Should You Pay Off Your Mortgage Before Retirement?
Should I pay off my mortgage before I retire, or is it okay to carry a mortgage into retirement?
This is a hotly debated question in retirement.
The truth is, there isn’t a one-size-fits-all answer. Plenty of retirees live comfortably while still making mortgage payments, while others sleep better knowing their home is fully paid off. What matters most is understanding how your mortgage fits into your overall retirement plan.
What A Paid Off Home Looks Like
For many, the emotional and psychological benefits of owning their home outright are hard to beat. Making that last mortgage payment is incredibly satisfying. When you are just paying utilities, taxes, insurance, and maintenance, there is a lot of freedom and flexibility. I’ve worked with a number of retirees who find that they are able to live quite comfortably on a modest social security benefit and perhaps a small pension without a need to touch retirement assets.
Without a mortgage, your baseline required expenses are lower. For a couple, it’s quite feasible for your required expenses to fit within your combined social security benefits which means you have flexibility in navigating market downturns.
Depending on your mortgage rate, paying off a mortgage can lower your retirement expense by paying off a higher interest rate than you can earn (after-tax) by investing in safe investments.
What Carrying a Mortgage Looks Like
Paying off a mortgage means tying up a large amount of cash in your home—an illiquid asset.
For many Americans, their home is their largest asset but it’s locked up. You cannot just use $50 of the equity to go out to eat.
If those funds could otherwise be invested for a higher return, you may be better off keeping the mortgage and letting your money grow.
While fewer retirees itemize deductions today (thanks to the higher standard deduction), in certain situations mortgage interest can still reduce taxable income. This is more common when paired with charitable giving or high medical expenses.
What Really Matters
The real problem isn’t whether you carry a mortgage—it’s not accounting for it properly.
Many people look at their retirement savings in isolation. If you have $500,000 in retirement assets and a $100,000 mortgage still to pay off, your spending power is not really based on $500,000—it’s closer to $400,000.
Why?
Because that $100,000 will need to be repaid, either in one lump sum or over time with interest. Either way, that money is already spoken for. Failing to account for this can lead to overspending or a false sense of security about your retirement readiness.
Running proper financial projections is the key to determining if you are able to sustain a mortgage in retirement or you need to build additional assets and resources to either pay it off or cover the ongoing expense.
Summary
Owning a home outright doesn’t guarantee a good retirement. Carrying a mortgage doesn’t doom it. But failing to account for the impact of your mortgage on your assets can.
Whether you keep the mortgage or pay it off, the key is to run the numbers, plan according to your goals, and be realistic about your future spending needs.
Peace of mind and financial flexibility come from knowing your plan can handle what’s ahead—mortgage or not.