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Retirement planning involves a myriad of financial decisions, but one question that doesn’t often arise is whether or not to pay off your mortgage before retiring. After all, the conventional wisdom is that owning your home free and clear is a goal to aspire to.
While it’s true that you most likely want to enter retirement with a clean slate of debts, there are instances where carrying a mortgage into your golden years could be a strategic move that better fits your financial objectives.
You’re Taking Advantage of Tax Benefits
Retiring with a mortgage can be a shrewd strategy, particularly for those who will maintain a high income during retirement. The key lies in what makes the most sense for your tax situation. Depending on your tax rate, it may make more sense to deduct the amount of interest from your loan than to pay off the mortgage in full and lose out on this deduction.
In cases where you’re anticipating a lower income level after retirement, paying off your mortgage beforehand might be the better route. This can help you take full advantage of income and tax credits within a lower tax bracket.
Seth Jacobs, a mortgage broker and founder of Maine USDA Home Loan, said, “Mortgage interest is still tax-deductible for many homeowners, providing potential tax benefits that can offset the overall financial burden. Retirees might consider weighing these tax advantages against the desire to be debt-free.”
You’re Able To Manage Interest Rates Strategically
If your mortgage interest rate is low enough, you can potentially make more money investing than you would save by paying off the loan. In this case, it might be smart to keep the mortgage. This could help you build more wealth over the years.
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Jacobs encouraged considering the potential for higher investment returns versus the interest rate on your mortgage. “With interest rates historically low, the cost of borrowing money for a mortgage is more affordable than ever. This presents an opportunity for retirees to allocate funds elsewhere, such as investing in diversified portfolios that have the potential to yield higher returns than the interest paid on the mortgage.”
You Have Other Debts
When deciding on whether you should pay off your mortgage, pause to assess if your money could be better utilized elsewhere.
For instance, you may have credit card balances with interest rates much higher than your mortgage rate. Focus on repaying these high-interest loans before you bid farewell to your mortgage.
You Want To Keep Money Liquid
If paying off your mortgage would significantly drain your savings, you may want to reconsider. Maintaining liquidity during retirement can prove invaluable. Jacobs emphasized this point: “Tying up a significant portion of your savings to pay off your mortgage could limit your access to liquid assets. By maintaining a mortgage, retirees can keep more cash on hand for unexpected expenses, medical bills or other investment opportunities that arise.”
In this case, retaining a mortgage would mean your cash flow remains fluid, offering a safety net for the unknown.
You’re Still Saving
If you’re still putting money away in a retirement account like an IRA or 401(k), it might be smarter to continue to add more to these accounts instead of rushing to pay off your mortgage.
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Retirement accounts like these come with tax benefits. When you save in these accounts, you could end up paying less in taxes now or even avoid paying taxes later when you take money out during retirement.
You Want To Stay Diversified
Jacobs pointed out that real estate has historically served as a hedge against inflation. “Holding onto a mortgage during retirement means you’ll have an asset that’s likely to appreciate over time, potentially offsetting the impact of inflation on your overall net worth.”
It’s important to spread out your investments to reduce risks. Instead of putting everything into your home, having a mortgage while also investing elsewhere diversifies your assets.
“Keeping a mortgage loan into retirement can help diversify your portfolio in retirement,” said Sandi Huynen, mortgage broker at Winnipeg Mortgage Broker. “The tax-deductible income that generates from the mortgage could be used to offset losses on other securities or investments.”
You Want Your Heirs To Benefit
When you are planning for the inheritance of your home, keeping some remaining mortgage could actually be a clever financial move.
“Leaving a mortgage balance for your heirs might provide a strategic financial advantage,” said Jacobs. “It can be more beneficial for them to inherit a property with a mortgage, as opposed to a paid-off property that comes with tax implications.”
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