When you dream of retirement, you may dream of a time where you no longer have to work constantly to pay your bills. Many people assume that when they are retired, they will have paid off the majority of their large debt. It seems only logical that to have more money in retirement, you would simply pay off your mortgage before retirement arrives. And, while you want to have financial freedom in retirement, it is not necessarily to your benefit to have paid off your mortgage. Sure, in theory, we would all love to no longer pay our mortgage and free up a large amount of income each month. But, having a mortgage in retirement can actually offer a number of advantages for the right borrower in retirement.
The ideal person that should consider keeping their mortgage into retirement is a person that has saved enough to be financially comfortable in retirement. If it is going to be financially uncomfortable to be retired while paying a mortgage, then you should pay off your mortgage if possible. However, if you can be financially comfortable in retirement while paying a mortgage, there may be a variety of advantages. First, if you want to begin making larger than necessary mortgage payments to pay your loan down more quickly in anticipation of retirement, consider where that money could be better utilized. For example, if you work for a company that offers 401K contribution matching and you are not maxing that out, it may be better to put additional funds towards that rather than paying your mortgage more quickly. The reason is that by putting more money and multiplying it with matching contribution from your company, a larger amount will accrue over time, giving you substantially more money for retirement.
To continue, if you have other debt that has a higher interest rate than your mortgage payment, it is better to pay that first. While it can be tempting to pay off the larger amount of debt (your mortgage) more quickly, if you pay off high interest rate debt, you will be saving yourself a significant amount of money in the long run. Additionally, if you are in a high-income tax bracket, maintaining your mortgage for tax purposes may be beneficial. And, if your assets are tied up in retirement accounts such as a 401K, it is best not to withdraw from the accounts to pay off a mortgage. The Washington Post explains why pulling from your retirement account to pay off your mortgage is not wise, “Katz says paying off the mortgage out of your retirement account ‘sounds good in your head’ but is not a good thing. ‘When you take money out of retirement accounts, first you have to pay taxes,’ he says. ‘In the retirement account, money gets to grow without taxes. The power is in longevity. You are essentially taking something that will produce income later and at an exponential level, and paying into something that will not produce income.’” The same goes for investments with a high yield. If you are earning a good return on investments, it may be best to leave them where they are for now rather than pay off your mortgage. The financial return in the long run may be far more beneficial than paying off your mortgage early. If you are considering paying your mortgage off early, speak to your accountant or financial advisor for advice on what your best financial move is.