When it comes to managing your mortgage as part of retirement planning, the general recommendation is to pay off your mortgage before retirement. This helps reduce expenses and eliminate debt, which will provide peace of mind in your later years.
Depending on how big your nest egg is, paying off your mortgage with your 401(k) could make sense. However, look at your other savings or assets first. If you need to stretch your 401(k) into retirement, it may make more sense to keep it invested and use other assets to pay down your mortgage.
It depends on several factors, including a homeowner's financial situation, life stage, risk tolerance, and overall financial goals. Orman generally advises against carrying unnecessary debt. However, she considers a mortgage to be 'good debt.
Peace of mind, saving on interest and building equity are three benefits of paying off your mortgage. Downsides include opportunity cost, reduced liquidity and removing a major tax deduction.
Dave Ramsey, the renowned financial guru, has long been a proponent of financial discipline and savvy money management. This can include paying off your mortgage early, but only under specific financial circumstances.
There is no specific age to pay off your mortgage, but a common rule of thumb is to be debt-free by your early to mid-60s. It may make sense to do so if you're retiring within the next few years and have the cash to pay off your mortgage, particularly if your money is in a low-interest savings account.
If it's expensive debt (that is, with a high interest rate) and you already have some liquid assets like an emergency fund, then pay it off. If it's cheap debt (a low interest rate) and you have a good history of staying within a budget, then maintaining the mortgage and investing might be an option.
The 2% rule states that you should aim for a 2% lower interest rate in order to ensure that the savings generated by your new loan will offset the cost refinancing, provided you've lived in your home for two years and plan to stay for at least two more.
More Americans are entering retirement with mortgaged homes, and the average balance of those loans is rising. The share of Americans ages 75 and over who are carrying mortgage debt has risen steadily for decades, according to the federal Survey of Consumer Finances: from 5% in 1995 to a historic high of 25% in 2022.
If you want more liquidity: Assets like stocks and bonds are far more liquid than home equity. If access to cash is a priority for you, then it may be better to invest rather than pay off your mortgage. In general, it's much more challenging to tap into the equity in your home, compared to investments in a portfolio.
Point out that paying off the mortgage in retirement might mean seriously depleting savings, and some might feel more comfortable keeping that money in the bank. Note the ways to tap home equity if necessary. The conventional wisdom is that you should pay off your mortgage before you retire.
You'll have a clear idea about your monthly housing expenses, which can help you make better decisions about retirement planning. Plus, you can take advantage of low interest rates to lock in an affordable monthly payment. Low payments now could help you put more money into your retirement fund later on.
For example, if you plan to travel frequently in retirement, you may want to aim for 90% to 100% of your pre-retirement income. On the other hand, if you plan to pay off your mortgage before you retire or downsize your living situation, you may be able to live comfortably on less than 80%.
Paying off your mortgage early frees up that future money for other uses. Your mortgage rate is higher than the rate of risk-free returns: Paying off a debt that charges interest can be like earning a risk-free return equivalent to that interest rate.
Mortgage Debt's Impact on Retirement. The financial wellness of retirees can depend greatly on the percentage of their income they need to spend on housing. Typically, a mortgage payment (or rent) is one of the largest budget items for retirees. So, carrying a mortgage into retirement can be a significant burden.
One of the most significant benefits of paying off your mortgage is the peace of mind that comes with owning your home outright. Without a mortgage, you don't have to worry about monthly payments, which can be especially comforting in retirement or during economic downturns.
Key Takeaways. Paying down a mortgage with funds from your 401(k) can reduce your monthly expenses as retirement approaches. A paydown can also allow you to stop paying interest on the mortgage, especially if it's fairly early in the term of your mortgage.
Data collected by NASDAQ suggests that while only 28% of homeowners below retirement age have paid off their homes, nearly 63% of those 65+ have done so. These statistics highlight Americans' importance in entering retirement with freedom from what is usually their highest monthly fixed cost.
In 2022, 66.8% of older households had debt. Overall, the older the head of the household is the less likely the household is to have debt. In 2022 in families in which the head was 55-64, 77.2% had debt. That drops to 64.8% when the head is 65-74 and 53.4 when the head is 75 or older.
Orman explained that if you have a 30-year mortgage and you've already made payments for 14 years, you should make it a point to get a refinanced mortgage paid off in 16 years. Otherwise, if you refinance for another 30 years, you'll end up paying for your mortgage with interest for 44 years in total.
If you drain your savings or put a ton of cash toward paying off your mortgage, it could leave you with very little money left for emergencies. While you can always sell your house, that's not a very liquid option — and could take a while to produce the money you need in a pinch.
Get in touch with your accountant
After paying off your mortgage, you should notify your accountant. You'll no longer have mortgage interest to deduct on your tax return, which could potentially increase your tax liability. However, paying off your mortgage might also free up cash that you can use for other purposes.