Should I Pay Off My Mortgage Before Retirement?

Let’s start off by talking about why you should pay off your mortgage before you retire in the first place. Well, for many Americans your mortgage is your biggest monthly expense. If you write down all of your monthly expenses, I wouldn’t be surprise if your mortgage payment is at the top of the list! For many Americans that represents a 1/3 of their total monthly expenses. If you pay off your mortgage prior to retirement, all you have left to pay is property taxes. This significantly trims your monthly expenses while your in retirement, and it’s easier for you to focus on other expenses.

Focus On Freeing Up Money Rather A Tax Deduction

A lot times when you hear people talk about paying off their mortgage, they’ll say “If I pay off my mortgage, then I won’t get a tax deduction anymore”. Personally, I would focus on how much money I’m freeing up, rather than a tax deduction. Let’s say you’re paying $4,000 a month in mortgage and insurance, and you pay off your mortgage. The $4,000 worth of expenses that you had before, you don’t have no more. You’re just paying taxes. Now, some people might say ” Hold on, I want a tax deduction for making payments on my mortgage”. The problem with that is you still spending $4,000 in monthly expenses, and you’re only getting a fraction of that back through maintaining a mortgage.

Don’t Withdraw From Your Retirement Account To Pay off Your Mortgage

Now, let’s talk about how you can pay off your mortgage. Because talking about it is one thing, but actually paying it off is another. I don’t recommend withdrawing money from your retirement account to pay off your mortgage, because your retirement account is something that you fund until you retire. Instead, it would be better to gradually pay off your mortgage over time. For example, you need to gather four pieces of information, which are your mortgage payment, interest rate, time left on the loan, and the balance. This information you can get off of your monthly statement that comes in the mail, or you can go to your mortgage lender’s website to get that information. Then you can take this information and put it into a amortization calculator.

Moreover, people ask “If I only have 5 years left to retire, why would I spend money and time to pay off my mortgage? Should I be focusing on saving more for retirement in these few years? The answer is yes, but if you calculate the numbers, chances are your going to be better off if you put extra money towards paying off your mortgage and getting out of debt.

When Not To Pay Off Your Mortgage

If you’re not hitting your 15% to 20% savings goal, or if you have a lot of money in your 401(k) and not a lot of money saved outside of your 401(k).

Saving outside your 401(k) gives you a lot more tax flexibility in retirement. Also, if you haven’t done a retirement plan, then you want to do that first before creating a pay-down strategy.

When To Partially Pay Down Your Mortgage

There’s a technique called mortgage recast, which allows you to pay down your current mortgage without refinancing. So you can keep the same interest rate and term, while lowering your mortgage balance and monthly payment. In this case, if you have extra money to put towards your mortgage do it, so you can get out of debt sooner. Also, if you have some stock, sell some of it, set aside the taxable income, then pay down your mortgage for a lower monthly payment.

When To Pay Off Your Mortgage

If you’re saving 15% to 20% of your income. You have an equal balance between your 401(k) funds and after-tax funds. And you have a financial plan in place that will last long-term, then you should pay off your mortgage before retirement.