Are you thinking about retiring this year? If so, there are many things to consider. One common piece of advice is to pay off as much of your outstanding debt as possible before you retire.
This makes perfect sense when it comes to credit-card debt, personal loans, and auto loans. But what about your mortgage? For most people, that represents the largest chunk of debt.
The answer is this: it depends on your financial situation.
Here are some considerations that can help you make that decision:
- Your mortgage rate. If you have a fixed-rate home loan with a great rate (let’s say below 4%), it may not make sense to pay it off before you retire–especially if you plan on pulling money from your retirement savings accounts to do so. Depending on how you’re invested, you could be losing money–in other words, if your investments are earning 6% or 7%, why would you cash out and lose out on that money?
- Tax consequences. If you are thinking about using qualified retirement savings to pay off your mortgage, it only makes sense to run some numbers to figure out how that will affect your taxes. If you take out money from pretax savings (like those from a 401(k) or traditional IRA), you’ll pay regular income taxes on your withdrawal. You may also be subject to an additional early withdrawal penalty of 10%, depending on your age and your plan rules.
- Your other outstanding debt. If you have a lot of higher-interest credit card debt, you may want to focus on paying that off before you consider paying off your mortgage.
- Your emergency fund. If you don’t have at least three to six months’ worth of living expenses squirreled away in a savings account, prioritize building up an emergency fund before you pay off your house.
- Your nest egg. If you don’t have enough money to comfortably live off of in retirement, consider delaying your mortgage pay-off and instead maximize your retirement contributions.
Even if you aren’t in a position to fully pay off your mortgage, you still may have other options. One is to refinance to a shorter mortgage (and possibly at a lower rate) than your current home loan. Another is to send extra payments towards the principal balance on your mortgage periodically. Doing this can save you a surprising amount of interest over time and shorten the length of your payments.
If you are trying to decide the best course of action, why not get a second opinion? Our advisors can help you make sense of your options. Click here to schedule a no-cost, no-obligation conversation with one of them.