Finances in Retirement - Investments

Should You Pay Off Your Mortgage Before Retirement?

by Alli Thomas

Jan 20, 2023

One common piece of advice for people approaching retirement is to pay off as much debt as possible first. This makes perfect sense when it comes to higher interest debt such as credit card balances, personal loans, and auto loans. But is paying off your mortgage early a decision that makes financial sense? After all, for most people, that represents the largest chunk of debt.

That not depends on your financial situation.

Here are some factors to consider when trying to decide if paying off your mortgage is right for you:

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 off your mortgage, especially if you plan on pulling money from your retirement accounts to do so.

If your investments are generating a higher rate of return than your mortgage rate and you withdraw that capital to pay off your mortgage, you would end up losing money.

Tax consequences. 

If you are thinking about using qualified retirement savings to pay off your mortgage early, it only makes sense to run some numbers to figure out how that will affect your taxes.

If you take out money from pretax retirement accounts (like 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.

Additionally, if you’re taking advantage of the mortgage interest deduction, you will lose that tax benefit if you pay off your mortgage.

Your other outstanding debt.

If you have a lot of higher-interest debt, you should prioritize paying that off first. Not only are your investments unlikely to generate a higher rate of return than the interest rate (particularly in the case of credit card debt), in most cases, your other debts will not offer any potential tax benefits.

Your emergency fund.

If you don’t have at least three to six months’ worth of living expenses on hand in a savings account, prioritize building up an emergency fund before you pay off your house. (And if you have significant high-interest debt, you should focus on paying that off first instead.)

Your overall retirement savings.

If you’re concerned that you don’t have enough money to comfortably live in retirement, consider maximizing your retirement contributions instead of making extra mortgage payments. Unfortunately, you may even want to consider delaying retirement to give yourself more time to save up – and increase the amount you’ll receive for your social security benefits.

Are there alternative options?

If you aren’t able 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 make 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.

Get a financial plan

Deciding whether you should pay off your mortgage before you retire shouldn’t be done on its own. Instead, the decision should be made as part of a comprehensive financial plan created with the assistance of a professional financial advisor. A personalized plan takes into account your entire financial situation to help you reach your retirement goals and get the most out of your money. Get you started with a no-cost, no-obligation consultation.

Request a no-cost, no-obligation advisor consultation today!

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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