Retirement planning often includes the goal of eliminating mortgage payments before leaving the workforce behind. This strategy is predicated on the notion that cutting costs and doing away with a mortgage while living on a fixed income makes it simpler to make ends meet in retirement.
However, is paying off your mortgage the best course of action always? Some experts argue that there might be drawbacks to devoting a substantial amount of your finances to repaying a home loan. Furthermore, keeping a mortgage into retirement may have advantages, such as the ability to deduct interest payments from your yearly taxes.
Still, this may not be the best move for everyone. Your mortgage interest rate, your projected retirement income, and the amount of liquidity you’ll give up to pay off your mortgage are the three most crucial considerations.
Retirement planning often includes the goal of eliminating mortgage payments before leaving the workforce behind, This approach is based on the idea that it’s easier to make ends meet in retirement by reducing expenses and not having to deal with a mortgage while on a fixed income
But is eliminating your mortgage always the best approach? Some experts suggest there may be downsides to using significant financial resources to pay off a home loan. What’s more, there may actually be benefits to bringing a mortgage into retirement—including using the interest payments as a deduction on your annual tax bill.
The Case for Keeping Your Mortgage in Retirement
In some cases, carrying a mortgage into retirement can be a smart financial move. Here are a few reasons why:
- Low Mortgage Interest Rates: If you have a low mortgage interest rate, it may be more beneficial to invest your money instead of paying down your mortgage. The average stock market return is around 6.5% to 7%, while the average mortgage interest rate is around 3%. This means that you could potentially earn more money by investing your money than you would save by paying down your mortgage.
- Tax Deductions: The interest you pay on your mortgage is tax-deductible. This can be a significant benefit, especially if you are in a high tax bracket. If you itemize your deductions, the mortgage interest deduction can help you reduce your taxable income and save money on your taxes.
- Guaranteed Income: If you have a guaranteed source of income in retirement, such as a pension, Social Security, or fixed annuities, you may not need to worry as much about eliminating your mortgage payment. This is especially true if you are in a higher income bracket and have a low mortgage interest rate.
The Case for Paying Off Your Mortgage Before Retirement
In other cases, it may make more sense to pay off your mortgage before you retire. Here are a few reasons why:
- High Mortgage Interest Rates: If you have a high mortgage interest rate, it may be worth paying it off as soon as possible. This will save you money on interest payments in the long run.
- Limited Income: If you expect to have limited income in retirement, you may want to eliminate your mortgage payment before you retire. This will free up more money each month to cover your living expenses.
- Peace of Mind: Some people simply prefer to be debt-free in retirement. If you value peace of mind, paying off your mortgage before you retire may be the right choice for you.
The Bottom Line: There’s No One-Size-Fits-All Answer
The choice to pay off your mortgage ahead of time or not is a personal one. The best option for you will rely on your unique situation; there is no right or wrong answer.
Here are some factors to consider when making your decision:
- Your mortgage interest rate
- Your expected retirement income
- Your current debt load
- Your risk tolerance
- Your personal preferences
It’s important to talk to a financial advisor to get personalized advice on whether or not to pay off your mortgage before retirement. They can help you assess your individual circumstances and make the best decision for your financial future.
Additional Resources:
- Investopedia: Should Retirees Pay Off Their Mortgages?
- Fortune Recommends: Should You Have a Mortgage in Retirement? Pros and Cons
Remember, the decision of whether or not to pay off your mortgage before retirement is a big one. Take your time, do your research, and talk to a financial advisor before making a decision.
If you have a low mortgage interest rate, investing might be the better option
Those who bought a house or refinanced their mortgage before the recent trend of interest rate hikes are probably going to have locked in a very low mortgage interest rate, E2%80%94 possibly in the 3% range.
Investing the extra cash to create a reliable passive income stream for your retirement years may be a more financially advantageous decision than using it to pay off mortgage debt at such a low interest rate. This is especially true when you take into account that the average stock market return is typically somewhere around six. 5% to 7%, according to data from McKinsey & Company.
“For those who are long-term investors and can tolerate stock market fluctuations, there can be times that you’re able to earn more on your investments than what you would be paying interest-wise on your mortgage,” says Courtney Myers, a financial advisor with the advisory, investment, banking, and insurance firm Thrivent.
The mortgage interest tax deduction might be less valuable if it’s your only one
Another thing to think about when determining if carrying a mortgage is a good option for you is the total amount of deductions you’re itemizing on annual tax returns.
The Tax Cuts and Jobs Act of 2017 made itemizing deductions on tax returns more challenging. The standard deduction now sits at $25,900 for married individuals and $12,950 for single filers, making qualifying for itemization difficult. Paying mortgage interest, however, may help push retirees above the standard deduction threshold and allow for itemizing. This plan makes sense if you typically have several other types of deductions each year in addition to mortgage interest.
“There are several factors that should be considered…and it depends on your unique circumstances,” says Myers. This would probably be an option for you, for instance, if you had very high medical bills, capital losses, or other deductions. But, you might not be over the standard deduction amount if your only deduction is mortgage interest, so you wouldn’t gain anything by keeping your mortgage until retirement in terms of tax deductions. ”.
One more caution that should be noted is that mortgages are frequently designed so that, as the loan matures over time, a smaller percentage of the monthly payment goes toward interest. The tax benefits of keeping the loan may be much less valuable depending on how long before retirement the mortgage was established.
Why You Should NOT Pay Off Your Mortgage Early
FAQ
Should a retired person pay off their mortgage?
At what age should you no longer have a mortgage?
Is it better to retire with or without a mortgage?
At what age do most people pay off their house?
Should you pay off your mortgage if you retire?
Here’s a look at more retirement news. He also pointed out that if you’re paying, say, 2.5% on your mortgage and you pay it off, you essentially just earned that rate on the money you used to retire the loan. “It would be a risk-free, tax-free, 2.5% return,” Roth said.
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. Generally, it’s not a good idea to withdraw from a retirement plan such as an individual retirement account (IRA) or 401 (k) to pay off a mortgage.
Are retired Americans still paying off their mortgages?
About 44 percent of retired Americans between the ages of 60 and 70 are still paying off their mortgages. Many of them expect to be paying it for the next eight years. Note that most of those folks bought their homes more than 20 years ago, and either financed or refinanced their mortgages during the low-interest years.
Should you knock out your mortgage before retirement?
If you’re paying 7% or more on your mortgage, then it could very much make sense to knock out your home loan balance ahead of retirement. But if you’re paying 3% on your mortgage, then it could be smarter to carry that mortgage into retirement and just keep making your monthly payments.