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Should Retirees Pay Off Their Mortgages?

Paying off the mortgage after 30 years used to be a rite of passage for Americans approaching retirement age but this once-common scenario is no longer the norm. Baby boomers, those born between 1946 and 1965, are carrying more mortgage debt than earlier generations and are less likely than earlier generations to own their homes at retirement age, according to research from Fannie Mae’s Economic and Strategic Research Group.

Whether it makes financial sense for retirees or those nearing retirement to pay off their mortgages depends on factors such as income, mortgage size, savings, and the value of the mortgage interest deduction.

Key Takeaways

  • Paying off a mortgage can be smart for retirees or those just about to retire if they’re in a lower-income bracket, have a high-interest mortgage, or don’t benefit from the mortgage interest tax deduction.
  • It’s generally not a good idea to withdraw from a retirement account to pay off a mortgage. That could reduce your retirement income too much.
  • If you have a hefty mortgage, there are other options to consider such as downsizing to a home that fits your retirement budget.

When to Continue Making Mortgage Payments

Monthly mortgage payments make sense for retirees who can do it comfortably without sacrificing their standard of living. It’s often a good choice for retirees or those just about to retire who are in a high-income bracket, have a low-interest mortgage (under 5%), and benefit from the deduction on mortgage interest.

This is particularly true if paying off a mortgage would mean not having a savings cushion for unexpected costs or emergencies such as medical expenses. 

Continuing to make monthly mortgage payments makes sense for retirees who can do it comfortably and benefit from the tax deduction.

If you’re retiring within the next few years and have the cash to pay off your mortgage, it may make sense to do so, particularly if the funds are in a low-interest savings account. Again, this works best for those who have a well-funded retirement account and enough reserve funds for unexpected emergencies.

Paying off the mortgage ahead of retirement can be a real stress reducer. Your monthly expenses will be cut, leaving you less vulnerable to a sudden property tax increase, an emergency repair, or the impact of inflation. You’ll save on the interest you would owe by keeping the mortgage.

Entering your retirement years without monthly mortgage payments means you won’t have to use your retirement funds to pay for them.

Should Retirees Pay Off Their Mortgage?

Avoid Tapping Retirement Funds

Generally, it’s not a good idea to withdraw from a retirement plan such as an individual retirement account (IRA) or 401(k) to pay off a mortgage. If you withdraw before you turn 59½, you incur both taxes and early-payment penalties.

Even if you wait, the tax hit of taking a large distribution from a retirement plan could push you into a higher tax bracket for the year.

It’s also not a good idea to pay off a mortgage at the expense of funding a retirement account. In fact, those nearing retirement should be making maximum contributions to retirement plans.

Over the past several years, research has shown that the majority of people are not saving enough for retirement. In a September 2018 report, the National Institute on Retirement Security revealed that more than half (57%) of working-age people don’t have a retirement account. The report adds that even among workers who have accumulated savings in retirement accounts, the typical worker had a modest account balance of $40,000.

Strategies to Pay Off or Reduce Your Mortgage

You can use strategies to pay off a mortgage early or at least reduce your payments before retirement. Making biweekly payments instead of monthly ones, for instance, means that over a year you’ll make 13 payments instead of 12.

If you have a larger home, another option is downsizing. If you structure the sale correctly, you might be able to buy a smaller home outright with the profit from the sale, leaving you mortgage-free. The pitfalls include overestimating the worth of your current home, underestimating the cost of a new home, ignoring the tax implications of the deal, and overlooking closing costs.

Although paying off a mortgage and owning a home outright before retiring can provide peace of mind, it’s not the best choice for everyone. If you’re a retiree or a few years away from retirement, it’s best to consult a financial advisor and have them carefully examine your circumstances to help you make the right choice.

Should I Refinance My Mortgage to Lower the Monthly Payment?

This would have been an option during the years when mortgage rates were below 5%. Interest rates began to climb steadily in 2022 and had topped 7% by late in the year. Anyone who obtained a mortgage or refinanced one in the years of low interest rates is unlikely to get a better deal in the foreseeable future.

Are Many Retirees Still Paying Off Mortgages?

About 44 percent of retired Americans between the ages of 60 and 70 are still paying off their mortgages. Many of them expect to be paying it for the next eight years. Note that most of those folks bought their homes more than 20 years ago, and either financed or refinanced their mortgages during the low-interest years.

Is it Worth Keeping the Mortgage to Get the Mortgage Interest Deduction?

Federal tax law changes implemented in 2018 nearly doubled the standard deduction and eliminated many itemized deductions. Since then, fewer Americans have found it worthwhile to itemize their taxes, even if they have mortgage interest to deduct.

The standard deduction for 2022 taxes is $12,900 for single filers and $25,900 for joint filers. If your interest payment (plus any miscellaneous deductions you might have) is less than that, you’re better off taking the standard deduction anyway.

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