The way it used to be was you paid off a thirty year mortgage and then you retired and could enjoy life after work; that really isn’t the case anymore. People between the ages of 51 and 69 have a large debt in mortgage than generations before them making it hard to retire. In 1992 the average pay off mortgage was $48,473 and it has now grown to $118,000. These figures come from a study known as “Baby Boomers and Their Homes: On Their Own Terms.” This study was conducted by a think tank that is jointly operated by The Conference Board and Neilson known as The Demand Institute.
It doesn’t matter if it makes sense to a financial advisor for a retiree to pay off a mortgage as they near retirement. It depends on the individual and their circumstances and several factors that they should consider and weigh before making a decision. Some of the things that come into play are.
- Size of the mortgage
- The Tax Advantage
When Paying Off a Mortgage Doesn’t Make Sense
For someone that is fixing to retire that is working in a high income bracket that has a low interest rate on their mortgage, and gets a tax benefit by deducting interest it makes more sense to keep making the monthly payment. You also need to consider that using a large portion of savings to pay off a mortgage could put you in a bad position later if there is an emergency or an unexpected expense that arises. According to Fidelity Benefits Companies someone that is retiring at the age of 65 is going to need roughly $220,000 in order to cover their medical expenses through retirement.
So, if a retiree can easily make the monthly payment it makes more sense to not be paying off a mortgage early and before retirement.
Don’t Tap Into Retirement Funds
There are drawbacks to withdrawing from a retirement plan to pay off a mortgage. First off that money is supposed to get you through retirement and by withdrawing it you are basically cutting a lifeline to retirement. Secondly if you withdraw it before you are 59 ½ you will be subjected to taxes and penalties. Not only will you pay taxes on the withdraw that money could possibly put you into another tax bracket and cost you even more at the end of the year.
As for the retirement fund; at this point if you are getting prepared for retirement you should be making maximum contributions to the fund; not pulling it out for paying off a mortgage. Unfortunately there are 26% of people from age 50 to 64 and 14% of people that are 65 that have nothing saved for retirement according to a survey study conducted by Princeton Survey Research Associates International for Bankrate.
When Paying Off a Mortgage Makes Sense
If a person is going to retire in the next few years and has money that is sitting in a low interest bearing savings account then it might make sense for them to use that money to pay off a mortgage. This though should only be done if they have a substantial retirement fund they have been contributing to that is going to cover unexpected expenses and emergencies during their retirement years. Another plus to this is that if they are paying off a mortgage; when they do retire they will not be pulling money from their retirement fund to make the monthly mortgage payment.
It also makes sense if one that can afford to pay off their mortgage will be living on a fixed income and know that the monthly payment is going to be something they will have to struggle to make each and every month through retirement.
Strategies to Use to Pay Off or Reduce Mortgages
There are some things that you can do to help get the mortgage paid off sooner. If you were to make a payment bi weekly instead of just once a month you will be making thirteen payments instead of just twelve.
You can also consider refinancing which can lower your payments, shorten the time of the loan, and get you a better interest rate. There are many options to choose from when refinancing you don’t just have to go to the bank any more.
A feasible option is to down size to a small home. Even if you owe on your home you can sell it for more than the mortgage and have enough to get set up in a small home with lower payments.
The Bottom Line About Paying Off a Mortgage
The truth is that paying off that mortgage and eliminating that monthly payment is going to give you tremendous peace of mind when you retire. Speaking from the money end of the situation; the same answer isn’t right for every person make the choice that is best for you and will give you the best end result.