Paying Off Your Mortgage: Is It Worth It?

In previous times, people approaching retirement were also looking forward to having a debt-free home. In fact, retiring and paying off the mortgage became almost simultaneous rites of passage for those who had spent the previous thirty years or more in the workforce–many of them working for the same company for their entire careers.

But this is no longer the norm. In fact, Baby Boomers (ages 51–71) are typically approaching retirement with much higher mortgage debt than their parents. According to a recent study conducted by the Demand Institute, the median balance owed on most Boomer mortgages is $118,000, up 142 percent from the 1992 median amount of $48,743.

It may still make sense to pay off your mortgage, but it depends on the specifics of your situation. If you are likely to be in a high income bracket following retirement, and especially if you have a low-interest (5 percent or less) mortgage, it may make sense for you to continue to make payments and to take advantage of the tax deduction for mortgage interest. This is doubly true if paying off your home would greatly deplete your cash reserves. In retirement, your need for money to pay for increased healthcare costs and other expenses associated with aging will only grow. A recent Fidelity report estimated, for example, that a typical couple retiring in 2014 at age 65 is likely to need about $220,000 to take care of medical expenses during retirement. While Medicare will handle part of this burden, it certainly won’t cover 100 percent of one’s medical expenses. Having a debt-free home is not as important as being able to maintain your health and mobility during your retirement years.

There is also the consideration of opportunity cost. Let’s assume, for example, that you are servicing a mortgage with an interest rate of, say, 4.5 percent. Meanwhile, your retirement or other investment account is earning roughly market-average returns of around 8 percent. Does it really make sense to withdraw funds that are earning 8 percent in order to liquidate a debt that is only accruing 4.5 percent? Such a calculation deserves careful thought.

The strategy of continuing your mortgage payments during retirement assumes, of course, that you will be able to also maintain your standard of living. As you approach retirement, it is very important that you do some careful financial forecasting, taking into consideration all your sources of income and all your projected expenses, including your house payment, to determine whether your monthly cash flow will be adequate for your needs. As with most important life events, good planning is paramount. You would also likely benefit from the services of a qualified, professional financial advisor as you evaluate this decision.

On the other hand, if you are approaching retirement with a well-funded retirement account, a relatively low mortgage balance, and adequate cash and income, it may be worth it to pay off the mortgage. The peace of mind that comes with knowing you are the true owner of your home can be a tremendous benefit, even if it is not strictly financial in nature.

Another strategy to consider is that of accelerating your mortgage payments while you are still working, in order to pay off the loan early. This can allow you to liquidate the debt while you are still in your peak earning years, and enter retirement with a debt-free home. Finally, you may wish to consider down-sizing upon retirement. In some cases, homeowners who anticipate needing less living space in retirement can sell a larger home with significant equity and use the proceeds to pay for most or all of a smaller dwelling–perhaps a low-maintenance town home or condo–and thus greatly reduce or eliminate their mortgage debt burden.

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