4 Arguments for Retaining Your Mortgage in Retirement

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We hear it all the time, most people want to be debt free when they retire. It is all about peace of mind and wanting to be free from financial obligations. However, mortgages are considered “good debt” and, if you can afford the payments, there are good reasons to retain your mortgage even after you retire. (Particularly if you would be using savings or money that could be put into savings to pay down the debt.)

Let’s explore:

1. You Can Often Do Better with Your Money by Investing Instead of Paying Off Your Mortgage

Most long term homeowners have been able to refinance their mortgages into ridiculously low interest rates. If this is you, it is worth doing the math to determine the financial pros and cons of paying down the mortgage vs. having your money invested at a higher rate of return.

Think about it, If you have a mortgage at 3%, and you think that your investments will increase at 6%, you may be better off letting your portfolio grow while continuing to make your mortgage payments.

Don’t trust the simple example above, run a scenario in the NewRetirement Planner with your own financial data.

If you currently have a mortgage, try this:

  • Start by duplicating your baseline scenario and creating a “mortgage free” scenario. (Go to Scenario Manager.)
  • In the “mortgage free” scenario, either accelerate your mortgage payments (increase how much you pay monthly on the real estate page) or do a lump sum pay off of your mortgage (do this on the Money Flows page in the transfers section).
  • If you are accelerating payments, be sure to reflect if less money is going into savings. If you do a lump sum pay off, you will be able to specify which account is used to pay off the mortgage.
  • Use Scenario Comparisons to evaluate the value of your savings, tax consequences, cash flow, your net worth at longevity, and other metrics with the two different plans.

It is good to have different kinds of money and financial tools available to you: After tax savings, pre tax savings and maybe even debt. Debt is a financial tool, a lever that can be used to get you ahead financially.

A mortgage or debt to fund real estate investments is generally considered “good debt.” It is usually available at low interest rate and you are investing in a tangible asset that is less likely to depreciate.

When you use debt, you usually have greater financial flexibility: you have more savings available for emergencies or other spending needs. On the other hand, when you pay off your mortgage, those funds are no longer available to you – you own the property, but you don’t have that money available for other purposes unless you sell or secure a home equity loan.

Taxes can be complicated, but it is worth considering the possible tax consequences of paying off your mortgage.

The 2017 Tax Cuts and Jobs Act changed the rules for the mortgage interest tax deduction and many people can’t necessarily deduct mortgage interest because of the higher standard deduction. And, if you don’t have enough deductions, you can’t itemize.

However, putting money into retirement accounts will help most anyone qualify for tax deductions. By not paying off your mortgage, you can save funds into 401(k)s, 403(b)s and IRAs, and reduce your taxes.

In most cases, if you have to make a trade off between saving more or paying down debt, the math is likely to show that you will be wealthier if you save and invest more.

However, the majority of people take great pains to pay off their mortgage before retirement because they want the freedom and peace of mind that being debt free promises.

There are no right financial answers, just what is right for you. Do you want a mathematical or emotional decision?

NOTE: More and more Americans are carrying a mortgage when they reach retirement age. Recent data from Harvard’s Joint Center for Housing Studies, found that 46% of homeowners ages 65 to 79 have yet to pay off their home mortgages. Thirty years ago, that figure was just 24%.

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