This week, David Ning had a great post over at U.S. News – Money, “Why to Pay Off Your Mortgage Before Your Retirement.” He gives some great reasons as to why entering retirement while still carrying a mortgage may not be a good idea for most. We’d like to review those reasons here.

  • “Focusing on paying off the mortgage greatly encourages us to spend less.” – If someone is paying extra money to pay off their mortgage early, that money cannot be spent on other (often unneeded) things. Since many people have trouble keeping spending under control, this can be an effective way to help cut spending while having a positive impact on their future. However, someone who has trouble controlling spending probably will not make the sacrifice of paying down the mortgage early.
  • “If you opt for the shorter fixed-rate mortgage, you’ll end up buying less home.” – If you are planning on taking on a mortgage in or nearing retirement, consider a shorter term mortgage. While a 30 year fixed-rate mortgage can be great for someone who has plenty of time to payoff that mortgage while still working, retirement is not the time to make that sort of long term commitment. And of course Ning’s point is that the shorter term mortgage will have higher payments, therefore will likely lead the retiree or near retiree to spend less on a house than a longer term mortgage might lead to.
  • “Not having a fixed expense can help you increase your retirement withdrawal rate.” – We like Ning’s reasoning here. One of the main reason entering retirement with a mortgage (or any debt) is usually a bad idea is that it can put a lot of strain on your retirement income. If you are like many other retirees, you will begin to draw down on your portfolios to cover your needed income that is not guaranteed (Social Security, pensions, annuities, etc.).

The safe withdrawal rate generally accepted in the financial world is 4.5% annually. This means that you can withdraw 4.5% of your portfolio value in one year “safely” without risk of running out of money over the long term. However, though this is a general rule of thumb, it’s not absolute. If you have a few down years in the market and your portfolio loses money, then throw 4.5% withdrawal on top of that, your chances of running out of money will greatly increase.

A great way to combat this risk is to be flexible with your withdrawal rate. Putting yourself in a position to be able to reduce or even eliminate your withdrawal rate during down years can be extremely beneficial to your portfolio over your retirement. And doing so can be very hard if you have a fixed monthly mortgage payment (that is likely one of your bigger expenses). If you are mortgage free, your withdrawal rate flexibility will be greatly increased.

  • “There’s one less thing to worry about.” and “You will sleep better at night without a mortgage.” – While Ning makes these two separate points, to us they are one in the same. Being debt free is not only a solid financial decision, but it can also be very positive in your personal and emotional life. Carrying debt, even a debt as common and acceptable as a mortgage, can be stressful, especially once you reach retirement and don’t have steady income from working any longer.

As Ning points out, paying off your mortgage early so that you can enter retirement mortgage free is not the best financial choice for everyone, nor is it always financially feasible. And while Ning concentrates mostly on paying off your mortgage early, that is not the only way to enter retirement mortgage free.

For example, someone who plans to downsize when he retires in a few years to a home that will cost $150,000, who currently has a $100,000 mortgage with a home value of $300,000 probably would not consider paying off his mortgage early. He could likely sell his current home, payoff his current mortgage, and buy his new, downsized home with cash to spare, all without spending extra dollars in the years leading up to retirement going toward early mortgage payoff. While a very simplified example, we just wanted to show that though we do believe entering retirement as close to mortgage free as possible doesn’t necessarily equate paying off your mortgage early.

 

  • Disclaimer: The information on this blog is not meant for specific financial advice. The ideas/opinions stated are not suited for everyone, and readers should use their own judgment in applying them in their financial lives.
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