mortgage is increased cash flow. Money you’re no longer putting toward your mortgage can now go into something more productive — like your savings or, better yet, making your golden years more fun.

Another advantage is not having that obligation over your head. Not only does it feel good, but should things go south, it’s one less bill to worry about.

Finally, if you’re earning less on your savings than you’re paying in mortgage interest, you’ll be better off paying down the mortgage. If you’re paying 4% on your mortgage and earning 2% at the bank, you’re going backward by 2% per year. Pay it off, and you’ll be gaining 2% per year.

Mortgage payoff cons

What are the disadvantages of paying off a mortgage? One is turning a liquid asset — money in the bank — into an illiquid asset, home equity. For example, a few years back during the housing crisis, I had a bunch of money in the bank earning very little. I used it to buy the house next door at a bargain price. I fixed it up, then sold it for a big profit.

Theoretically, I could have borrowed against my house to raise the cash, but I probably wouldn’t have. Because I had the cash and it wasn’t earning much, I did something with it that earned a lot.

In short, having money in the bank can help you make more money. Plus, it feels good to know that if things go south, or an opportunity arises, you’ve got the funds to deal with it.

Another thing to consider: You might get a tax deduction for your mortgage. This is harder to do now because the standard deduction for single taxpayers is $12,000 and $24,000 for married couples, so a lot of us are no longer getting a tax write-off for mortgage interest. Still, if you’re getting that deduction, it essentially lowers the cost of the interest you’re paying.

The bottom line

I’ve given you pros and cons, but what should you do? Well, it depends. Pay off your mortgage if:

  • You’ve got all your retirement accounts fully funded and you’re socking away as much as you can.
  • You’ve got a ton of savings that’s earning almost nothing.
  • You’re not getting a tax deduction.
  • You can’t see any future use for the cash.

On the other hand, you might be better off leaving your mortgage alone if:

  • You’re earning more with your savings than the mortgage is costing.
  • You’re getting a tax deduction.
  • You might find something rewarding to do with your cash.
  • You simply don’t have the money to pay it off.

Either choice could be the correct answer.

I hope that answers your question, Sara!

About me

I founded Money Talks News in 1991. I’m a CPA, and I’ve also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

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