Should I Pay Off My Mortgage in Retirement?

Whether you’re in the run-up to retirement or are already there, you might be considering paying off your mortgage. It may seem like a great idea, but doing so can have a ripple effect that impacts your overall financial health. In some cases, it could make more sense to keep your mortgage and invest the money instead.

The truth is that there isn’t an automatic right or wrong answer—the best decision for you really boils down to your unique financial situation. Understanding the pros and cons of paying off your mortgage in retirement can help bring things into focus.

The Benefits of Paying Off Your Mortgage in Retirement

Your housing payment may very well be your largest monthly bill. The average monthly mortgage payment in New York is just north of $2,100, according to a recent Business Insider analysis. This could skew even higher, depending on where you live. Settling your mortgage is an attractive option as it could free up a sizeable chunk of income each month, essentially providing greater cash flow and a more comfortable lifestyle in retirement. An added benefit is that you’ll eliminate the interest you’d otherwise pay by keeping the mortgage alive.

It could also put you in a position to rely less on portfolio distributions for income. If much of your nest egg is tied up in tax-deferred accounts like a 401(k) or traditional IRA, you’ll have to pay taxes on those withdrawals; something that can diminish your wealth over time.

If you were planning on downsizing in retirement anyway, another option is to sell your home—then combine the profit with other liquid cash you have available to buy your next home outright.

Keeping the Mortgage and Investing Instead

Those who have a significant sum of money at their disposal may be wiser to keep their mortgage and invest these funds instead. The average annual rate of return for a 60/40 portfolio over the last decade has been about 10%. If your mortgage rate is currently much lower than that, directing additional money to your investment accounts could have a greater payoff in the long run. At the time of this writing, the average 30-year fixed mortgage rate was just 3.21% (2.48% for 15-year fixed mortgages).

You might also consider keeping your mortgage if you benefit from tax-deductible mortgage interest, which essentially makes your loan even cheaper. You must itemize your deductions to claim it, as opposed to taking the standard deduction, but it’s certainly worth consulting your financial advisor and accountant before making any big moves. Depending on how the numbers shake out, taking this tax deduction and investing additional income could make more financial sense than paying off a low-interest mortgage.

It’s also wise to ask yourself how you would go about paying off your mortgage. If tapping tax-advantaged retirement accounts, like the ones we mentioned earlier, is the only way to make it happen, you could be hit with a potentially costly tax bill. This in itself could negate the financial benefits.

One last word on paying off your mortgage: Once you do so, you’ll lose access to principal. In this way, your home will no longer have a metaphorical ATM attached to it. If you decide later on that you want the money back, that wealth may be tied up in unusable home equity. That loss of liquidity shouldn’t be overlooked.

How to Decide What’s Right for You

Should you pay off your mortgage in retirement or invest the money instead? The best starting point is to run the numbers and weigh the pros and cons. You may find that paying off a low-cost mortgage isn’t likely to net you the kind of long-term return you might get via investing. Some important questions to ask yourself include:

  • What is your mortgage rate?
  • Do you currently benefit from tax-deductible mortgage interest?
  • What is your risk tolerance if you’re thinking about investing?
  • How would you fund your home purchase—with liquid assets or dipping into tax-deferred accounts?
  • Would paying off your mortgage significantly deplete your nest egg?

These are big questions that aren’t always so simple. Teaming up with a financial advisor can help you create a wealth management plan that fits your unique vision for retirement. Contact us today to get the individualized guidance you need.

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