In a recent conversation with a long-term client, Rush Griffith, a Schwab financial planner in Dallas, discussed a decision she was grappling with: paying off her mortgage or keeping her money in the stock market. Rather than watch her investments weather the ups and downs of the market, the soon-to-be retiree sold a significant portion of her stocks and paid off her roughly $135,000 mortgage.
“When I asked her, ‘Which scenario would make you most happy?’ she quickly shouted out that no longer having a mortgage would be reaching a milestone she never thought was possible,” says Griffith.
Many people strive to pay off their mortgage before they retire. It’s a legitimate objective, especially when you consider that 73% of seniors said their home is their most valuable asset, a 2021 survey by American Advisors Group found. “When you buy a home, your goal is to own it one day, and retirement is a good goal post for paying off your mortgage,” says Rob Williams, managing director of financial planning at Charles Schwab.
But wiping out your mortgage before you retire isn’t always the best financial move.
“Having fewer bills to pay in retirement makes your retirement savings go further and your mortgage payment is typically your biggest monthly expense,” says David Edmisten, founder and lead adviser at Next Phase Financial Planning in Prescott, Ariz. “However, there are other aspects pre-retirees need to consider before they use a large amount of their savings to pay off their home loan.”
It’s not uncommon to retire with a mortgage. Between 1989 and 2016, the share of homeowners ages 65 to 79 with mortgage debt more than doubled, from 17% to 43%, with a median balance of $77,000, according to a report by the Harvard Joint Center for Housing Studies.
Here are scenarios in which it does and doesn’t make sense pay off your mortgage before you retire:
Eliminating your mortgage means you’ll be crossing off what is almost certainly your largest debt and cutting your fixed monthly expenses significantly. That’s a big win. Consider: The median monthly mortgage payment for U.S. adults ages 55 to 64 is $989, according to ValuePenguin. a financial research firm.
And who couldn’t use an extra grand every month? Although you may have less in savings or investments after retiring the loan, reducing your baseline expenses will free up your cash flow for other wants and needs, such as travel, entertainment and health care–not to mention today’s soaring prices on gas and groceries.
Your home loan’s interest rate is an important factor to weigh. Although mortgage refinancing surged during the past two-and-a-half years, with many homeowners taking advantage of record-low mortgage rates, nearly half of baby boomers said they didn’t refinance during the pandemic, a LendingTree survey shows.
If your mortgage rate is high, or you have an adjustable-rate mortgage that has already reset to a higher rate, it probably makes sense to pay off your remaining loan balance before you retire, says Edmisten at Next Phase. “If your interest rate is relatively low—say, under 3% or 3.5%—it might make sense to carry that low-interest debt and put your savings toward other things,” he says.
“You never want to end up house rich and cash poor by paying off your mortgage,” says Brandon Ashton, director of retirement security at Cornerstone Financial Services in Southfield, Mich.
Retirees should keep 12 to 24 months’ worth of liquid savings to protect themselves from market volatility, says Kevin Lao. A home is not a liquid asset, he stresses, and, while you can always take out a home equity loan or line of credit, it can take a long time to go through the borrowing process. It’s better to have ready cash on hand.
So, before you pay off your mortgage make sure you have a solid cash cushion. “The money doesn’t all have to be in a savings account,” Lao adds. “It’s okay to have a few other interest-bearing assets that are liquid, like short-term corporate bonds or money market accounts.”
Carrying high-interest debt? You’re far from alone. Baby boomers have average credit card balances of nearly $6,000, a recent LendingTree study found. Credit Karma data pins debts even higher, reporting in May an average credit card debt of $7,285 for those born between 1946 and 1964.
“Always pay down high-interest debt first,” says Williams. “High interest rates compound and create a significant drag.” David Edmisten agrees: “You absolutely want to get high-interest debts paid off before you touch your mortgage.”
Take a close look at your retirement savings. If you’ve fallen behind, Edmisten suggests prioritizing “catch-up” contributions. “You can typically get a larger return on your money by making catch-up contributions as opposed to paying off your mortgage, especially if your employer offers a 401(k) match,” he says.
If you’re age 50 or older, you can add an extra $6,500 per year in catch-up contributions, bringing your total 401(k) contributions for 2022 to $27,000. Contribution limits may increase: Benefits consulting firm Mercer projects the annual 401(k) contribution limit to rise to $22,500 in 2023, with the catch-up contribution for people 50 and older forecast to reach $7,500.