Are you thinking of paying off your mortgage before retiring? According to a Center For Retirement Research study most, but not all, households would be better off for it. Is paying it off right for you? As with many things in life and finances – it depends. To get the conversation started, ask yourself – do you want to stay in your house during retirement? Is it in the right city? Will you be able to take care of it as you age? Other key things to consider:
Risk: Will the after-tax return of paying it off exceed the after-tax cost of the mortgage payments? If you have more funds to invest in the market and you’re comfortable with the risk of stocks, carrying the mortgage could make sense.
Assets: If you’re conservative and hold most of your assets in bank accounts and CDs, paying off the mortgage could work in your favor – the interest you’re paying out probably exceeds the interest you’re earning in the bank account. If the assets are in a taxable investment portfolio and you’re earning more on the investments than you’re paying out on the mortgage, paying it off may be your best bet.
Taxes: For most people who itemize tax deductions, mortgage payments are fully deductible; the after-tax cost of the payments could be substantially less. In general, the higher your marginal tax bracket and the larger your mortgage interest payments, the greater the tax benefit of keeping the mortgage.
Retirement costs: Retirement brings its own risks, like increased medical costs. You may need a financial pool to cover them. If you have large amounts of assets, this may have little impact. But for most, it has major consequences. If you use your financial assets to pay off your mortgage, you’ll have to continue contributing to your portfolio to compensate for the withdrawal – which may be difficult, or even impossible.
Peace of mind: There are many legitimate factors to consider when thinking about paying off your mortgage before retiring – not all of them are logical. Owning your home outright and not having to worry about paying on it during retirement could be a major life goal and will provide you with a sense of security.
Call our office today. We can help you determine if paying off your mortgage is a better option than carrying it into retirement.
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