Should you pay off your mortgage before you retire? | Baby boomers
Paying off your mortgage before you retire is a major financial achievement, but you don’t necessarily have to eliminate all of the housing get into debt in order to retire well. Low mortgage interest rates mean that it can make financial sense to continue making mortgage payments during your retirement years. “Interest rates are a game changer,” says Bryson Roof, a certified financial planner for Roof Advisory Group, a division of Fort Pitt Capital Group, in Harrisburg, Pennsylvania.
Here are five great scenarios you can get away with by holding onto your mortgage until retirement:
- You get a better rate on your investments than you pay on your mortgage.
- You would pay off your mortgage with savings.
- You have other debts with higher interest rates.
- You can get a tax deduction by saving elsewhere.
- You are making an emotional decision rather than a financial one.
1. You get a better rate on your investments than you pay on your mortgage
A mortgage can help you earn more on your investment portfolio than you pay for mortgage interest. “My mortgage was 3.6%,” Roof says. “If I can earn 6% on my portfolio and pay 3.6% interest on my mortgage, I’d better let my portfolio grow.
It is important to calculate the interest you are paying on your mortgage and compare it to your expected investment returns. “Do the math,” says Barry Bigelow, senior advisor at the Duluth, Minnesota branch of Great Waters Financial. “Make sure that if you can’t do the math yourself, someone will help you.”
Sometimes it might not make sense to pay off the loan, but refinancing can be beneficial. “If they have a variable rate, retirement rates could start to increase,” Roof says. “It makes sense to lock in a fixed rate today.”
2. You would pay off your mortgage with savings
You don’t want to use all of your savings to pay off your mortgage and then be unable to meet other expenses in retirement. “If you are paying off your mortgage and have no money set aside for emergencies, now you need to get a home equity loan or line of credit to get a new roof or buy a new car, whatever. she is. Said. A emergency expense could force you to take on higher interest rate debt, eliminating the benefit of paying off your mortgage.
Using your retirement savings to make mortgage payments could also trigger taxes. If you withdraw $ 60,000 from your IRA to pay off your mortgage, you could end up with less than $ 50,000 after taxes. It might not make sense to pay off your mortgage from your retirement accounts. “I recommend it against those who haven’t been disciplined enough and want to cut back on what they’re saving for retirement to pay off a home,” says Nicolas Abrams, chartered financial planner for AJW Financial Partners in Baltimore, Maryland. “If you have a shortfall in retirement, all of your money is in your house. You will need to get a line of credit. Sometimes paying off a mortgage can also affect other retirement goals, such as forcing you to work longer.
3. You have other debts with higher interest rates
Consider pay off the debt with the highest interest rate first. “If you have high interest student loans and credit cards, you better prioritize reducing that high interest debt over a low interest mortgage,” Roof says. .
4. You can claim a tax deduction by saving elsewhere
Remember to take taxes into account when deciding to pay off your mortgage or maintain your investments. The Tax Cuts and Jobs Act 2017 changed the rules for tax deduction of mortgage interest. Due to the new tax law, many people cannot necessarily deduct mortgage interest due to the higher standard deduction, and if you don’t have enough deductions, you cannot itemize them.
However, you may be able to benefit from a tax deduction by putting money into retirement accounts. While it can be emotionally rewarding to pay off your mortgage, sometimes you can get away with saving elsewhere instead of paying off your home. “By not paying off your mortgage, you can divert that money to 401 (k), 403 (b), and IRAs, and lower your taxes,” Roof explains.
Instead of paying off a mortgage, Abrams often recommends that clients put more money into their retirement account or IRA. “You will have access to this money,” says Abrams. “If you took the money and paid off the mortgage, it’s not cash. If you get it, you have to pay it back with interest.”
5. You are making an emotional decision rather than a financial one
There are people who want to pay off their mortgage just to have peace of mind in retirement. “If a client wants their mortgage paid off, that’s not a bad thing,” says Abrams. “I have clients whose mortgages are paid off before retirement. Their finances are structured and they still have enough to finance their retirement.
Some people want to pay off their mortgage even when mortgage rates are low and their portfolio is earning more. “What I like to talk to people about is understanding the emotional components and the math components,” says Roof. “This is a unique question for each individual. There is no hard and fast answer. You need a plan of action that matches each person’s unique circumstances.”
Some people just aren’t comfortable with debt in retirement, whether it’s how it was raised, an aversion to risk, a nagging sense of duty to pay. money or the sense of accomplishment of living debt free. “If you’ve done the math, it makes the decision less emotional,” Bigelow says.