04 Feb Should You Pay Off Your Mortgage Before You Retire?
Conventional wisdom dictates minimizing expenses if you want to stretch your retirement savings as far as possible. Traditionally, this has included paying off your home mortgage. However, a 2018 survey by a national mortgage broker indicates that practice may be changing. In fact, the survey found that 44 percent of Americans between 60 and 70 years of age still have a mortgage when they retire.
A 2014 report by the Consumer Financial Protection Bureau (CFPB) states that older Americans today are carrying more debt—including mortgage debt—into retirement than in previous decades. The CFPB suggests that the reasons for this include the refinancing boom of the early 2000s, consumers purchasing properties later in life, smaller down payments on homes, and the rising popularity of home equity loans.
Another reason to postpone mortgage payoff, which was not addressed by the CFPB, is that it may make financial sense to do so. I encourage you to decide on a personal course of action only after carefully evaluating factors including your total retirement savings, investments, and cash flow. If you recognize yourself in any of the following scenarios, you may benefit from continuing to make mortgage payments into your golden years.
- Your mortgage interest rate is lower than what you’re earning on your investments.
Mortgage interest rates have remained near historical lows for years and should continue to do so for some time. Freddie Mac, a government-sponsored enterprise that buys home mortgages and sells mortgage-backed securities, expects the interest rate on a 30-year fixed-rate mortgage to drop to an average of 4 percent in 2020.
If you’d have to sell some of your investments to pay off your mortgage this year, and those investments are earning or expected to earn more than that 4 percent, then it may make sense to capitalize on your returns and continue to make monthly mortgage payments.
- You have to spend your savings in order to pay off your mortgage.
An emergency savings fund is as important in retirement as it is during your working years. When you’re younger, most experts recommend stashing at least three to six months’ worth of living expenses in a savings or money market account to cover unexpected expenditures such as auto repairs, home repairs, or a layoff. In retirement, you may want an even larger cash cushion to fall back on—especially in the event of an extended bear market in which your investments may generate lower returns.
If you need to make a significant dent in your savings to pay off your mortgage, it may not make sense to do so. Without an emergency savings fund at hand, a roof repair or major medical scare could require you to take out a home equity loan or high-interest credit card debt, eliminating any benefit of the early mortgage payoff.
- You’re still carrying credit card debt.
As noted earlier, mortgage interest rates are quite low and expected to remain so. The average credit card interest rate, however, is currently above 15 percent. Before you consider paying off your mortgage early, it may make more sense to prioritize paying down any credit card balances you’ve been carrying. Start with your highest-interest credit card and work your way through them from there to get the most debt-reduction bang for your buck.
- You want to maximize your tax benefits.
If you routinely itemize deductions on your taxes, including the mortgage interest that you’ve paid can reduce your annual tax burden. Additionally, diverting money into your 401(k)s, 403(b)s, and IRAs may net you tax savings as well. Worth noting: if you’re over the age of 50, the IRS allows for catch-up contributions to your 401(k) plan. In 2020, you can sock away an extra $6,500 (on top of the baseline $19,500 limit).
While paying off a home mortgage will always be an achievement worth celebrating, I hope the considerations outlined above will help you make the best decision for your personal financial situation in retirement. If you decide that paying off your mortgage is not the right course of action but carrying home loan debt continues to make you uncomfortable, you can always chip away at your balance by making the occasional extra payment towards the principal. If you’d like to discuss further, please don’t hesitate to contact me.