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.
For many retiring baby boomers, paying off the mortgage was a rite of passage that signaled financial freedom in retirement. However, today’s retirees are less likely to own their homes free and clear. Data shows that retirees are carrying more mortgage debt into their golden years compared to previous generations.
This leaves many questioning if they should prioritize paying off their mortgage before retiring or if continuing to make payments in retirement can be a better option. The answer depends on your personal financial situation. While becoming mortgage-free can provide peace of mind, it is not the ideal choice for every retiree.
When Continuing Mortgage Payments Makes Sense
For some retirees continuing to make mortgage payments is a reasonable choice. This is often true if
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You can comfortably afford the monthly payments on your fixed-rate mortgage without impacting your retirement lifestyle.
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You have a low interest rate under 5% on your mortgage,
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You stand to benefit from the tax deduction on mortgage interest payments.
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Your income in retirement puts you in a high tax bracket where mortgage interest deductions provide significant savings.
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You have limited savings and need cash on hand for a rainy day instead of tying it up in home equity.
In these situations, keeping the mortgage and continuing payments from retirement income streams can be financially wise. The key is being able to afford the payments without straining your budget.
Avoid Withdrawing Retirement Funds to Pay Off Mortgage
While being mortgage-free can be tempting, it is generally not advisable to withdraw funds from retirement accounts like 401(k)s or IRAs to pay off your home loan. Doing this subjects you to taxes and penalties for early withdrawals if under age 59 1⁄2.
Even if you are over 59 1⁄2, the tax hit could push you into a higher tax bracket and significantly reduce the amount available to pay off your mortgage after-tax. It’s usually better to avoid compromising your retirement nest egg.
Consider Downsizing to a Smaller, Cheaper Home
Some retirees consider downsizing to a smaller, less expensive home that better aligns with their retirement budget and lifestyle needs. If done strategically, you may be able to buy a smaller home outright with the profits from selling your current larger, more expensive home.
This can leave you mortgage-free, but downsizing has challenges. Home values don’t always align with expectations. Closing costs eat into profits. Capital gains taxes apply on investment properties. And moving in retirement can be stressful.
What If Your Retirement Income Is Too Low?
Some retirees realize their retirement income is insufficient to cover living expenses plus mortgage payments. In this case, becoming mortgage-free may be a necessity. Strategies to pay off a mortgage faster include:
- Making bi-weekly instead of monthly mortgage payments
- Consistently paying extra principal with each payment
- Temporarily cutting discretionary spending to allocate more cash flow towards paying down principal
If you have retirement income shortfalls and home equity, utilizing a reverse mortgage could provide funds to eliminate mortgage debt. But proceed cautiously as reverse mortgages reduce equity in your home.
Weigh the Pros and Cons Carefully
The choice of whether to pay off your mortgage before or during retirement is complex. Being mortgage-free provides security, reduces expenses, and prevents retirement funds from being siphoned towards debt. But keeping a low-rate mortgage can sometimes make mathematical sense if you have sufficient assets earning higher returns.
Carefully weigh the pros and cons for your situation. Seek input from a financial advisor to decide if becoming mortgage-free should be a top priority or if continuing mortgage payments in retirement better aligns with your overall financial plan. The right approach depends on your unique circumstances and retirement goals.
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 I Refinance My Mortgage to Lower the Monthly Payment?
This would have been an option during the years when mortgage rates were below 5%. Interest rates began to climb steadily in 2022 as the Fed fought inflation. Anyone who obtained a mortgage or refinanced one in the years of low interest rates is unlikely to get a better deal in the foreseeable future, even though the Fed made a rate cut in 2024 after many increases.
When Retirees Should not Pay off Their Mortgages? Pay off the Mortgage or Invest
FAQ
What does Suze Orman say about paying off your 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.
Should a senior pay off their mortgage?
Point out that paying off the mortgage in retirement might mean seriously depleting savings, and some might feel more comfortable keeping that money in the bank. Note the ways to tap home equity if necessary. The conventional wisdom is that you should pay off your mortgage before you retire.
Is there any reason not to pay off a mortgage?
- 1) You lose your mortgage interest deduction.
- 2) You lose a low borrowing cost.
- 3) You tie up capital in an illiquid asset.
- 4) You decrease your financial returns.
- 5) You might start being less efficient with your time.
- 6) A chance your credit score might take a hit.
Should you pay off a mortgage at the expense of retirement?
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.
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.
Can you retire without monthly mortgage payments?
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.
Should you pay down your mortgage when you retire?
Those withdrawals typically trigger more taxes, while reducing the pool of money that retirees have to live on. That’s why many financial planners recommend their clients pay down mortgages while still working so that they’re debt-free when they retire.
Should you retire a mortgage?
Most people would be better off not having mortgages in retirement. Relatively few will get any tax benefit from this debt, and the payments can get more difficult to manage on fixed incomes. But retiring a mortgage before you retire isn’t always possible.