Are you thinking about retirement but worried about your monthly mortgage payment? You’re far from alone. Studies show “44% of 60 to 70-year-old homeowners bring their mortgage into retirement.” Some financial experts are quick to tout that we must be debt-free before hanging up our careers, when in reality, there’s no one size fits all solution when it comes to a successful retirement.

Minimizing debt and monthly payments, in general, makes living on a fixed income easier, this is not news to anyone. But pouring every last penny into your mortgage in the final years leading up to your retirement isn’t your only option, and for some, may not be the best use of funds.

Deciding How to Prioritize Extra Funds

The time frame of five to ten years before your preferred retirement date is when most begin to formalize a retirement plan. While you’ve likely contributed to a retirement account or accumulated other investments prior, many start to see the light at the end of the tunnel in their late 50s.

Deciding how to prioritize your retirement contributions isn’t an easy decision.

Should I put it all into the stock market? Even then — how do you choose what to invest in?
Should I pay down debt first and save later?
Do I need to stockpile cash to cover short-term expenses?
What if I want to take a vacation or help pay for a child's wedding?
What if I have to live in a nursing home someday — will I be a financial burden to my family?

It’s these common questions along with many others that lead pre-retirees to seek out the guidance of a trusted financial advisor. Your home is a large portion of your net worth but tapping into that equity is often out of the picture unless you sell or borrow against the value of your home. Let’s look at a few pros and cons to help you determine if paying off your mortgage is the right decision for you.

Carrying a Mortgage into Retirement Does Not Equate to Bad Financial Management — There’s Another Side to the Story

If paying off your mortgage is still several years out, you may wish to continue paying each month as you have been. If you had extra funds you were considering throwing towards the principal, what if you invested them elsewhere?

Consider your mortgage interest rate — Baby Boomers have likely moved or refinanced since the peak interest rate days of the 80s. While mortgage interest rates are currently hovering around 6%, yours very well may be lower. Now compare your interest rate to the average stock market return for the 30-year period from 1991 to 2020 — which was *10.7%. By investing the extra funds you had earmarked for your mortgage principal you may have been able to earn a higher return.

The goal is to make a higher return than you would have saved by paying down your mortgage. However, while comparing these two rates of return makes for easy comparison, at Integrated Wealth Management, we like to remind clients that these are not comparable returns. Paying down your mortgage is as close to a risk free return you can get. While investing in the stock market comes with a much higher level of risk. Before deciding whether to pay off your mortgage faster or to invest there are many factors you should consider.

Pros of Paying Off Your Mortgage Before Retirement

Reaching retirement debt-free can undoubtedly aid in making a smooth transition into retirement. After all, you’ll likely be on a fairly fixed income, and a little extra breathing room in the budget is always welcomed.

Your home, an investment, will likely continue to appreciate while you live out your retirement years. And when you inevitably sell or pass on the home to a loved one, you’ll be thankful there's no mortgage tied to the transaction.

Budgeting for Retirement

If retiring debt-free will bring you a far greater sense of peace heading into retirement, then you’ll want to start today, while simultaneously still saving for retirement. If your retirement income can support your mortgage payment, then prioritizing investing elsewhere may offer a greater return.

In the end, your comfort level comes into play when making this decision. Start creating a retirement budget and reviewing your expected income streams to see where you stand. To learn more about when you can retire with confidence while meeting your financial goals, reach out to our team at Integrated Wealth Management.

We offer one-time financial plans and ongoing wealth management. We strive to set up each of our clients for retirement success. Don’t let your mortgage stop you from meeting with a financial advisor — we’ve only brushed the surface on working a mortgage into your retirement journey. We’d be happy to review your circumstances and provide a detailed and personalized recommendation.

Learn more

About Integrated Wealth Management

Integrated Wealth Management is owned by Burt Hutchinson, CPA, CFP®. We’re a CPA-led organization, meaning we’re here to handle your complex tax scenarios and provide cost-saving insight related to your financial plan.

We’re here to guide you through the 3 stages of retirement:

Uncertainty Stage: When you are within 10 years of retirement and have questions about how to make it work
Stability Stage: When you have reached the financial milestone to retire comfortably and confidently
Reflection Stage: When you are looking to leave a legacy

We are also here to provide experienced, empathetic support during times of loss, such as the death of a life partner. You need confidence and a sense of security to enjoy retirement. As fiduciaries with a fee-only structure, we never receive commissions. Free of ulterior motives, you can be sure we’re focused on your goals.

Continued Readings:

Sources:

“Reverse Mortgage Basics.” American Financing. 29, June, 2022. https://www.americanfinancing.net/reverse/mortgage-options-after-retirement

*S&P 500 index. It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results