Your home mortgage is likely to be the biggest debt you ever take on. And if you’ve moved or refinanced a few times since your first home loan, you may be years or even decades away from owning your house free and clear. But that begs the question: What about retirement? If you’re getting ready to retire or already have stopped working, does it make financial sense to keep making monthly payments? Or should you use some of your savings to retire that debt?
Traditionally, paying off the mortgage was a pre-retirement objective, but the recent trend has been to carry the debt longer. A recent study by the Center for Retirement Research at Boston College found that 41% of households with people in their 60s still had a mortgage, even though more than half owned sufficient assets to repay the loan.
Why would you hold a mortgage in retirement? Depending on your situation, you may value the tax benefits and liquidity. Consider these four critical factors.
1. Investment returns. Recently, the average 30-year fixed rate for mortgages has been between 4% and 5%. You might keep your mortgage if you think you can do better investing the money you would spend to retire it. But retirees who invest heavily in low-risk vehicles such as bank certificates of deposit (CDs) and Treasury securities are likely to come up short. And though stocks and mutual funds may provide higher rates of return, they carry greater risks, and if your portfolio plummets, you could have trouble making mortgage payments.
2. Tax breaks. You can generally write off mortgage interest if you itemize deductions. But people who claim the standard deduction—and that’s almost two out of every three taxpayers—receive no tax benefit from mortgage interest payments. So if you’re not an itemizer, it may make sense to pay off the mortgage. Also keep in mind that the tax benefit of itemized deductions will be reduced if your income is high.
3. Retirement accounts. It’s generally not a good idea to pay off your mortgage if you have to invade your retirement accounts to do it. The money you pull out of a 401(k) plan or an IRA will be reduced by taxes—at ordinary income rates of as high as 39.6%—plus you’ll be hit with an additional 10% penalty if you’re under age 59½. And you’ll be left with fewer funds to draw upon during retirement.
4. Refinancing. One alternative to paying off the mortgage may be to refinance it at a lower interest rate. That can reduce your payments, or you could use the opportunity to pull out equity you’ve built. But the deep decline in real estate values has underscored the risks of financial strategies built around home loans.
Choosing what to do about your mortgage is a major financial decision. We can help you choose the best approach for your situation.