As you head into retirement, a lot of focus is rightly on how you will be able to generate an income once your working days are over. However, we can’t neglect your expenses, and one of the biggest and most important expenses is your mortgage.
Should you have a mortgage in retirement? When does it make sense to keep it, and when does it make sense to pay it off, potentially early?
For a number of reasons, many homeowners aim to pay off their mortgage before they retire. However, it may make financial sense to continue paying on your mortgage in retirement.
Here are four things to consider when determining whether you should have a mortgage in retirement.
1. Do The Math
Before you decide to invest in paying off your mortgage, be sure to sit down and do the math.
For a lot of people, if they are considering paying off their mortgage, they have some type of investment account that they can pull that money from to pay off the remaining mortgage balance.
Now everyone has their money invested differently in the stock market, so I am going to keep this quite general. But let’s say your invested with a moderate risk tolerance, and your portfolio is earning returns of between 5 and 7%. .
On the other hand, the average mortgage rate today sits around 3-4% depending on your terms.
So there could be anywhere from a 2-4% interest rate difference between your investment account and your mortgage rate.
You want to sit down and look at what kind of return you are getting with your current investments. If you are earning more through your portfolio than what you are paying in interest on your mortgage, you need to decide whether you want the potential higher returns of the stock market (which are never guaranteed), or do you want the safety and comfort of paying off a guaranteed 3-4% interest rate? .
However, you also want to keep in mind the terms of your mortgage. For instance, if you currently have a variable rate loan, there’s a chance your interest rates could rise after you retire. In this case, it may make sense to refinance your home to secure a fixed rate before you retire so that you can get more stability and certainty on your mortgage terms. Then you can decide whether it makes sense to keep your mortgage when you retire.
Either way, sitting down and working out how much you’re making in your investments compared to what you are paying in interest on your mortgage is an essential step in deciding whether to pay it off before you retire.
2. Consider Your Savings and Expenses
While retiring mortgage-free can feel good, you don’t want to take the decision lightly. You’ve worked your whole life to build up your savings for retirement. While this may be enough to pay off your mortgage, you want to make sure that you still have enough to cover unexpected expenses in retirement.
If you use all of your savings (or investments) to pay off your mortgage and suddenly you find yourself with medical bills, needing to replace your car, etc., you’ll need to take out additional debt, often at a much higher rate than the interest rate you had on your mortgage.
Another reason to pause before using your savings/investments to pay off your mortgage is that you could suddenly find yourself with a tax bill. Making large withdrawals from your retirement fund will likely trigger a tax bill, given that many retirement accounts defer taxes until funds are withdrawn.
Likewise, taking out a large withdrawal can force you into a higher tax bracket, resulting in you owing more taxes than you would have otherwise. Large withdrawals from retirement funds and savings could also mean that you need to work longer than you planned to build your savings back up to cover emergency expenses after you retire.
3. Look at Your Other Debt
Talking about debt is a huge part of proper retirement planning. That’s why It’s common for most people to think about their mortgage first, given it is often the debt with the biggest principle. However, it doesn’t mean that it’s the first thing to go. Before you decide to pay off your mortgage before you retire, focus on your high-interest debt first.
Your credit cards and personal loans often have much higher interest rates than your mortgage, sometimes to the tune of 10-20% or even more! Plus, many credit cards have variable interest rates on top of already high-interest rates. This means your rate could go up, causing difficulties with your fixed retirement income. Therefore, if you have extra money in savings, it makes financial sense to pay off this kind of debt before you even consider paying off your mortgage, given that your mortgage only has an interest rate of around 3-4%.
4. Protect Your Retirement Income
Once you retire, you’re on a fixed income based on what you have in your retirement accounts, pension, social security and other types of income you may have. This means you need to take every measure possible to protect your retirement income, and ensure that your assets are enough to provide you a comfortable monthly income.
In some cases, it makes financial sense to get rid of your mortgage before you retire, especially if it means it won’t adversely affect your emergency savings, and that you can still generate enough of an income from your other sources to live off of.
But if you are going to deplete your investments to the point where you won’t be able to generate income from them, and you don’t have enough assets elsewhere to provide you a retirement income, then we really need to consider keeping the mortgage so that we can allow your investments to provide you the income you need.
If it isn’t feasible to pay off your mortgage before you retire, it may be worth it to look into refinancing. If you have a high interest rate, refinancing could help you lower that to a number that might be near historical lows. Also, if you have a variable rate loan on your mortgage, you could turn it into a fixed rate, so you know what you’ll be paying in retirement.
Further, if you opt to refinance your mortgage, that can help minimize your monthly mortgage payments. This can help you keep more of your fixed income each month, and give you a little more financial wiggle room.
Do What’s Right For You
As you can tell, when it comes to deciding whether to pay off your mortgage before you retire, there is no right or wrong answer. It is a decision that is largely dependent on your financial situation and your financial goals for your retirement.
While many of these points are based on numbers, it’s important to remember that the decision is also an emotional one. If the thought of paying on your mortgage in retirement makes you uneasy and you can pay it off without cutting your investment portfolio too low, then it may make sense to go ahead and pay off your mortgage.
I would be happy to help you decide which option is right for you, given your circumstances. You can book a free Start My Retirement consultation with me, where we will create a one page retirement plan for you, outlining everything I think you should do as you approach retirement.