Retiring, Should You Pay Off Your Mortgage?

For many, paying off their mortgage was a rite of passage after 30 years, followed by retirement. This scenario is no longer the norm: According to research conducted by Fannie Mae’s Economic and Strategic Research Group, Baby Boomers, born between 1946 and 1965, are carrying more debt than earlier generations at this age and are less likely to own their homes at retirement age than generations before them.

The benefits of paying off a mortgage for retirees or those nearing retirement depend on income, mortgage size, savings, and the ability to deduct mortgage interest from income taxes.

Consider the following: 

  • Compared to previous generations, Americans born between 1946 and 1965 carry more mortgage debt.
  • It may make sense for retired people, or those about to retire who have a high-interest mortgage and cannot deduct the interest, to pay off their mortgage may make sense.
  • A mortgage should never be paid off at the expense of a retirement account.

When to keep making mortgage payments

For retirees who can afford monthly mortgage payments without sacrificing their standard of living, monthly mortgage payments make sense. A low-interest mortgage (less than 5%) and tax-deductible interest make it a good option for retirees or those just about to retire in a high-income bracket. 

However, if paying off your mortgage would mean not having a savings cushion for unexpected costs or emergencies such as medical bills, it is better to keep making payments. 

It makes sense for retirees who can afford to continue making mortgage payments and benefit from the tax deduction. Over the next few years, if you intend to retire and have the funds to pay off your mortgage, you might consider doing so, especially if those funds are in a low-interest savings account. It is best to do this if you have a well-funded retirement account and a substantial emergency fund.

When a reduced fixed income makes it difficult to afford mortgage payments, paying off the mortgage ahead of retirement makes sense. Without monthly mortgage payments, you won’t have to withdraw funds from your retirement account to cover them in retirement.

Retirees should avoid tapping retirement funds.

You shouldn’t withdraw money from a retirement account such as an IRA or 401(k) to pay off a mortgage. The tax hit of withdrawing a large amount from a retirement plan before age 59.5 and the early-payment penalty can push you into a higher tax bracket. Even if you wait, taking a large distribution could push you into a higher tax bracket.

Also, it isn’t a good idea to fund a retirement account while paying off a mortgage. Making maximum contributions to retirement plans is essential for those approaching retirement.

According to recent research, most people are not saving enough money for retirement. The National Institute on Retirement Security reported in September 2018 that 57% of working-age people do not have retirement accounts. According to the report, workers with retirement accounts have an average balance of $40,000, even if they have accumulated savings.

How to pay off or reduce your mortgage

There are a few ways you can pay off your mortgage early or at least reduce your payments before retiring. By making biweekly payments rather than monthly ones, you’ll make 13 payments yearly instead of 12.

If refinancing your mortgage will result in a lower interest rate and a shorter loan term, you can also do so. Refinancing could benefit you in the long run but hurt your net worth. Mortgages, new or old, are liabilities subtracted from a household’s assets.

Another option is to downsize by selling your home if you have a larger one. Your profit from the sale might allow you to buy a smaller home outright with the profit from the sale, leaving you mortgage-free. Overestimating the value of your current home, underestimating the cost of a new house, ignoring taxes, and overlooking closing costs are some pitfalls to avoid. While paying off a mortgage and owning a home outright before retiring can provide peace of mind, it isn’t for everyone. To make the right choice, you should consult a financial advisor if you are a retiree or a few years away from retirement.