Aging Options

5 reasons to pay off your mortgage before you retire

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Some notable and financially astute people suggest you hold off on retiring your mortgage early and consider investing extra money in retirement savings plans instead.  After all, the theory goes; if you take that extra cash and invest it, you will have compounding interest on your side.  There are other advantages to using that money to invest.  One is that with mortgage loan rates so low, you could invest in an investment portfolio with a much better than even shot at beating the low mortgage rate.  (Here’s how you can calculate that.)  However, the reason this discussion never quite goes away is that there are really good reasons to pay your mortgage off early and certainly by the time your retire.  So, let’s look at them.

  1. If you pay your mortgage off early, you eliminate the need to draw more money from stocks and funds to make monthly payments when the market is in free fall.  Not only does that allow you to have more control in timing but also it can keep your taxes low if you aren’t taking a big chunk out each month just to pay for housing.  That can be doubly important since Social Security can be taxed if income goes above a certain level.
  2. Most financial experts say that retirement income needs to be somewhere between 70 to 100 percent of your pre-retirement income.  However, housing costs for older Americans remains the single highest spending category.  An EBRI report found that on average, retired households spend about 80 percent of what working households spend, while their earnings are about 57 percent of working households.  For people 65 and older, housing accounts for 40 percent of their spending.  By wiping at least part of the expense equation down, retirees can bring their spending more in alignment with their income, an observation seconded in an AARP article by Jane Bryant Quinn who notes that having a mortgage after retirement is a risky bet since having a mortgage puts you in jeopardy of having more expenses than you have income.
  3. According to the Motley Fool, paying off the mortgage, after you’ve maxed out retirement accounts, is a solid retirement strategy.  Many financial advisors don’t recommend paying off your mortgage if in order to do so you reduce or stop contributing to retirement accounts but after those things are taken care of paying it off can provide more control.  Having a home free and clear provides an ability to increase or decrease your spending as you wish.  Only about 29 percent of retirees are debt-free but being debt free means financial independence.  Financial independence leads to a better night’s sleep, fewer worries about cash flow and fewer concerns about employment.
  4. You can get more from a reverse mortgage if you decide at some point to get one since reverse mortgages consider your equity in determining your loan amount.
  5. If your home is paid off your heirs likely receive a bigger inheritance since they won’t have to pay off your home.

Finally, if paying off your mortgage before retirement won’t happen, consider whether it might be in your interest to downsize before your retirement.

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