Should You Pay Off Your Mortgage Before Retiring?

mortgage payments illustration

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For years, it has been part of retirement planning collective knowledge that paying off your mortgage before you retire should be a top priority. But is this advice true for all homeowners and retirees? The answer is that it depends. While having a mortgage during retirement adds a hefty bill to a post-employment lifestyle, allocating more money to paying off your mortgage before retirement to the detriment of your ability to save for retirement is generally not the answer.

To determine whether paying off your mortgage before retirement is a good strategy for you, here are three questions to ask yourself:

1. What Are the Rates of Return?

One way to evaluate the decision to pay off your mortgage versus keeping more of your money in savings is by comparing the rates of return you expect to earn by following each path. Should you choose to pay off your mortgage, your rate or return is certain; you "earn" by saving the interest rate charged on your mortgage.

If you instead choose to save and invest the money, your rate of return may vary considerably. Your expectation will be determined by how you choose to invest. If you choose to invest very safely, like in a savings account, your rate of return will be quite low, likely below that of your mortgage. If you choose to invest more aggressively, you may very well earn a higher return, but will do so at a cost of significantly more risk and greater uncertainty.

For most people planning for retirement, sticking to a strict and regular savings schedule is generally more advantageous than neglecting to save because while they try to pay off the mortgage. If you get a bonus or occasionally have extra discretionary income after funding your retirement accounts, you can put that extra towards your mortgage payment.

2. What About the Home Mortgage Interest Deduction?

With every mortgage payment you make, you might benefit from a mortgage interest deduction on your tax bill. However, the benefit of the home mortgage interest deduction may be less than you think, since:

  • Your tax rate may be lower: In retirement, you’re no working and saving, which for many lowers their total income for tax purposes and their income tax rate.
  • Your payment consists of more principal and less interest: Each successive mortgage payment is comprised more of principal and less of interest than the last, reducing the size of your mortgage interest deduction on your tax return over time.
  • Your other itemized deductions are probably lower, too: Because you’re in retirement, you’re probably paying less state income tax. Since you only receive a tax benefit to the extent your itemized deduction exceeds your standard deduction, this means you get less of a tax break from your home mortgage payments.
  • You may no longer be itemizing your deductions under the new tax laws: The Tax Cuts and Jobs Act (TCJA) increased the standard deduction amounts for taxpayers. If your itemized deductions such as mortgage interest, and state or local taxes does not exceed the standard deduction amount you may no longer be benefiting from the deductions of mortgage interest.

3. Would You Prefer No Bill or No Cushion?

While it may be of comfort to avoid a mortgage bill every month in retirement, you don’t want to pay off your entire mortgage if doing so would leave you without any savings cushion. You would not want to find that you can’t afford to pay for an unexpected car or home repair without going into credit card debt because you depleted your savings to pay off your mortgage early. Ideally, you could pay off your mortgage and have significant savings remaining. Regardless, make sure you retain an emergency fund in retirement.

The questions highlighted above are all important financial considerations to keep in mind. However, there is an emotional component to this decision that cannot be ignored. After examining the financial impact of your mortgage payoff decision, you may decide the financial loss is worth the peace of mind you would receive from knowing you have eliminated your mortgage earlier than originally planned. In that case, there is nothing wrong with your decision to pay off your mortgage prior to retirement as long as it's an educated one.