Should You Pay off Your Mortgage Before You Retire?

A lot has changed since our parents celebrated their last mortgage payment by burning the paperwork. Mortgage rates soared to nearly 20% in the early 1980s and then dropped to almost under 3% in 2021. People have more mortgage options – including 15- and 20-year mortgages.

Despite the changes, there is nothing more joyful than that last mortgage payment – but should you pay off your mortgage before you retire and live debt-free in retirement?

The answer might be simple if it was a purely financial question. But, as with many of the issues facing Americans as we age, there is an emotional component. The answer is not a simple yes or no. Actually, it depends.

What is your interest rate?

Many Baby Boomers are lucky enough to have mortgages that they go when rates were at their lowest – sub-4%.

“If the interest rate is one of those low ones, (2%, 3%, even 4%) I say, no way. Don’t pay it off,” says Eric Bond, president of Octave Wealth Management in in Long Beach, California. “But pay at least one extra payment a year. If you’ve ever looked at an amortization table, it’s all interest for the first 10 years, for the most part. Those rates of 4% are commodity. Keep them. Even the low fives. I would definitely keep it now.”

Also, Bond says even if someone has just $100,000 left on a mortgage they have paid for 20 years, he still wouldn’t recommend that they pay it off. “If you’ve ever looked at an amortization table, it’s all interest for the first 10 years, for the most part,” he says. “I would still say no, because it’s all principal. Because you’re paying all the interest in the beginning.”

“So, whether or not to pay off your mortgage, it really kind of, depends on the situation,” Bond says.

Should you draw down your retirement savings to pay off the mortgage?

The answer is a resounding no. “I’m generally not a fan of taking large withdrawals from retirement savings in order to pay off a mortgage,” says Russell Hackmann, president of Hackmann Wealth Partners in Boston, Massachusetts.

“Some people, because maybe they refinanced, may still have hundreds of thousands of dollars of mortgages,” he says. “I’d rather just make sure we have a good financial plan that can accommodate the payments and have a budget that accommodates the payments for the mortgage, as opposed to saying, ‘let’s take out $500,000, or $250,000 or whatever the number is, to pay off the mortgage and lower our liquid retirement savings by doing that.’”

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If you can afford it, does it make sense?

Sometimes it may make perfect sense, especially if you are well off and can afford to make the payment without cashing out your investments or retirement accounts. “If somebody has $2 million in after-tax savings and, wants to write a check for $400,000 to pay off their mortgage, there is nothing tremendously wrong with that,” says Hackmann.

“I’m generally not a fan of taking large withdrawals from retirement savings in order to pay off a mortgage,” he says. “There are exceptions to that. We recently were working with one client who they had like, $150,000 remaining on their mortgage. We will take a couple steps to sort of get that below $100,000 which was sort of a nice, kind of psychological number to get below.

“But some people, because maybe they refinanced over time, may still have hundreds of thousands of dollars left on their mortgages,” says Hackmann. “And I’d rather just make sure we have a good financial plan that can accommodate the payments and have a budget that accommodates the payments for the mortgage, as opposed to saying, let’s take out half a million dollars, or $250,000 or whatever the number is, to pay off the mortgage and lower our liquid retirement savings by doing that.”

Beware of tax implications

Hackmann says you don’t want to take huge withdrawals from your IRA or any retirement plans because that could easily push you into a higher tax bracket. It can also substantially boost your Medicare payments.

Your withdrawals are considered ordinary income. And moving into a higher tax bracket pushes you into the Income-Related Monthly Adjustment Amount (IRMAA), which is a Medicare surcharge on Part B and Part D premiums for higher-income beneficiaries. (The monthly premium for people with monthly gross adjusted income of $109,000 to $137,000 would pay premiums of $81 and $14.50 for Part B and D respectively. For higher income earners those premiums could be pushed to nearly $700.)

The smarter option, rather than a retirement fund withdrawal, is an accelerated payment plan for your mortgage or, if your mortgage still has years to go, a smaller lump-sum payment, Hackmann says.

Peace of Mind: Pay off a mortgage and retire debt free

One of the reasons people hire a financial planner or financial advisor is to help take the emotion out of some of their financial decisions. Some retirees need the peace of mind of going into retirement knowing that their biggest expense – a mortgage payment – will not be a worry as they age. They would prefer to be debt free.

That’s OK. “Sometimes the best move isn’t the best financial move,” says Bond. So, yeah, you do get some people who need to do that. I wouldn’t sell out of investments and pay a capital gains tax to pay off a loan. You should take that into consideration. But if someone has a lot of money, and just wants to pay it off, I totally get it. But I’m not advising my clients with loans that are 2%, 3% or 4% to pay them off. What’s the benefit?”

“I don’t mind debt, as long as it’s what I call managed debt,” Bond says. “If you can pay off your mortgage with cash you have, that means it’s managed debt. But it all depends on the loan.”

YOUR TURN

Have you or would you pay your mortgage early before you retire?  Why or why not? Share your thoughts in the comments!

 

Rodney A. Brooks is an award-winning journalist and author. The former Deputy Managing Editor/Money at USA TODAY, his retirement columns appear in U.S. News & World Report and Senior Planet.com. He has also written for National Geographic, The Washington Post and USA TODAY and has testified before the U.S. Senate Special Committee on Aging. His book, “The Rise & Fall of the Freedman’s Bank, And Its Lasting Socio-economic Impact on Black America” was released in 2024. He is also author of the book “Fixing the Racial Wealth Gap.” His website is www.rodneyabrooks.com

 

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