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September 17, 2021

Should you pay off your mortgage before retiring?

Deciding whether to pay off the house ranks as a top retirement planning decision. Retirees who can afford to pay off the mortgage in one lump payment, must both weigh financial and emotional factors into their decision. However, retirees can benefit from understanding both sides of the debate. This will help retirees evaluate their own circumstances to make the decision for themselves.

When paying off the mortgage makes sense

The idea of owning your home outright, and a debt-free retirement have obvious appeal. These are some of the major benefits of getting rid of your biggest debt early in retirement.

  • Lower monthly costs. An obvious reason to pay off a mortgage early in retirement is the improved cash flow. When you pay off your house, you only need cash flow for maintenance, taxes, and insurance. This can save hundreds or even thousands of dollars each month in cash flow.
  • Risk-free return. Paying off the mortgage is akin to a risk-free investment return. If your mortgage is 3%, and you have 13 years remaining on the mortgage, you achieve a 3% return on your money for that 13 years. With low returns on bonds and other lower-risk assets, paying off the mortgage may make financial sense.
  • Peace of mind. A paid-off house can offer retirees tremendous peace of mind. Having a paid off home can help you live frugally if market performance suffers during retirement. Retirees with paid off homes can enjoy comfortable place to live no matter what is happening in the stock market or how the markets perform.

When keeping a mortgage during retirement makes financial sense

Despite the tremendous benefits of paying off the mortgage, it may make sense to keep the loan in place into retirement. Retirees will want to weigh some of these financial possibilities before selling assets to pay off a mortgage.

  • Paying off the mortgage depletes your entire savings. Retirees who don’t have substantial retirement savings may not want to deplete their nest egg all at once. Using cash-flow from Social Security may make more financial sense. This will allow your nest egg to fund other aspects of retirement down the road.
  • Faster asset growth. Retirees often need  to sell assets to pay off their mortgage. However, they may be financially better off if they let those investments grow over time. Retirees can withdraw a bit of money each month, but keep the bulk of the money invested. Keeping the money invested allows the bulk of the money to grow. With this disciplined approach the retiree is likely to have some extra money invested to fund other aspects of their life.
  • Negative tax consequences. Selling assets from a 401(k) or a traditional IRA results in taxation on the amount withdrawn from the account. Withdrawing a large sum from the account could bump a retiree up several tax brackets. This could lead to a very expensive repayment compared to paying off the mortgage a little at a time.
  • Only a few years remaining on the mortgage. Retirees who have a few years left on the mortgage may not see a huge benefit from eliminating it early. During the first few years of retirement, you may have some opportunity to earn extra money through selling old items, taking on part-time work, or consulting. That extra money can keep your cash flow up during the few years your mortgage remains.

Some special scenarios to consider

Retirees who have carefully considered both sides may still be undecided about whether to pay down the mortgage. In those cases, a few special circumstances may tip the scale in favor or against paying down the mortgage. These are a few of the common circumstances that may affect a retiree’s decision.

  • Intending to downsize. People intending to downsize within a few years of retirement may not need to worry as much about paying off a mortgage before retirement. After the sale of a larger home or a home in a more expensive area, you may be able to pay for their less expensive home using the money from the sale of your home. Rolling equity into a new home purchase can leave you with a paid-off home paid-off without having to make large withdrawals from an investment account.
  • Substantial taxable investments. Retirees who have substantial taxable investments face a different decision than those who must rely on retirement funds to pay down the mortgage. Those with taxable investments will have to pay capital gains on their investments, but the gains may not bump them up to a higher income tax bracket. That could make the lump sum payment worth it. The Retirement Budget Calculator may help you decide which decision is likely to be better in the long run. However, you should also factor in your peace of mind when you run the numbers.
  • Willing to take on a reverse mortgage. Home Equity Conversion Mortgages (HECM) or reverse mortgages are loans available for those 62 and older. Retirees may qualify for a HECM to pay off the remainder of the mortgage without taking a lump sum. Those who qualify for a HECM won’t have to make monthly mortgage payments, and they cannot lose their house to loan foreclosure. However, the reverse mortgage leads to declining home equity, and retirees cannot expect their heirs to receive a free and clear house following their death. If you have a reverse mortgage you still must pay for taxes, insurance and maintenance so not all housing expenses are eliminated.

How to run the numbers

The Retirement Budget Calculator can help aspiring retirees understand the financial implications of keeping or paying off the mortgage. To start, people can review the scenario if they choose to keep the mortgage. By entering their mortgage information (especially the end date of the mortgage), they can see how their various retirement benchmarks look.

To demonstrate the “pay off” option, retirees can remove the principal and interest payments from their monthly budget. However, they will need to add in a one-time payment for the mortgage payoff (and associated taxes). A couple that owes $75,000 on their house and has a 22% effective tax rate will need to have a $96,153.85 one-time expense. Retirees will want to review their retirement benchmarks and compare the "Future View" to the previous scenario. If both show plenty of portfolio longevity, the decision can come to down to peace of mind. However, those that see assets depleting too quickly may be better off holding onto the mortgage, downsizing, or using a reverse mortgage.

Of course, the Retirement Budget Calculator uses averages to model one likely financial scenario. However, you should use this as one data point when making your decision since market returns and circumstances can vary.

Invest or Pay Down Mortgage?

In the RBC Nerds community portal, Kari asked this age old question. Pay down mortgage or invest?  Given low mortgage rate of less than 3% on our 15 year mortgage, I tend to invest over paying down the mortgage. (She provided additional details in the post but I wanted to give you a peek into the conversations around this topic.)

Here is what John had to say:
You don't mention what you are doing with respect to tax-advantaged retirement accounts. I would make sure you get any matching funds that are available as a higher priority than paying off the mortgage. I would also prioritize getting money into Roth IRA (use back-door Roth if you need to) over mortgage. If the choice is between paying off the mortgage in 5 years versus investing in the brokerage, you have to guess whether you will make more than your mortgage rate (after taxes) in the brokerage account over those 5 years. My guess is that is likely, but that's my guess and you have to make that call for yourself (depending on your asset mix and risk tolerance). There is a risk that we could have a long-term bad market (like the 2000s), so you have to think about whether you can stomach that risk. If you can't, then maybe hedge your bet and split your excess funds between the mortgage and brokerage.

Brian Says:
“I tend to invest over paying down the mortgage”.

I think this is the right move. With a mortgage of less than 3%, it makes more sense to me to have your money work better for you. With investing, your likely to have gains more than that. Plus with compounding, it is better to invest as much as you can earlier (when younger).

It would be wise to meet with a financial/retirement advisor. Many factors to consider with your question. How much retirement savings do you have? When do you plan to retire? Do you want to be cash poor and miss out on family experiences (life is short)? Will your mortgage be paid off by the time you retire (taking a mortgage into retirement is a big expense)? Etc…

Gordon says:
I enjoyed reading the comments and believe you can make a strong financial case to invest rather than pay off the mortgage due to the historically low-interest rates. Three things I would consider are:
1.) I've never talked to anyone who regretted paying off their mortgage.
2.)Borrowing always presumes the future. 
3.) Most important because you mentioned you are married - Make sure your spouse agrees with the plan. 

Melvin says:
IMHO, in addition to the low mortgage interest rate, one of the reasons for keeping the 15 year mortgage is your youth. You are blessed with resources, and just as importantly, Time, to pay off your 15 year mortgage before retiring, and invest funds instead of paying down the mortgage early, thus setting yourself up for a high degree of success to make your plan work based on your due diligence. The thoughts provided by commenters are thought-provoking, and a financial advisor can increase your due diligence.   

William says:
I paid off my home many years ago and then continued to pay myself a mortgage via investing.   To quote Larry Burkett, do not presume upon the future and get yourself out of all debt.   The question I ask people who grapple with this question is this:   if your home was already paid off, would you take out a loan against it to invest in the stock market?


In addition to all of the great feedback provided by other people in our community, we call ourselves the RBC Nerds, we also recently contracted with a Certified Financial Planner to help moderate discussions and provide a professional perspective to these questions and conversations in the community portal. Our local CFP provided a link to a great article by Fidelity on this subject and essentially broke it down into 4 additional areas to consider.
1.) What are your goals?
2.) What is the math problem?
3.) Compound interest pays.
4.) Both!

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