SHOULD I pay off my mortgage before I retire?

By Justin Bolmgren

Ideally so.  However, it used to be that you worked for a company 30 years, got a watch and a pension, health insurance paid for,  and enjoyed a “care-free” retirement.  The impetus was on controlling cash-flow… not asset accumulation.  Managing and controlling debt was a way of life and it often dictated when to retire.  In recent decades, however, people change employers more frequently taking their “portable” retirement plans (401k, 403b, IRAs, etc.) with them as they go.  Thus, the retirement "trigger" is more likely to be a certain dollar amount saved than a net cash flow number.  Not to mention, the increased probability of moving or relocating. Meaning, the odds of carrying a mortgage into retirement has increased dramatically in recent years.

According to the Survey of Consumer Finance published by the Federal Reserve Board, in 1992 the median outstanding mortgage balance for Baby Boomers was a little over $48,000.  Today, that figure has more than doubled.  So the big question for those looking at retirement: Should you pay off your mortgage when you retire?  Let’s discuss three possible answers.

I’ll start with the easy answer.  No...if you need to take money out of a retirement account to pay it off.  Taking money out of your retirement account is a taxable event.  With our graduated income tax system, you can push yourself  into higher and higher tax brackets.  Especially if you are in the back third of your mortgage when you are paying little interest.  Why pay additional federal and state income taxes just to reduce a monthly expense?

Then of course there is the tricky answer. Probably…if you have taxable accounts i.e. savings account or taxable money market account.  Why do I say “probably” and not an affirmative yes? Retirement planning has more to do with using financial resources wisely, as it does investing appropriately.  Many such recipes to reduce taxes and/or maximize social security call for taxable savings accounts in the recipe.  Often, those strategies add far more value to your financial situation than the benefit of eliminating mortgage interest.

The least common answer. Yes…if financially advantageous.  If you have asmall mortgage left and savings on hand, by all means.  A lot of people, I've found, have it in their heads to pay off their mortgages when they retire as a financial goal.  Perhaps, they may have missed that goal by a couple years and would find peace of mind in reaching that goal. Paying off the rest of your mortgage, in this case, make perfect sense.