Should I Pay Off My Mortgage Before Retirement?

By: Stacey Nickens

As you prepare for your retirement, you may be considering whether or not you should hold a mortgage in retirement. You may be considering increasing your mortgage payments in order to pay off your mortgage earlier. If you are considering moving or downsizing before retiring, you may be wondering if you should buy your house outright. Before making this decision, follow the below steps to work towards a choice that is right for you.

1. Determine how you will pay off your mortgage or how you will pay outright for a new home. Will you be using surplus cash savings? If so, make sure you will have enough cash leftover to cover 3-6 months’ worth of living expenses in the event of an emergency. You may alternatively be using funds from the sale of a home or pulling funds from an investment account.

2. Compare your mortgage interest rate to your savings’ growth rate. Your interest rate could be anywhere from 2%-7%. If you are planning to pull funds from a cash account, your savings’ growth rate may be far less than your mortgage interest rate. If you are pulling funds from an investment account, your savings’ growth rate could be much higher than your mortgage interest rate. If you are using the funds from the sale of a house or surplus cash, consider how those funds might alternatively be invested. If you were to invest those funds in a brokerage account, those funds could potentially have an average annual growth rate of 7%-10%.

3. Consider the opportunity cost. Say you plan to pull funds from a brokerage account that has an average annual growth rate of 8%. You will use these funds to pay down a mortgage with an interest rate of 3%. Doing so means you are giving up 5% in growth that you could be earning on your investments. Moreover, home equity is illiquid compared to invested equity. If you were to need those funds for something else, it would be much more challenging to pull those funds from your home than from an investment account. This is an important consideration in retirement, when unexpected healthcare, home care, and other costs can become a significant burden.

4. Consult a financial professional. At the end of the day, building a comprehensive financial plan can help you determine the best way to manage your debt and your savings. Reach out to our experienced financial planning team today to begin the process of planning for your financial future.