Should Retirees Pay Off Their Mortgage?

As retirement approaches, there’s a common questions people ask. Should they pay off their mortgage?

The answer depends on one’s financial situation and priorities.

A Kiplinger article looked at the subject recently and created three common scenarios to help retirees decide.

1. You Have the Money in Cash

If you’ve kept your savings in cash because you’re wary of market risks, the decision comes down to the interest rates:

    • Pay it off if your mortgage rate is higher than your savings account interest rate.
    • Keep the mortgage if your savings account earns more than your mortgage costs, allowing you to benefit from “positive arbitrage.”

    However, paying off your mortgage reduces liquidity, meaning the cash you use is no longer easily accessible unless you sell your home or borrow against it. Additionally, mortgage interest often offers tax benefits, which you might lose.

    2. You Have the Money in a Brokerage Account

    In this case, it’s usually better not to pay off your mortgage. Historically, stock market returns have far exceeded typical mortgage interest rates. Over time, this can create positive arbitrage, where your investments earn more than your loan costs. That said, market volatility is a risk. If your portfolio takes a downturn, your returns may not cover your mortgage interest. Balancing potential gains against risk tolerance is key.

    3. You Have the Money in a Retirement Account

    Paying off your mortgage with retirement savings is generally a bad idea. Withdrawing large sums from pre-tax retirement accounts triggers significant tax penalties and can push you into a higher income tax bracket. The financial hit is rarely worth the emotional comfort of being mortgage-free.

    The Bottom Line

    There’s no one-size-fits-all answer to whether you should pay off your mortgage in retirement. It boils down to your financial situation, goals, and personal values. While some prioritize peace of mind and freedom from debt, others focus on maximizing investment opportunities.

    The article’s author says the good news is that few people ever regret not having a mortgage in retirement.

    Taking the time to weigh the pros and cons carefully will help you make the best decision for your unique circumstances.

    >>Click here to read the article in its entirety.