Should I Pay Off My Mortgage When I Retire?

Living debt free sounds like a dream come true to most of us. Once upon a time, retirees paid off their mortgages and held mortgage burning rituals upon retirement. But times are changing and pension plans, health insurance for retirees and gold watches are becoming relics of the past.

Retirees today have a much different financial picture. Many retirements are funded by 401k plans with minimal employer contributions, Traditional and Roth IRAs and other self-funded retirement plans. This means planning for retirement looks much different than it did 30 years ago, and the answer to whether or not you should pay off your house upon retirement is not so cut and dry.

If you’re able to pay off your mortgage prior to your first day of retirement, that’s excellent news for you! But, if you’re like an ever increasing number of American retirees who plan to move and carry a mortgage on a new house, or stay in your current house and continue to carry a mortgage or take out a line of credit to make significant home improvements, don’t fret. With proper planning, it is possible to carry a mortgage into retirement.

It’s important to look at your whole financial picture when deciding whether or not to pay off your mortgage prior to retirement. Paying your mortgage each month does carry a tax benefit, but don’t overvalue this credit. Mortgage interest and property taxes are tax-deductible, but the savings probably won’t outweigh the interest you’re paying to continue carrying a mortgage. Your tax deduction is at your tax rate, which is typically less than 30%. That means 70% is not tax deductible. Lower-priced homes often won’t receive much of a tax credit at all.

It’s also important to look at how you fund paying off your mortgage while preparing to retire. If putting extra money toward your mortgage causes you to reduce the amount you’re contributing to your 401k or other retirement savings, it might not be the best decision. If your employer offers a matching contribution to your retirement savings, it could be best to take advantage of that match to the fullest rather than paying off your mortgage faster. If you’re thinking of raiding your 401k with a lump sum to pay off a mortgage, this could put you in a financial bind as well. Taking a lump sum from your 401k will cost you extra taxes and penalties if you’re under 59 ½ years old. Look at the interest rate on your mortgage versus the earnings rates on your investments. If your investment rates are higher, it may make sense to evaluate the benefits of reducing your investments for this purpose.

If you do have enough income prior to retirement to pay down your mortgage more quickly, without hurting your 401k savings, it is likely beneficial for you to enter retirement debt-free. Reducing this large monthly expense can give you peace of mind, help your retirement savings last longer and give you the flexibility to gift or leave something behind to your family after you are gone.

Making this decision is not easy, and sometimes, it helps to talk to family about long-term goals like these. A trusted financial advisor can also help you decide whether or not to pursue paying off your mortgage prior to retirement. No matter which road you choose, it will take careful planning. Today is the perfect time to start thinking about what might work best for you and your loved ones.

Wood Smith Advisors, a Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.

“Finance Made Simple” blog posts are intended for educational purposes and not for specific advice.  Each person’s situation is different.  Consult your financial advisor for advice relating to topics discussed.

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