Financial Factors to Consider When Deciding Whether to Pay Off a Mortgage Before Retirement

It’s no secret that money is an emotional topic, and I have never seen clients more adamant or defensive than when they discuss carrying a mortgage into retirement. Owning a home evokes an immense sense of pride, and rightly so. Even so, a home is most likely the single biggest purchase that people make, and it is not always feasible or even financially beneficial to pay it off by the time retirement rolls around.

Why the Baby Boomers Insist on Paying Off the Mortgage

There are many factors that fuel baby boomers’ desire to pay off their mortgages. Baby boomers are — by and large — the children of Depression-era parents. Their upbringing has led them to place a sense of security on a guaranteed dwelling. The second reason, I believe, is that the value of home ownership was instilled in them from an early age as the very cornerstone of the American Dream. A third reason is that through the 1980s and 1990s — the peak time when boomers purchased homes — home ownership was heavily encouraged by public officials, and the masses bought into this notion.

Why the Math Doesn’t Always Work

Although a few of my baby boomer clients who have insisted on paying off their mortgage before retirement succeeded, it is not the most financially prudent decision for everyone. I remind people to check with their CPA before paying off their mortgages, because doing so can have a ripple effect on their overall tax planning. Mortgage interest is usually deductible, and it is also the deduction that usually allows people to itemize on a Schedule A. Itemizing on a Schedule A opens up other opportunities for tax planning. Essentially, paying off a mortgage is not as simple as one less payment each month!

Interest rates also play into the mortgage payoff decision. Mortgage rates have been so low for so long now, many people have been able to refinance their homes at a lower interest rate. Over a long-term scenario, such as the length of a 30-year mortgage, there is a high probability based on past overall market performance that investment returns will be greater than the average mortgage interest rate. When you factor in the likely tax deduction at your own effective tax rate, that margin widens.

Based on these facts, I would argue that it is better to leave your money invested for retirement and continue making mortgage payments. If you have done the adequate saving and planning with your advisor, then there should be comfort in knowing that you will have the money to afford the mortgage factored into your retirement income.

The (False) Security Factor

Where paying off a mortgage before retirement can really affect future retirees is in creating a false sense of financial security. If they use the notion of not having a mortgage in retirement as an excuse to not save as much as they know they should, they could find themselves underprepared. For example, if it costs you $6,000 per month to run your household, but that is inclusive of a $1,200 mortgage, you may reason that it is easier to save the money needed to generate $4,800 per month in retirement than $6,000. This, however, does not take into account how the added challenge of paying off a mortgage early can affect retirement savings. The math says that you will have the same expense either way, unless you truly downsize the size and cost of your home.

Perhaps the Fear Is Really That You Are Behind

If your rush to pay off your mortgage before retirement comes from a fear that you are behind on your retirement plan, you need to work closely with an advisor to bring those numbers into focus. Even though this is probably the very thing you don’t want to do, you will find great comfort in working with someone who is empathetic and motivational, and who will coach you to get to where you need to be.

Advisory services offered through Investment Advisors, a division of ProEquities Inc., A Registered Investment Advisor. Securities offered through ProEquities, Inc., a Registered Broker-Dealer, Member FINRA & SIPC. Stable Waters Financial is independent of ProEquities, Inc.

Katie Waters is a member of the DailyWorth Connect Program. Read more about the program here.

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