Rethinking Mortgage Payments in Retirement


March 18, 2021 (Updated on July 19, 2023)

3:06 min

Houses sitting on top of coins

Traditionally, paying off a mortgage before retirement was considered a financial milestone. However, it may not always be the most advantageous move for retirees.

Traditionally, paying off a mortgage before retirement was considered a financial milestone. However, it may not always be the most advantageous move for retirees. Several factors, including income, mortgage size, savings, retirement plans, and tax advantages, should be carefully evaluated. Let's explore the pros and cons of paying off your mortgage before retirement to help determine which option is best for you.

Pros of paying off your mortgage:

  • Availability of Funds: Eliminating your mortgage payment frees up a significant portion of your monthly expenses, providing you with more financial flexibility.
  • Savings on Interest: Paying off your mortgage saves you money on interest payments. Although you may lose the mortgage interest tax deduction, the overall savings from eliminating debt can be substantial. As you approach the end of your mortgage term, a larger portion of your payment goes towards the principal, reducing the tax deduction amount.

Cons of paying off your mortgage:

  • Insufficient Retirement Savings: It's crucial to prioritize building retirement savings. With retirement accounts offering tax-deferred growth, it is advisable to avoid using retirement savings to pay off your mortgage.
  • Inadequate Cash Reserves: Exhausting your cash reserves to pay off your mortgage can leave you feeling financially vulnerable. Experts recommend maintaining a reserve of three to six months' worth of living expenses for emergencies and unforeseen circumstances.
  • Higher Interest Debt: Before paying off your mortgage, evaluate whether you have any high-interest debt, such as credit card debt. Prioritize paying off non-deductible debts with higher interest rates to optimize your overall financial situation.
  • Opportunity Costs: Consider comparing your mortgage interest rate with the after-tax rate of return on low-risk investments. If the potential return on investments exceeds your mortgage interest rate, it may be a better financial decision to keep your mortgage and invest the funds instead.

Strategies to Pay Off or Reduce Your Mortgage:

  • Make More Frequent Payments: If your mortgage permits it, consider making additional principal payments each month or sending in partial lump sums. This approach can save you money on interest and reduce the loan term. However, ensure that you balance your savings goals with other financial obligations.
  • Refinance: Explore refinancing options to reduce your debt over time. Refinancing can provide a shorter loan term and lower interest rates, potentially saving you more money in the long run. Evaluate the cost-benefit analysis carefully to avoid increasing your overall debt.
  • Downsizing: Assess whether your current housing expenses align with your needs and financial goals. Downsizing to a smaller or less expensive home may allow you to sell your existing property, purchase a new one outright, and become debt-free. Consider the profit from the sale, potential tax implications, and closing costs.

Deciding whether to pay off your mortgage prior to retirement requires careful consideration. While it can offer a sense of accomplishment, it may not always be the optimal financial choice. Consult with a financial advisor to assess your overall financial situation and determine the best path for you.


Should You Pay Off Your Mortgage Early, Before You Retire?, Charles Schwab

Should You Pay Off Your Mortgage Before You Retire, U.S. Money News

Should Retirees Pay off Their Mortgage?, Investopedia

Investing involves risk including the potential loss of principal. No investment strategy, including diversification, can guarantee a profit or protect against loss. The information presented here should only be relied upon when coordinated with individual professional advice. The information provided in these articles is intended for informational purposes only. It is not to be construed as the opinion of Central Investment Advisors and/or its subsidiaries and does not imply endorsement or support of any of the mentioned information, products, services, or providers. All information presented is without any representation, guarantee, or warranty regarding the accuracy, relevance, or completeness of the information.

Category: Retirement

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