Many people strive to pay off their mortgage before they retire. But that isn’t always the best financial move.
“Having fewer bills to pay in retirement makes your retirement savings go further and your mortgage payment is typically your biggest monthly expense,” says David Edmisten, founder of Next Phase Financial Planning in Prescott, Arizona. “However, there are other aspects pre-retirees need to consider before they use a large amount of their savings to pay off their home loan.”
Here are scenarios in which it does and doesn’t make sense pay off your mortgage before you retire:
Do, if you want to cut expenses. Eliminating your mortgage means you’ll be crossing off what is almost certainly your largest debt and cutting your fixed monthly expenses significantly. Consider: The median monthly mortgage payment for U.S. adults ages 55 to 64 is $989, according to ValuePenguin, a financial research firm.
Although you may have less in savings or investments after retiring the loan, reducing your baseline expenses will free up your cash flow for other things.
Do, if you have a high interest rate. Although mortgage refinancing surged during the past two-and-a-half years, with many homeowners taking advantage of record-low mortgage rates, nearly half of baby boomers said they didn’t refinance during the pandemic, a LendingTree survey shows. If your mortgage rate is high, or you have an adjustable-rate mortgage that has already reset to a higher rate, it probably makes sense to pay off your remaining loan balance before you retire, says Edmisten.
Do, if you can make low-risk investments. “Yields on government-issued bonds are very attractive right now,” says Kevin Lao, founder of Imagine Financial Security in Jacksonville, Florida.
Crunch the numbers to see whether you could make more money paying off your mortgage versus investing in short-term bonds. The math is a little different if you can deduct mortgage interest on your taxes. In that case, compare your after-tax mortgage rate with your after-tax investment rate.
Don’t, if your cash reserves are low. “You never want to end up house rich and cash poor by paying off your mortgage,” says Brandon Ashton, with Cornerstone Financial Services in Southfield, Michigan.
Retirees should keep 12 to 24 months’ worth of liquid savings to protect themselves from market volatility, says Lao. A home is not a liquid asset, he stresses, and, while you can always take out a home-equity loan or line of credit, it can take a long time to go through the borrowing process.
Don’t, if you have other high-interest debt. That debt will compound at a high rate and create a significant drag. So, this debt should be paid off before you pay off your mortgage.
Don’t, if you’re behind on retirement saving. “You can typically get a larger return on your money by making catch-up contributions as opposed to paying off your mortgage, especially if your employer offers a 401(k) match,” says Edmisten. In 2023, you can contribute up to $22,500 to a 401(k) plus an extra $7,500 if you’re age 50 or older.
(Daniel Bortz is a contributing writer at Kiplinger’s Retirement Report. For more on this and similar money topics, visit Kiplinger.com.)
