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Paying off a Mortgage Before Retirement? It's Not Always the Right Move

Heading towards retirement, many people strive to become debt-free. That often means paying off a mortgage so you don’t need to worry about the monthly payments during your “leisure years.”

Yet it’s not always the right move. It all depends on how much of a cash cushion you’ve put in place for unforeseen expenses like home repairs or medical concerns, and whether there is other higher-interest debt that still needs tending to.

According to a 2016 study by Harvard University, more than 40% of homeowners 65 and older had mortgage debt on their primary residences. That’s nearly double the rate from two decades earlier. That’s partially because today’s soon-to-be-retirees are less debt averse than their parents.

The real test for a mortgage payoff is how your interest rate compares to expected stock market returns. If you’re carrying a mortgage with a 4% interest rate, you should that compare that with a choice of investing in stocks and bonds, which tend to bring a higher return than that over the long haul. 

But here’s the big caveat. The stock market has posted remarkable gains since the end of the Great Recession. That suggests we may be poised for a period of “mean reversion,” when the stock market delivers more muted returns for a stretch, perhaps a smaller return than the interest rate on your mortgage. That argues for paying off the mortgage, and foregoing the near-term opportunity for more market investments. (Over the course of a decade or two, stocks are likely to deliver more robust gains that that 4% mortgage interest rate we just discussed).

For some people, refinancing a mortgage might be a better option. Depending on your current mortgage rate, you may be able to lower your monthly payments by refinancing and extending the life of the loan while locking in a lower rate.  These are good questions to ask a financial planner.

Lastly, don’t pull funds out of your retirement plan to pay off a mortgage. The tax bite on outsized withdrawals means that the potential psychological benefits of a reduced debt load is more than offset by the very real pain of a large tax bill.