Retirement planning often includes the goal of eliminating mortgage payments before leaving the workforce behind. This approach is based on the idea that it’s easier to make ends meet in retirement by reducing expenses and not having to deal with a mortgage while on a fixed income.
But is eliminating your mortgage always the best approach? Some experts suggest there may be downsides to using significant financial resources to pay off a home loan. What’s more, there may actually be benefits to bringing a mortgage into retirement—including using the interest payments as a deduction on your annual tax bill.
Still, this may not be the best move for everyone. The most important factors to weigh are your mortgage interest rate, expected retirement income, and how much liquidity you’ll sacrifice to eliminate your mortgage.
When it might not be make sense to carry a mortgage into retirement
For many retirees, being free of mortgage payments in time for retirement is becoming a thing of the past. The oldest segment of baby boomers—individuals born between 1946 and 1951—are far less likely to have paid off their mortgage prior to retirement, according to TIAA. And in some cases, that may be a deliberate decision.
About 30% of TIAA clients in retirement or within one year of retirement continue to maintain a mortgage.
“While the goal for many retirees is to minimize the amount of debt they have during their retirement years, there are pros and cons to having a mortgage in retirement,” says Jarrod Fowler, head of TIAA’s investment and advisory center.
There are various scenarios in which paying off your mortgage aggressively may not necessarily be the most advantageous financial decision.
If you have a low mortgage interest rate, investing might be the better option
Individuals who purchased a home or refinanced their mortgage prior to the recent trend of interest rate hikes are likely to have locked in a very low mortgage interest rate—perhaps in the 3% range.
With a rate that low, using your free cash to pay down mortgage debt may not be as financially valuable as investing the money instead to develop a passive stream of income that you can rely upon during retirement years. This is particularly true when considering that the typical average stock market return is in the neighborhood of 6.5% to 7%, according to data from McKinsey & Company.
“For those who are long-term investors and can tolerate stock market fluctuations, there can be times that you’re able to earn more on your investments than what you would be paying interest-wise on your mortgage,” says Courtney Myers, a financial advisor with the advisory, investment, banking, and insurance firm Thrivent.
The mortgage interest tax deduction might be less valuable if it's your only one
The total deductions you're itemizing on annual tax returns are another factor to consider when deciding whether carrying a mortgage is a good option for you.
The Tax Cuts and Jobs Act of 2017 made itemizing deductions on tax returns more challenging. The standard deduction now sits at $25,900 for married individuals and $12,950 for single filers, making qualifying for itemization difficult. Paying mortgage interest, however, may help push retirees above the standard deduction threshold and allow for itemizing. This plan makes sense if you typically have several other types of deductions each year in addition to mortgage interest.
“There are several factors that should be considered…and it depends on your unique circumstances,” says Myers. “For example, if you had extremely high medical bills, capital losses, or other deductions…then this would likely be an option for you. However, if your only deduction is mortgage interest, you may not be over the standard deduction amount and wouldn’t benefit from carrying your mortgage into retirement for tax deduction purposes.”
Yet another caveat worth noting is that mortgages are often structured in such a way that a decreasing portion of the monthly payment is devoted to interest as the loan matures over the years. Depending on how long before retirement the mortgage was established, this may mean the tax benefits of maintaining the loan are far less valuable.
When it makes sense to carry a mortgage into retirement
There are other instances as well when paying your mortgage down aggressively prior to retirement may not necessarily be the most financially beneficial approach.
For instance, if you don’t have a lot of debt otherwise, and expect to have a guaranteed source of income in retirement, such as a pension, Social Security, or fixed annuities that will cover at least two-thirds of your retirement living expenses, then eliminating a mortgage payment may not be as critical. This is particularly true for those in a higher income bracket, as well as those with a minimal mortgage interest rate.
Additionally, if pulling money from a tax-advantaged retirement plan such as a 401(k), 403(b), or IRA during retirement will push you into the next tax bracket, you may want to forgo paying down your mortgage and instead put the money into savings. This may be an especially wise move if you do not have an adequate emergency fund established or are sacrificing your savings in order to pay more on a mortgage.
“It’s important to have an emergency fund of six to 12 months in living expenses readily available,” says Fowler.
When it does not makes sense to have a mortgage in retirement
The decision to carry a mortgage into retirement is highly personal and will not make sense for everyone. For instance, if you expect to have limited income in retirement and may not be able to reliably make mortgage payments, then eliminating this debt ahead of time may be the best move.
Additionally, if you have many other types of debt and expect to continue to have these debts well into retirement, you may want to eliminate your monthly mortgage bill.
“It doesn’t make sense to have a mortgage in retirement if you don’t have a strategy for how to fund it. You should have enough income for both your mortgage and your fixed expenses,” says Myers. “We can’t predict the future and never know when the unexpected could happen. Therefore, it’s important to plan for the worst-case scenario and determine whether you’d be able to pay for your mortgage during those times. If funding one would be a challenge for you, then you shouldn’t carry it into your retirement.”
The takeaway
There are some occasions when aggressively paying off a mortgage may not be the best long-term plan. This includes when your mortgage interest rate is particularly low, and the money you might direct toward additional mortgage payments can instead earn better returns by being invested.
But there is no one-size fits all answer to this question. Everyone’s situation is unique.
Before making such an important decision, consider working with a financial advisor who can look at the total financial picture and help determine whether carrying a mortgage into retirement makes sense for you.
