Key Takeaways:
- Paying off a mortgage can reduce retirement expenses and investment withdrawals, but it may also reduce the liquidity and flexibility of your assets.
- Keeping a mortgage in retirement can make sense when the interest rate is low and you have enough reliable income and liquid savings to cover the payment.
- The right choice depends on your cash flow, taxes, investment assets, healthcare needs, comfort with debt, and long-term retirement goals.
A mortgage can determine how much income you will have to spend in retirement because it will affect your overall cash flow. Expenses such as healthcare, taxes, food, utilities, travel, and other lifestyle costs must be covered after paying the mortgage.
Those with a mortgage can choose whether to keep paying on schedule, pay it off early, or do something in between, such as accelerating payments to pay it off sooner.
How the Mortgage Payment Affects Retirement Income
The size of your mortgage payment will affect how much you may need to withdraw from your investment assets, cash reserves, and other income sources.
Eliminating your mortgage will allow you to reduce the amount you need to withdraw from your investments. However, you still need to plan for expenses such as property taxes, insurance, utilities, maintenance, and unexpected repairs.
Does your mortgage payment place undue pressure on your retirement assets?
When the Benefits of Paying Off Your Mortgage Early May Be Worth It
If your mortgage interest rate is relatively high (upper single-digit or double-digit), it might make sense to pay it off or at least part of it (if allowed) as long as this does not weaken your cash reserves.
Reducing a home mortgage can help you avoid withdrawing money from other investments when the stock market suffers a downturn, when unexpected healthcare costs arise, or when other unexpected costs come up.
In the end, paying off or paying down the mortgage can improve your income situation.
Income Benefits
Lowering or eliminating your mortgage payment can lower the need to tap into your investment assets.
A smaller need for money, by eliminating or reducing your mortgage payment, can make your retirement income plan easier to manage.
You will get the greatest benefit of eliminating or lowering your mortgage when the mortgage payment is large in comparison to your income stream.
Emotional and Risk Benefits
It is not uncommon for some people to want to eliminate debt in any form, even at the expense of earning more money by keeping it invested. I have come across that situation numerous times. It is a personal belief which I respect.
By eliminating or reducing your mortgage, you may be able to reduce your emotional stress if your income is fixed or you have limited spending flexibility.
When Being Retired With a Mortgage Can Still Work
As long as you have a reliable income stream or can withdraw sufficient funds to pay your mortgage, being retired and still having a mortgage is not a mistake.
Depending on the situation, having a mortgage in retirement may make economic sense. For instance, if the mortgage has a low interest rate and/or you want to preserve liquidity, not paying it off is not a poor decision.
On the other hand, if your mortgage requires large withdrawals from your investments and leaves you with little cash for emergencies, you might want to make changes.
What to Check Before Using Assets to Pay Off a Mortgage in Retirement
Keep in mind that paying off your mortgage affects your remaining investment assets.
When using cash, retirement assets such as IRAs & Roth IRAs, and taxable investments, consider how this will affect your taxes, liquidity, investment growth potential, and your ability to stay flexible with your remaining assets.
Before paying off your mortgage, check for prepayment penalties and the payoff procedure.
Although paying off a mortgage can reduce your monthly expenses, be careful it doesn’t drain your savings, create an overly large tax bill, or leave too much wealth locked up in your residence.
Tax and Account Impact
Taking large IRA withdrawals to pay down your mortgage can create more taxable income for you and may affect what you pay for your Medicare premiums.
Selling taxable investments to reduce your mortgage will produce taxes in the form of capital gains and will likely reduce your future income potential that these investments would have provided.
Roth assets are a great source of tax-free income and therefore should be considered carefully before using such assets to pay down your mortgage.
Liquidity Impact
Always, always keep 6-12 months of expenses in cash before deciding to pay down or pay off your mortgage.
You’ll need cash for emergencies, healthcare, taxes, family support, home repairs, and everyday living.
Going too far in one direction, such as becoming house-rich but cash-poor, won’t lead to a secure retirement.
How to Compare Your Mortgage Payoff Options
Paying down or paying off your mortgage doesn’t have to be all or nothing—consider all scenarios before committing.
Possible scenarios: complete payoff, partial payoff, extra principal payments, refinancing, downsizing, or, if necessary, no changes.
Compare each scenario with your retirement income needs, tax impact, healthcare costs, and comfort with debt.
In the end, the wisest choice is the one that affords you a long-lasting retirement income stream.
Mortgage Payoff Before Retirement FAQs
1. Is it smart to pay off your mortgage before retirement?
Paying off your mortgage before you retire depends on your interest rate, cash savings, and personal peace of mind.
2. What is the biggest mistake most people make regarding retirement?
The single biggest mistake people make regarding retirement is failing to start saving and planning early enough. Waiting too long destroys the power of compound interest, meaning you must save vastly larger sums later in life to reach the same financial goal.
3. What is the 2% rule for a mortgage payoff?
The 2% rule for a mortgage payoff usually refers to either an extra-payment strategy to clear your loan faster, a traditional refinancing threshold, or a prepayment penalty cap.
4. How does paying off a mortgage affect retirement income?
Paying off a mortgage lowers your monthly expenses and reduces the amount of income you need to withdraw from your retirement accounts every month.
5. Is it bad to be retired with a mortgage?
Roughly 35% of households aged 65 to 74 still have a mortgage, making it common and creating distinct financial pros and cons.
6. Should I use retirement savings to pay off my mortgage?
Using retirement savings to pay off a mortgage is generally not recommended because it can trigger heavy taxes, a 10% early withdrawal penalty (if you are under 59½), and a permanent loss of compound investment growth.
Get Help Deciding How Your Mortgage Fits Into Retirement Income
Before deciding whether to pay off your mortgage, consider your retirement income (now and in the future), your tax situation, how much you have in liquid assets, healthcare costs, investment risk, survivor needs, and your long-term goals.
Financial planning can help you decide whether to pay off your mortgage by comparing your options.
Your goal should be to choose the best option for your situation, not just to eliminate debt. You want to stay financially strong and remain flexible with your options.
For over 40 years, Retirement Solutions has helped women view their financial future with anticipation rather than apprehension. We do that by empowering our clients through education. We believe an educated client is a client who can make the right financial decisions. As a way to introduce our services, we offer a no-cost, no-obligation 15-minute telephone conversation to determine your current situation and whether we can assist you in getting you to where you want to be financially. Simply click the link in the upper right-hand corner of the Home page of the website, “Let’s Discuss Your Financial Future”. You talk, we listen.