I’m in my 50s: Should I Pay Off My Mortgage Before Retirement?
For many pre-retirees, the 50s is a time of serious financial planning. With retirement in your sights, you might be prioritizing savings, considering your post-retirement lifestyle, and thinking about how to tackle a number of important planning issues.
One key question? What to do about your mortgage.
Should you pay it off before you retire or just stick with the program? Unfortunately, as we tell our clients, there is no simple, one-size-fits-all answer to this question. It’s important to understand the pros and cons and consider how they relate to your personal financial situation before making an educated decision.
Here’s how to get started.
The benefits of not having a mortgage in retirement
The key argument in favor of paying off your mortgage is that it’s one less financial obligation to worry about. Without a mortgage payment hanging over your head, you’ll have lower cash-flow needs, which means lower withdrawals from your retirement accounts – which means more money for the future and the possibility of lower income taxes.
Needing less money for living expenses also means more flexibility if you get into a tough financial spot. You won’t have to keep making large withdrawals to pay the mortgage, and you can sell your home (and access its full value) if you need to.
What’s the downside?
That said, there are potential costs to focusing your financial planning efforts on paying off your home mortgage.
If you have other high-interest or credit card debts, your first order of business should probably involve paying those off. The cost of carrying debt with a high interest rate is much higher than the cost of carrying a mortgage, and it doesn’t come with any of the tax benefits that you can potentially access with your mortgage. If you’re looking to pay down debt before retiring, this is a good place to start.
Second, consider the other uses for that money. If you’re paying down your mortgage at the expense of saving for retirement, you could be setting yourself up for a precarious situation later on. Putting money towards your mortgage may help you save on costs, but it might not provide you with the asset base you need for a comfortable retirement.
Retirement: Are You Ready? The 50+ Retirement Plan Guide
How do I decide?
How the numbers work out for you will depend on the specifics of your personal financial situation.
With our clients, we generally consider the following:
- How much you’re saving for retirement each year, and what that means for a projected income from your retirement accounts.
- How your investments are allocated and the kind of long-term growth rates you’re expecting to achieve.
- How many years you have left on your mortgage, the interest rate you’re paying, and the amount you’d need to come up with in retirement to continue making payments (remember to account for income tax!).
- The other assets and income sources you’ll be able to turn to in retirement, especially if you have a sudden rise in medical expenses or another emergency.
- Any other debt balances you’re carrying and how much they’re costing in interest.
Sometimes, this information is enough to lead you to the right answer – especially if you could use more savings or if you have a lot of debt. In other cases, it’s important to consider tax strategy or more personal factors, like the risks you’re willing to take both now and in retirement.
The potential financial benefits of paying off your mortgage early:
- If you itemize deductions, your mortgage payments will be partially deductible, which could save you money today.
- Paying off your mortgage early can reduce the amount of interest you need to pay for your home and help you reduce your cash flow needs in retirement.
The other financial factors you need to account for:
- Contributions to a workplace retirement plan or a Traditional IRA are generally fully tax deductible, regardless of whether you itemize.
- The potential growth rate on investments could exceed the cost of your mortgage, depending on your mortgage interest rate and asset allocation. That could make investing more financially beneficial.
- Having full equity in your home may be less meaningful if you don’t have enough savings to cover your retirement living expenses and potential emergencies.
Don’t forget about alternative solutions
All that said, paying your mortgage early or putting that money in savings aren’t your only options.
Another possible alternative is refinancing your mortgage.
If you can get a lower interest rate, you could lower the total cost of your mortgage and even your monthly payment – freeing up more money for other priorities. Alternatively, you could keep your payments the same and reduce the time it takes to pay the mortgage. In both situations, you might find that you can accomplish both your savings and mortgage-payoff goals without having to choose one over the other.
However, it’s important to run the numbers: if you cannot get a significantly lower interest rate, it might not make sense to go through the cost and hassle of refinancing.
Finally, you could also consider balancing both priorities by adding just a little bit more to your mortgage payment. On a 30-year loan, adding one extra payment a year (so that you make 13 payments instead of 12) could reduce the loan term by about 4 years. It’s another potentially good strategy for those concerned about balancing both goals.
Whatever you choose, remember to balance the financial benefits, the retirement implications, and of course your personal financial preferences and risk concerns. Each approach has potential benefits and costs, but taking the time to find the right strategy for your situation can help you get that much closer to retirement security.
Want to make sure your retirement plans are built to last?
Your mortgage strategy is just one piece of a complex financial puzzle. Help make sure your retirement plans are built to last a lifetime by downloading our free guide to the key retirement planning issues for your 50s – and how to make the best choices for your situation.
Retirement: Are You Ready? The 50+ Retirement Plan Guide