Should You Pay Off Your Mortgage by Retirement?
With interest rates as low as they are today, many financial advisors are encouraging those near or in retirement to refinance their mortgage and pull the cash out to invest, or just not pay off their mortgage and keep their lump sums invested.
At Zynergy Retirement Planning, we disagree. We recommend that when your paychecks stop, so do your monthly mortgage payments.
The benefits of paying off your mortgage in retirement are substantial. First and foremost, it takes a lot of financial pressure off of you during a time when you should be enjoying your life. It allows you to do all the things you’ve wanted to do without worrying about whether you can make your monthly payment. It also makes your retirement less risky by reducing your retirement gap.
What is a Retirement Gap?
When you’re working, you have more income than expenses, and can use the additional income to save in a 401k, IRA, or cash savings account. In retirement, this tends to switch. Between social security, annuities, and pension, most people don’t make enough to sustain their lifestyle, which is why they draw from their retirement accounts and savings. The difference between what you have coming in each month and what you need each month is called your retirement gap.
- If your gap is very wide, retirement is more risky because you’re relying on the performance of your investments. This is always a risk, no matter how safe and secure your investments are.
- If your gap is very narrow, you aren’t relying as heavily on the markets, economy, or your investments, so your retirement has less risk.
Paying off your mortgage by retirement will drastically reduce your monthly expenses, and therefore your retirement gap.
Are There Cases Where I Shouldn’t Pay off My Mortgage by Retirement?
Despite our above advice, there are certain circumstances where it’s not recommended to pay off your mortgage by retirement, such as:
- All your assets are in qualified retirement accounts (such as an IRA or 401k). In these circumstances, you don’t want to take a large distribution from those accounts to pay off your mortgage, or you will get a giant tax bill in April.
- You have non-retirement accounts that are tied up in investments with large unrealized capital gains. If you have an after-tax investment account that has done well over time and you have giant unrealized gains, it’s unwise to take those gains immediately just because you want to pay your mortgage off.
- You are very near retirement and do not have the money to pay off your mortgage in the next five years. In this case, we encourage you to refinance your mortgage and stretch it into a new 30-year fixed mortgage to get your monthly payment as low as possible.
Here are some quick examples:
- $80,000 balance on remaining mortgage
- Retiring in 4 years
- Currently paying $1,200 per month in principal and interest with 7 years left
Zynergy Recommends: ‘Pinning’ your mortgage payoff to retirement. If you were to pay $1,673 per month for the next four years, your mortgage will be paid off by the time you retire just by paying slightly more each month.
- $240,000 balance on remaining mortgage
- Retiring in 6 months
- Currently paying $1,800 per month in principal and interest with 16 years left
- Only $76,000 in investments in after-tax accounts with the rest in IRA and 401k accounts
Zynergy Recommends: Refinancing to a new 30-year mortgage, making the monthly payment $686 per month. $1,800 per month is a large financial hardship and will create a large gap. In retirement, cash flow is king: this strategy puts an additional $1,100 in your pocket each month, which will help you enjoy the early years of your retirement and do the things you love.
Contact the experienced financial planners and fiduciaries at Zynergy Retirement Planning to learn more about the benefits of paying off your mortgage by retirement, and discuss the best option for you.