In a recent conversation with a long-term client, Rush Griffith, a Schwab financial planner in Dallas, discussed a decision she was grappling with: paying off her mortgage or keeping her money in the stock market. Rather than watch her investments weather the ups and downs of the market, the soon-to-be retiree sold a significant portion of her stocks and paid off her roughly $135,000 mortgage.
“When I asked her, ‘Which scenario would make you most happy?’ she quickly shouted out that no longer having a mortgage would be reaching a milestone she never thought was possible,” says Griffith.
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No brainer.
Many people strive to pay off their mortgage before they retire. It’s a legitimate objective, especially when you consider that 73% of seniors said their home is their most valuable asset, a 2021 survey by American Advisors Group found. “When you buy a home, your goal is to own it one day, and retirement is a good goal post for paying off your mortgage,” says Rob Williams, managing director of financial planning at Charles Schwab.
But wiping out your mortgage before you retire isn’t always the best financial move.
“Having fewer bills to pay in retirement makes your retirement savings go further and your mortgage payment is typically your biggest monthly expense,” says David Edmisten, founder and lead adviser at Next Phase Financial Planning in Prescott, Ariz. “However, there are other aspects pre-retirees need to consider before they use a large amount of their savings to pay off their home loan.”
It's not uncommon to retire with a mortgage. Between 1989 and 2016, the share of homeowners ages 65 to 79 with mortgage debt more than doubled, from 17% to 43%, with a median balance of $77,000, according to a report by the Harvard Joint Center for Housing Studies.
Here are scenarios in which it does and doesn’t make sense pay off your mortgage before you retire:
Do pay off your mortgage if you want to cut your expenses
Eliminating your mortgage means you’ll be crossing off what is almost certainly your largest debt and cutting your fixed monthly expenses significantly. That’s a big win. Consider: The median monthly mortgage payment for U.S. adults ages 55 to 64 is $989, according to ValuePenguin. a financial research firm.
And who couldn’t use an extra grand every month? Although you may have less in savings or investments after retiring the loan, reducing your baseline expenses will free up your cash flow for other wants and needs, such as travel, entertainment and health care–not to mention today’s soaring prices on gas and groceries.
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Do pay off your mortgage if you have a high interest rate
Your home loan’s interest rate is an important factor to weigh. Although mortgage refinancing surged during the past two-and-a-half years, with many homeowners taking advantage of record-low mortgage rates, nearly half of baby boomers said they didn’t refinance during the pandemic, a LendingTree survey shows.
If your mortgage rate is high, or you have an adjustable-rate mortgage that has already reset to a higher rate, it probably makes sense to pay off your remaining loan balance before you retire, says Edmisten at Next Phase. “If your interest rate is relatively low—say, under 3% or 3.5%—it might make sense to carry that low-interest debt and put your savings toward other things,” he says.
Do pay off your mortgage if you can make more money in low-risk investments
“Yields on government-issued bonds are very attractive right now,” says Kevin Lao, a financial planner and the founder of Imagine Financial Security in Jacksonville, Fla. Inflation-adjusted Series I savings bonds offered enticing annual interest rates of 9.62% through the end of October.
Crunch the numbers to see whether you could make more money paying off your mortgage versus investing in short-term bonds. Let’s say you have a $100,000 mortgage with a 3% interest rate. By paying off your mortgage you’d save 3% a year, effectively earning a guaranteed 3% return. But if you use the $100,000 to purchase a short-term Treasury note with an interest rate above 3%—yields on three-month Treasuries were around a pre-tax 3.34% at the beginning of October—you could nab a higher return investing the $100,000 in a short-term Treasury note, depending on the after-tax rate of return of your investment. Investing in tax-free municipal bonds is also an option to consider.
The math is a little different if you can deduct mortgage interests on your taxes. Far fewer people itemize their taxes these days because the standard deduction is so high. The Tax Cuts and Jobs Act that was passed in 2017 nearly doubled the standard deduction from $6,350 to $12,000 for single taxpayers, and today the standard deduction has risen to $12,950 for single filers in tax year 2022. As a result, fewer than 14% of taxpayers itemize under the current law.
But if you do itemize taxes, compare your after-tax mortgage rate with your after-tax investment rate. And know that if you took out or refinanced your home loan after December 15, 2017, you can deduct interest on only the first $750,000 of debt ($375,000 if married filing separately); for mortgages acquired before then, interest on up to $1 million of debt is deductible.
Thinking of investing your savings in the stock market instead of paying off your mortgage? Consider your risk tolerance. “The stock market can be very volatile in the short term, and stock market returns aren’t guaranteed,” says Schwab’s Rob Williams. “Not everyone is comfortable taking on that risk.” Generally, older adults are more financially risk averse than younger adults, and for good reason—younger adults have more time to weather market downturns.
Don’t pay off your mortgage if your cash reserves are low
“You never want to end up house rich and cash poor by paying off your mortgage,” says Brandon Ashton, director of retirement security at Cornerstone Financial Services in Southfield, Mich.
Retirees should keep 12 to 24 months’ worth of liquid savings to protect themselves from market volatility, says Kevin Lao. A home is not a liquid asset, he stresses, and, while you can always take out a home-equity loan or line of credit, it can take a long time to go through the borrowing process. It’s better to have ready cash on hand.
So, before you pay off your mortgage make sure you have a solid cash cushion. “The money doesn’t all have to be in a savings account,” Lao adds. “It’s okay to have a few other interest-bearing assets that are liquid, like short-term corporate bonds or money market accounts.”
Don’t pay off your mortgage if you have other high-interest debt
Carrying high-interest debt? You’re far from alone. Baby boomers have average credit card balances of nearly $6,000, a recent LendingTree study found. Credit Karma data pins debts even higher, reporting in May an average credit card debt of $7,285 for those born between 1946 and 1964.
“Always pay down high-interest debt first,” says Williams. “High interest rates compound and create a significant drag.” David Edmisten agrees: “You absolutely want to get high-interest debts paid off before you touch your mortgage.”
Don’t pay off your mortgage if you’re behind on retirement contributions
Take a close look at your retirement savings. If you’ve fallen behind, Edmisten suggests prioritizing “catch-up” contributions. “You can typically get a larger return on your money by making catch-up contributions as opposed to paying off your mortgage, especially if your employer offers a 401(k) match,” he says.
If you’re age 50 or older, you can add an extra $6,500 per year in catch-up contributions, bringing your total 401(k) contributions for 2022 to $27,000. Contribution limits may increase: Benefits consulting firm Mercer projects the annual 401(k) contribution limit to rise to $22,500 in 2023, with the catch-up contribution for people 50 and older forecast to reach $7,500.
Other factors to consider
For many people, there’s an emotional component to paying off their mortgage before retirement, says Michael Roberts, a finance professor at the Wharton School at the University of Pennsylvania. “You can’t discount the psychological effects of debt,” he says. “If having a mortgage is causing you an enormous amount of stress, that’s an argument in favor of paying off or paying down your mortgage. If it’s not a source of stress, it’s less of a concern.”
Another factor to consider is whether you plan to pick up part-time work in retirement, since more income in retirement can help free up cash flow. Of the 1,016 Americans age 50 and older who were surveyed by AARP in May, 57% said they expect to work in retirement for financial reasons. Among retirees who were not currently working, 25% said they think they will need to work during their retirement years out of financial need.
Before paying off your mortgage, also consider where the money is coming from. “Do you have a ton of cash sitting in the bank, or are you taking a large distribution from your 401(k) or IRA? Those are very different situations,” cautions Lao.
In addition, factor in whether you plan to move during retirement; about 226,000 Americans moved when they retired in 2021, according to a survey by HireaHelper, an online marketplace that connects consumers with local moving companies. “If you’re planning to relocate and buy a different home, you may want to put the extra cash that you have toward a down payment on your next house instead of using it to pay off your mortgage,” says David Edmisten. Using the extra cash to make a larger down payment on your new home could be a particularly good idea right now given the current mortgage market, where 30-year interest rates are approaching 7%.
Granted, attacking your mortgage “is not an all-or-nothing decision,” says Schwab’s Rob Williams. “You could pay down a large chunk of your mortgage, without paying it off completely, to shorten how long you’re going to be paying off your loan.”
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