Paying off the mortgage after 30 years was a rite of passage for Americans approaching retirement age, but this once-common scenario is no longer the norm. According to research from Fannie Maes Economic and Strategic Research Group, baby boomers, those born between 1946 and 1965, are carrying more mortgage debt than earlier generations and are less likely than earlier generations to own their homes at retirement age.
This is confirmed by Federal Reserve data showing that those 75 and over own more mortgage debt than previous generations. According to separate research, approximately 40% to 50% of Americans in their 60s no longer have a mortgage, which leaves a big chunk that still does.
Whether it makes financial sense for retirees or those nearing retirement to pay off their mortgages depends on factors such as income, mortgage size, savings, and the value of the mortgage interest deduction.
Deciding whether to pay off your mortgage when you retire is a big financial decision that requires careful thought. There are pros and cons to weigh when determining if it makes sense for your personal situation. This article will examine the key factors to consider when deciding if you should pay off your home loan in retirement.
The Potential Benefits of Paying Off Your Mortgage
Here are some of the main advantages of paying off your mortgage before or early in retirement
Lower Expenses and Simplified Budgeting
One of the biggest pros is that it can substantially lower your fixed expenses in retirement. Your mortgage payment is likely one of your largest recurring costs. Eliminating this expense means you won’t have to budget as much each month for housing costs. This can make it easier to live on a reduced income in retirement.
More Cash Flow Flexibility
Without a monthly mortgage bill, you’ll have greater flexibility in how you allocate your retirement cash flow. You can use the extra money that was going toward your mortgage for other priorities like travel, hobbies, charitable gifts or health care costs.
Peace of Mind
Owning your home free and clear can provide peace of mind You won’t have the stress of making monthly mortgage payments on a fixed income This sense of financial security is important for many retirees,
Interest Savings
Paying off your loan early means you’ll pay less interest over the life of the loan. This depends on factors like your mortgage balance, interest rate and how early you pay it off. But mortgage interest adds up over decades. Avoiding some of these costs can mean more money in your pocket.
Inflation Hedge
Your fixed mortgage payment shields you somewhat from inflation. Housing costs and other expenses will likely rise over your retirement, but your monthly mortgage bill stays stable. Paying it off entirely eliminates this inflation hedge, however.
Estate Planning Benefits
If you pay off your home before passing away, you’ll be able to leave the full value of the home to your heirs rather than having them inherit a mortgage. This can make estate planning and distributions easier for your loved ones.
The Potential Downsides of Paying Off Your Mortgage
Here are some of the main drawbacks to consider:
Lost Liquidity
Making a large lump-sum payment to pay off your mortgage means you lose access to that money. At some point in the future, you may wish you still had those liquid funds in your bank account or investment portfolio.
Lower Returns Than Investing
Historical stock market returns tend to exceed mortgage rates. So if you pay off a 3% loan but could have earned 6% investing, you may come out behind in the long run. However, stocks do involve more risk than paying off a fixed-rate mortgage.
Higher Taxes
Without mortgage interest to deduct on your tax return, you may end up in a higher tax bracket and owe more to the IRS each year. Run the numbers to see if this could impact you.
Forfeiting Some Inflation Protection
As noted above, keeping your set monthly mortgage payment as other costs rise can help combat inflation to some degree. Giving up your mortgage eliminates this hedge.
Opportunity Costs
Using a big chunk of savings or investments to pay off your home means you can’t utilize that capital for other priorities. Make sure you won’t later regret not having those funds available.
May Still Need a Mortgage Eventually
Even if you pay off your current mortgage, you may need to take out a new home equity loan or reverse mortgage later in retirement depending on your financial situation. These options have their own pros/cons.
Key Factors to Consider Before Paying Off Your Mortgage
When deciding if paying off your home loan in retirement makes sense, here are some key factors to weigh:
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Your age and life expectancy – The older you are, the less advantage you may get from interest savings. Weigh how long you are likely to stay in your home.
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Your mortgage balance and interest rate – The size of your loan and rate impact potential interest savings. Consider refinancing your mortgage before deciding to pay it off.
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Other savings and assets – If paying off your home taps most of your nest egg, you may want to reconsider. Make sure you’ll still have adequate liquid reserves.
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Your post-retirement budget – Can you afford your intended lifestyle without the mortgage payment? Run the numbers to find out.
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Your health and long-term care needs – If you end up needing in-home care or assisted living, home equity may help fund costs.
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Your spouse’s situation – If you pass away first, will your surviving spouse be okay without your income helping to make mortgage payments?
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Your tax situation – Will losing the mortgage interest deduction significantly impact your taxes?
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Alternative uses for your capital – How else could you utilize the money if you invested it vs. paying off your home?
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Your comfort with debt – If being debt-free is really important for your peace of mind, that’s a strong argument to pay off your mortgage.
Tips for Paying Off Your Home Loan
If you decide it makes sense to pay off your mortgage in retirement, here are some tips:
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Crunch the numbers to pick the optimal time – Consider interest rates, your tax situation, etc.
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Explore downsizing first to lower your balance
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Pay down incrementally if possible, so you maintain some liquidity
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Use your most tax-advantaged accounts last to avoid penalties
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Discuss implications with your financial advisor and tax professional
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Refinance your mortgage first if you can improve your rate
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Make sure you’ll still have adequate insurance coverage
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Have a plan in place in case you need to borrow against your home equity again later
The Bottom Line
Deciding whether to pay off your entire mortgage in retirement is a complex choice. Make sure to weigh all the pros and cons before tapping your retirement nest egg. Paying off your home can have many benefits, but also some risks. Look at your full financial picture, and don’t be afraid to get professional advice. With prudent planning, you can make the right mortgage payoff decision to support your retirement goals.
At What Age Should You Pay Off Your Mortgage?
There is no specific age to pay off your mortgage, but a common rule of thumb is to be debt-free by your early to mid-60s.
It may make sense to do so if you’re retiring within the next few years and have the cash to pay off your mortgage, particularly if your money is in a low-interest savings account. Again, this works best for those who have a well-funded retirement account and enough reserve funds for unexpected emergencies.
Paying off the mortgage ahead of retirement can be a real stress reducer. Your monthly expenses will be cut, leaving you less vulnerable to a sudden property tax increase, an emergency repair, or the impact of inflation. You’ll save on the interest you would owe by keeping the mortgage.
Entering your retirement years without monthly mortgage payments means you won’t have to use your retirement funds to pay for them.
Continuing to make monthly mortgage payments makes sense for retirees who can do it comfortably and benefit from the interest tax deduction.
Avoid Tapping Retirement Funds
Generally, it’s not a good idea to withdraw from a retirement plan such as an individual retirement account (IRA) or a 401(k) to pay off a mortgage. You’ll incur both taxes and early-payment penalties if you withdraw before you reach age 59½.
The tax hit of taking a large distribution from a retirement plan could push you into a higher tax bracket for the year even if you wait until you’re older than age 59½.
It’s also not a good idea to pay off a mortgage at the expense of funding a retirement account. Those nearing retirement should be making maximum contributions to their retirement plans. Research shows that the majority of people are not saving enough for retirement.
According to Pew, 51% of Americans worry theyll run out of money once they stop working and 70% of retirees wish they had started saving for retirement earlier. Additionally, the report states that 56 million private-sector workers dont have a retirement plan at work; employees who dont have retirement plans, save less.
The report goes on to state that those earning less than $75,000 but above the poverty line will fall short of their retirement income target by approximately $7,050 a year.
Should you pay off your house before you retire?
FAQ
Does Suze Orman recommend paying off a mortgage?
For those nearing retirement age, though, Orman offers different advice: If you’re in your forever home, pay off your mortgage by the time you retire. Considering that baby boomers own 38% of America’s housing stock—and more than half plan to never sell—is an important caveat.
Do most people have their house paid off when they retire?
Increasingly, though, people retire owing money on their homes. Thirty-five percent of households headed by people ages 65 to 74 have a mortgage, according to the Federal Reserve’s Survey of Consumer Finances. So do 23 percent of those 75 and older.
What does Dave Ramsey say about paying off your mortgage?
Opportunity costs To be fair, Ramsey does not advise paying off your mortgage as a first step. He wants you to pay off all of your other debt first and then start setting aside 15% of your money to stick in mutual funds. Only after you do these things does he tell you to pay off your mortgage.
Should you pay off your mortgage before you retire?
Many people strive to pay off their mortgages before they retire. It’s a legitimate objective, especially when you consider that 73% of seniors said their home is their most valuable asset, a 2021 survey by American Advisors Group found, as reported by PR Newswire.
Should you pay off a home before or after retirement?
There are some very obvious benefits to paying off a home before retirement, or ASAP after retiring. Most notably, housing costs are a lot cheaper without a home loan.
Can I withdraw from a retirement account to pay off a mortgage?
It’s generally not a good idea to withdraw from a retirement account to pay off a mortgage. That could reduce your retirement income too much. There are other options to consider if you have a hefty mortgage, such as downsizing to a home that fits your retirement budget.
What happens if you don’t pay a mortgage in retirement?
Your monthly expenses will be cut, leaving you less vulnerable to a sudden property tax increase, an emergency repair, or the impact of inflation. You’ll save on the interest you would owe by keeping the mortgage. Entering your retirement years without monthly mortgage payments means you won’t have to use your retirement funds to pay for them.
Should you keep paying off your property before retirement?
Instead, keep making your current payments, leave your money invested to earn returns, and wait until your property gets paid off on the normal schedule over time. The road to retirement may seem long, but with Advisor.com , you can find a trusted partner to guide you every step of the way
Should you pay off your mortgage?
“You never want to end up house rich and cash poor by paying off your mortgage,” says Brandon Ashton, director of retirement security at Cornerstone Financial Services in Southfield, Michigan.