Should You Pay Off Your Mortgage Before Retirement?

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Housing is often the typical American’s greatest monthly expense, whether during retirement, or during working years. If you happened to sign a 30-year mortgage in your 30s and made all of your payments as scheduled, there’s a good chance your home will be paid off by the time you bring your career to a close.

But what happens when you sign a 30-year mortgage in your 40s, yet want to retire in your 60s? If that’s the case, you risk the same predicament as 30% of seniors today — entering retirement with mortgage debt hanging over your head.

On the one hand, having a mortgage in retirement isn’t terrible if you plan for it financially.

On the other hand, wouldn’t it be nice to kick off retirement without that nagging monthly payment?

Of course, there’s a solution: Knock out your mortgage before retirement, even if that means accelerating your payment schedule to get there.

But before you run with that answer, know that there are both advantages and drawbacks to going that route.

Benefits of paying off your mortgage before retirement
The primary advantage of paying off a mortgage prior to retirement is you’ll have less debt — and more disposable income — as a senior. This can be extremely helpful when you’re no longer working and are limited to a fixed income. It can also leave you with more wiggle room in your budget for other expenses seniors typically face, such as healthcare and leisure.

Another benefit of paying off your mortgage in time for retirement is that you’ll save money on interest if meeting that goal means speeding up your repayment plan. As is the case with any sort of money you borrow, the less time it takes you to repay your loan, the less you lose to interest charges. Just make sure your mortgage lender won’t penalize you for an early payoff, because some loans do.

Drawbacks of paying off your mortgage before retirement
Generally speaking, paying off a mortgage prior to retiring is a good idea. But there are still a few pitfalls to be aware of. For one thing, you’ll lose out on the mortgage interest deduction, which could bump you into a higher tax bracket at that time. Granted, you may end up in a lower tax bracket in retirement than during your working years, in which case it would make sense to reap that benefit when you’re younger and your taxes are higher. But if you’ve saved well and have reason to worry about taxes in retirement, not having that deduction might cost you.

You might also end up hurting yourself taxwise in the latter stages of your career by using your spare cash to pay off a mortgage rather than sock it away in an IRA or 401(k). Though you might eke out a little more savings via the mortgage interest deduction, any time you use your cash to pay off a home instead of sticking it in a retirement plan, you’re losing out on the tax advantages of that plan. In the case of a 401(k), that could mean missing the chance to sock away up to $24,500 this year (if you’re 50 or over) in pre-tax dollars.

Furthermore, if you managed to lock in a relatively low interest rate on your mortgage — say, something in the 4% range — then you might come out ahead financially by filtering spare cash into a retirement plan instead. That’s because the stock market, even on an average year, can easily return twice that amount.

Also, keep in mind that the housing market isn’t nearly as liquid as the stock market. If you use a large chunk of your available savings (even non-retirement savings) to pay off your mortgage, you’ll have that much less cash available to invest, or cover an unforeseen expense. You may, therefore, be better off investing that cash and leaving yourself with greater liquidity in the face of life’s unknowns.

What’s the right move for you?
Not everyone gets the option to enter retirement mortgage-free, but if you have cash available that could go toward meeting that goal, you’ll need to consider the aforementioned pros and cons. As a general rule, the higher your mortgage interest rate, the more sense it makes to pay it off sooner, but only if doing so doesn’t impede your retirement savings, or put you at a financial disadvantage during your working years.

Remember, a mortgage payment doesn’t have to hurt you in retirement if you save enough to cover it. Plan accordingly, and you’re apt to come out OK in either scenario.

— Maurie Blackman