Paying off the mortgage after 30 years followed by retirement used to be a rite of passage for many. But this scenario is no longer the norm. Baby Boomers, Americans born between 1946 and 1965, are carrying more mortgage debt than earlier generations at this life stage, and are less likely than the generations before them to own their homes outright be retirement age, according to research from Fannie Mae's Economic and Strategic Research Group.
Whether or not it makes financial sense for retirees or those nearing retirement to pay off their mortgage depends on individual circumstances and a variety of factors that need to be carefully examined and weighed. Income, mortgage size, savings and the tax advantage of being able to deduct mortgage interest all come into play.
When to Continue Making Mortgage Payments
Continuing to make monthly mortgage payments makes sense for retirees that can do it comfortably without sacrificing their standard of living. It's often a good choice for retirees or those just about to retire who are in a high-income bracket, have a low-interest mortgage (below 5%) and benefit from tax-deductible interest. This is particularly true if paying off a mortgage would mean not having a healthy savings cushion to pay for unexpected costs or emergencies such as medical expenses.
If you're retiring within the next few years and have the funds to pay off your mortgage, then it may make sense for you to do so, particularly if those funds are in a low-interest savings account. This option works best for those who have a well-funded retirement account and are still left with substantial savings to cover unexpected expenses and emergencies.
Paying off a mortgage ahead of retirement also makes sense if monthly payments will be too high to afford on a reduced fixed income. Entering retirement years without monthly mortgage payments also means you won’t have to withdraw funds from your retirement account to pay for them.
Should Retirees Pay Off Their Mortgage?
Avoid Tapping Retirement Funds
Generally speaking, it's not a good idea to withdraw money from a retirement plan such as an individual retirement account (IRA) or 401(k) to pay off a mortgage. Those who do will be subject to taxes and penalties if they withdraw before age 59 1/2. In addition, taking a large distribution from a retirement plan could potentially push you into a higher tax bracket in the year it is withdrawn.
It's also not a good idea to pay off a mortgage at the expense of funding a retirement account. In fact, those nearing retirement should be making maximum contributions to retirement plans if possible.
Over the past several years, research has shown that the majority of people are not saving enough for retirement. In a September 2018 report, the National Institute on Retirement Security revealed that the median balance in retirement accounts for all working people in the U.S. was $0, and that 57% of people who are of working age don't have a retirement account.
Strategies to Pay Off or Reduce Your Mortgage
There are a few strategies you can use to help pay off a mortgage early, or at the very least, reduce mortgage payments before retirement. Making biweekly payments instead of monthly means that over a year you'll make 13 payments instead of 12.
You can also consider refinancing your mortgage if doing so would help shorten the length of the loan and lower your interest rate. Although it could be helpful in the long run, just be aware that doing so could also negatively impact your net worth.
If you have a larger home, then another option you have to reduce or pay off your mortgage is downsizing by selling your home. If you do it carefully, then you might be able to buy a smaller home outright with the profit from the sale, leaving you mortgage-free.
Although paying off a mortgage and owning a home outright before retiring can provide peace of mind, it's not always the best choice for everyone. If you're a retiree and or a few years away from retirement, then its best to consult a financial advisor and have them carefully examine your circumstances to help you make the right choice.