Historically, conventional wisdom suggested that paying off one’s home was a critical step to accomplish before retiring comfortably. That wisdom, however, doesn’t seem to be carrying through as prominently into current trends. According to the Consumer Financial Protection Bureau’s study following the 2010 Census, the “analysis of Census data shows that the percentage of homeowners’ age 65 and older carrying mortgage debt increased from 22 to 30 percent (3.8 to 6.1 million) from 2001 to 2011.”[i]
The question of whether or not it makes sense to plan to retire mortgage-free is, like so many financial questions, a very personal one. Here’s a list of some of the most important factors that should be considered in your analysis:
- What is your overall debt situation? Compared to other forms of debt, mortgage loan rates are low, especially since so many homeowners have refinanced to take advantage of historically low rates. If you have higher interest rate debt, like credit card debt, you’re better off focusing on that area first.
- Are you able to deduct the interest you pay on your mortgage? If so, the after-tax cost of borrowing the money through your mortgage is even lower than it appears.
- Are you on track to meet other financial needs? Do you have emergency reserves that can cover job loss? Do you have funds set aside to meet college needs? Remember, equity in your home is not an easily-accessible liquid asset. If you need money quickly, having a home that’s paid off at the expense of your emergency fund may be a costly error.
- Are you leaving money on the table at your employer and your spouse’s employer? If you’re not getting the match in your company-sponsored retirement plan, you’re missing out on one of the greatest opportunities for wealth accumulation that exists. Never sacrifice the retirement plan match in favor of paying down your mortgage.
- Have you run the numbers? In other words, have you prepared a retirement analysis that compares side-by-side the impact of carrying a mortgage into retirement versus being debt-free? If not, you’re just guessing!
In our history as CERTIFIED FINANCIAL PLANNER™ practitioners, we’ve recommended to some clients that paying off their mortgage makes sense. We’ve also recommended that clients retire with a mortgage. It’s a case-by-case planning decision that should be evaluated in light of your unique situation and with an eye to the various other goals and values that shape your personal financial outlook.
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