Table of Contents
Table of Contents
People tend to balk at the idea of retiring with an unpaid mortgage. The sentiment makes sense — you may not want to use the bulk of your monthly retirement income toward those payments. But just like carrying a mortgage into retirement could have downsides, paying off a mortgage while you're still working might too. Whether or not your retirement should be mortgage-free may depend on a number of factor.
Here are some considerations.
- Paying off your mortgage eliminates a major monthly expense in retirement, reducing the income you'll need. But this should be balanced with saving adequately for retirement.
- Retiring with a mortgage means more of your retirement income goes toward mortgage payments rather than discretionary spending. But you retain potential investment growth if you don't pay it off early.
- Consider your overall financial situation, including your retirement savings and other assets/debts. This context helps determine if paying off your mortgage is advisable.
- Downsizing or refinancing your home before retirement can help reduce mortgage costs if you don't pay it off entirely. This is an alternative approach to consider.
- There's no one-size-fits-all answer. Weigh paying off your mortgage vs. continuing retirement contributions and investment growth to make the best decision for your situation.
Paying Off Your Mortgage
There are good reasons for the standard advice that you should pay off your mortgage before retirement.
- Having your mortgage paid off relieves you of what is often the largest monthly expense for most Americans, according to the U.S. Bureau of Labor Statistics.
- Since your retirement income may come partly from tax-deferred retirement accounts — such as certain 401(k)s or independent retirement accounts (IRAs) — having lower monthly expenses could mean that you're withdrawing less from those accounts and keeping your tax burden lower.
- Mortgage interest payments are potentially tax-deductible, however, which could offset some of the taxes triggered by taking distributions from your tax-deferred retirement accounts.1
- Having your mortgage paid off before retirement might give you more financial options.
Retiring With a Mortgage
Paying off your mortgage before retirement might improve your financial standing, but that's not always the case.
- If paying off your mortgage early comes at the expense of saving for retirement, or even dipping into what you've already saved, you may want to think carefully before making a decision.
- If you stop putting money away for your retirement, you could potentially miss out on compounding interest and the opportunity to grow your retirement savings.
- A large withdrawal from funds earmarked for retirement could result in an unfavorable tax consequence. You'll be taxed on the money that you withdraw from a tax-deferred retirement account, and, if you're younger than 59 1/2, you may be subject to a 10% early withdrawal penalty.
- Also, depending on how much you take out of your retirement account, you could end up in a higher income tax bracket.
How Can I Mitigate My Mortgage?
Carrying a mortgage into retirement does not necessarily mean you are stuck with a high monthly mortgage payment forever. There are a number of ways to potentially mitigate those costs.
- Downsizing your home could be a good way to make your mortgage (and living space) more manageable.
- A smaller, less costly home may suit current needs and help reduce or even eliminate your mortgage.
- Another potential option is to refinance your mortgage before you retire. While you may end up with a longer mortgage term, you may also end up with a reduced monthly payment.
The Bottom Line
When deciding whether or not to carry a mortgage payment into retirement, consider how you can mitigate your housing costs and tax burden while maximizing your retirement savings. The best approach will depend on these factors, as well as your personal needs and financial goals.
- Publication 936 (2022), Home Mortgage Interest Deduction. https://www.irs.gov/publications/p936.