Should You Pay Off Your Mortgage Before Retirement?

February 4, 2014
Study Finds Homemakers are Unprepared for Retirement

Should you pay off your home loan and enjoy your retirement mortgage-free? Or would it be better to keep the mortgage and retire with more cash? It probably won’t come as a surprise that the answer to this question will depend on each person’s situation and financial goals. However, there are a few things you can consider to help you determine which option will work better for you.

Here are a few things you should consider and possibly discuss with your financial advisor before deciding whether or not to pay off your mortgage before retirement:

  • Current income
  • Savings
  • Current tax rates
  • Schedule A itemization before and during retirement
  • Health Savings Account access
  • Retirement-income needs with/without a mortgage
  • Mortgage balance
  • Number of years remaining on your mortgage
  • Interest rates
  • Opportunities to refinance

According to a recent article in the Seattle Times, choosing to retire with or without a mortgage can have certain tax consequences that should also be carefully considered. Annamaria Lusardi, who, along with Olivia Mitchell, is co-author to “Financial Literacy: Implications for Retirement Security and the Financial Marketplace,” was quoted in the Seattle Times article, expressing the importance of considering tax breaks associated with saving for retirement.

“There are tax advantages to pension contributions,” said Lusardi. “…and interest payments on mortgages are tax deductible, so one has to compare these advantages.”

Kathleen Mealey, a financial counselor with Cabot Money Management, was also interviewed on the subject. Mealey agreed with Lusardi, noting that contributing to a 401(k) and deducting interest payments from a mortgage could be more beneficial, particularly if it gets you in a lower tax bracket.

A good rule of thumb, according to Mealey, is to evaluate which option offers the biggest return on your investment.

“If the long-term rate of return on the 401(k) plan will be higher than the mortgage, and there is a comfort level with the risk involved, it may not be advantageous to pay off the mortgage,” said Mealey.

When it makes sense to pay down the mortgage:

If you have a variable interest rate and rates are on the rise, paying off your mortgage may be more appealing. Also, if you are considering (or think you may be interested in) taking out a reverse mortgage at some point, having your home paid off or paid down significantly will help you qualify.

For some folks, the simplest reason to pay off the mortgage is just so they can sleep better at night. Being free of mortgage debt can be very liberating, and as long as you’ve got ample assets in place to cover your retirement needs, then being mortgage-free likely makes sense.

When It Doesn’t Make Sense to Pay Down the Mortgage:

Unfortunately, more and more Americans are approaching retirement age without ample assets to cover their retirement-income needs. According to the 15th annual Joint Conference of the Retirement Research Consortium, more than half (55%) of the American population aged 55 to 64 carry a mortgage on their home. Furthermore, among people aged 65 to 74, nearly half had mortgages or other loans on their primary residences. This indicates that mortgage debt (and possibly other types of debt) isn’t going away after retirement. Is this purely by choice? Or is it because more people are discovering that their retirement options are limited? It’s hard to say for sure.

A lot of financial experts say you shouldn’t pay off your mortgage early because you’re essentially denying yourself beneficial tax deductions and opening yourself up to increased taxation on your current income. However, it’s impossible to provide an answer that will ring true for everyone.

The most responsible thing you can probably do is consult your financial advisor before making any major decisions about your mortgage or retirement. He or she will be able to evaluate your situation, help plan out your financial future, and see whether or not a mortgage will fit in with that strategy.

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