For Americans nearing retirement age, paying off the mortgage after thirty years was once considered a milestone, but this situation is no longer typical. According to research from the Fannie Maes Economic and Strategic Research Group, baby boomers, those born between 1946 and 1965, are carrying more mortgage debt and are less likely than earlier generations to own their homes when they reach retirement age.
Depending on variables like income, mortgage size, savings, and the value of the mortgage interest deduction, it may or may not be financially advantageous for retirees or those close to retirement to pay off their mortgages.
A mortgage is a significant financial commitment, and it can be a major concern for retirees. While some people aim to pay off their mortgage before retirement, others choose to keep it. The decision of whether or not to pay off your mortgage in retirement depends on several factors, including your financial situation risk tolerance, and retirement goals.
Here are some key considerations to help you decide:
Benefits of Paying Off Your Mortgage in Retirement:
- Reduced Monthly Expenses: Eliminating your mortgage payment can significantly reduce your monthly expenses, freeing up more money for other retirement needs or wants.
- Increased Financial Security: Owning your home outright provides peace of mind and financial security, especially if you experience unexpected expenses or income fluctuations during retirement.
- Potential Tax Savings: Depending on your tax situation, you may be able to deduct mortgage interest payments from your taxes. However, this benefit is limited under the Tax Cuts and Jobs Act, which reduced the deductibility of some types of mortgage and home equity debt.
Risks of Paying Off Your Mortgage in Retirement:
- Reduced Investment Potential: Paying off your mortgage may mean using funds that could be invested for potential growth. If your investments outperform the interest rate on your mortgage, you could potentially earn more money by keeping the mortgage and investing the difference.
- Tax Implications: Withdrawing funds from retirement accounts to pay off your mortgage may trigger tax penalties and push you into a higher tax bracket.
- Loss of Liquidity: Using a large sum of money to pay off your mortgage can reduce your liquidity, making it more difficult to access funds for unexpected expenses or emergencies.
Additional Factors to Consider:
- Your Age and Health: If you are in good health and expect to live a long life, you may have more time to benefit from the financial security of owning your home outright.
- Your Retirement Savings: If you have a substantial retirement nest egg, you may be more comfortable using some of those funds to pay off your mortgage.
- Your Risk Tolerance: If you are risk-averse, you may prefer the security of owning your home outright, even if it means sacrificing some potential investment growth.
- Your Interest Rate: If your mortgage interest rate is low, it may make more sense to keep the mortgage and invest the difference. However, if your interest rate is high, paying off the mortgage could save you a significant amount of money in the long run.
Ultimately, the decision of whether or not to pay off your mortgage in retirement is a personal one. There is no right or wrong answer, and the best choice for you will depend on your individual circumstances and priorities.
Here are some additional tips for making this decision:
- Talk to a financial advisor: A financial advisor can help you assess your financial situation and develop a retirement plan that aligns with your goals.
- Consider your risk tolerance: How comfortable are you with the potential risks and rewards of different options?
- Do your research: Understand the tax implications of paying off your mortgage and the potential returns you could earn by investing the money instead.
- Be flexible: Your retirement plans may change over time, so be prepared to adjust your decision as needed.
You can decide whether or not to pay off your mortgage in retirement by carefully weighing these considerations and consulting a professional.
Avoid Tapping Retirement Funds
Generally speaking, taking money out of a retirement plan, like a 401(k) or individual retirement account (IRA), to pay off a mortgage is not a smart idea. If you withdraw before you turn 59½, you incur both taxes and early-payment penalties.
The tax consequences of taking a sizable withdrawal from a retirement plan may cause you to move into a higher tax bracket for the year, even if you wait.
Additionally, funding a retirement account at the expense of paying off a mortgage is not a smart move. In fact, those nearing retirement should be making maximum contributions to retirement plans.
Studies conducted in the last few years have revealed that most people are not saving enough money for retirement. The National Institute on Retirement Security revealed in a September 2018 report that a majority of people (57%) who are of working age do not have a retirement account. According to the report, even among employees who have saved money for retirement, the average employee only had a meager $40,000 in their account.
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 and had topped 7% by late in the year. It is improbable that anyone who took out a mortgage or refinanced one during the period of low interest rates will find better terms in the near future.
Pay Off The House or Save For Retirement?
FAQ
When retirees should not pay off their mortgages?
Is it better to retire with or without a mortgage?
At what age should you have your house paid off?
How much do I need in retirement if my house is paid off?
Should you pay off your mortgage before you retire?
No brainer. Many people strive to pay off their mortgage before they retire. It’s a legitimate objective, especially when you consider that 73% of seniors said their home is their most valuable asset, a 2021 survey by American Advisors Group found.
Can you pay off a house in retirement?
For many in retirement, paying off the house simply isn’t possible. “The best case ‘wishful thinking’ scenario is that they’ll have a cash windfall via an inheritance or the like that can be used to pay off the debt,” says CFP Rebecca L. Kennedy of Denver.
Do people retire owing money on their homes?
Increasingly, though, people retire owing money on their homes. The Federal Reserve’s Survey of Consumer Finances found that 37.6% of households headed by people age 65 to 74 had a mortgage on their primary residence in 2019. So did 27.7% of those 75 and older. In 1989, the proportions were 21.7% percent and 6.3% percent, respectively.
Should I keep my mortgage in retirement?
Sometimes it makes sense to keep your mortgage in retirement, sometimes it doesn’t. Find out what strategy works best for you. Pay Off That Mortgage Before You Retire Consider paying off the debt with the highest interest rate first.