The decision to pay off your mortgage before retirement is a personal one that depends on various factors, including your financial goals, risk tolerance, and overall financial picture.
Indeed, paying off your mortgage early can provide a sense of financial security and peace of mind. Nevertheless, it’s essential to weigh the pros and cons carefully.
In this article, we’ll explore the potential benefits and drawbacks of paying off your mortgage before retirement, so you can prioritize your financial goals and retire confidently.
Benefits of Paying Off Your Mortgage Before Retirement
Everyone’s financial situation is unique. However, if you’re wondering if you should pay off your mortgage before retirement, consider the following benefits.
#1: Fewer Expenses in Retirement
First, eliminating your mortgage payment can significantly reduce your monthly expenses in retirement. According to the most recent data from the Bureau of Labor Statistics, housing costs account for approximately 32.8% of expenditures for those age 65 and older.
Lowering your expenses in retirement can give you greater flexibility and provide a cushion in case you experience an unexpected financial setback. In addition, it allows you to allocate your savings to other priorities, such as travel, hobbies, or healthcare costs.
#2: Reduced Sequence of Return Risk
If you’re planning for retirement, you may have heard of sequence of returns risk. This is the risk that you’ll experience a market downturn just before or right after you retire.
As your account balances decline due to falling asset prices and untimely withdrawals, you risk depleting your savings faster than you anticipated. However, lowering your fixed expenses in retirement can help reduce this risk.
Indeed, paying off your mortgage before retirement is one way to meaningfully reduce your fixed expenses. Doing so may give you more flexibility in the event of a market downturn, so you can scale back your withdrawals and potentially preserve your financial resources longer-term.
#3: Greater Peace of Mind
Money is a common stressor for many people. In fact, 65% of Americans find money to be a significant source of stress, according to a February 2022 study from the American Psychological Association.
Being debt-free can provide a sense of financial security and peace of mind as you transition into retirement. In addition to eliminating a meaningful financial obligation, paying off your mortgage before retirement can help you feel more confident about tackling financial challenges that may arise once you stop working.
With this additional peace of mind, you can focus on other retirement goals and aspirations and potentially find more fulfillment in your golden years.
Potential Drawbacks of Paying Off Your Mortgage Early
Despite the advantages of paying off your mortgage before retirement, there are potential drawbacks. Thus, it’s important to weigh all pros and cons as you prioritize your financial goals.
#1: Opportunity Cost
Depending on what you owe, you may need to set aside a significant amount of cash to pay off your mortgage before retirement. In some cases, this may mean sacrificing the potential for higher returns by investing the same funds.
According to an analysis by McKinsey, stocks have consistently returned an average of 6.5% to 7% annually, after inflation, since 1800. Depending on your risk tolerance and financial goals, investing your money in equities and other growth-oriented investments may provide greater benefits over the long run than paying off your mortgage early.
Thus, be sure to consider the opportunity cost of putting all that cash to work before committing it to your mortgage. You may want to consult a financial planner, who can help you prioritize your financial goals and allocate your funds accordingly.
#2: Reduced Liquidity
Many financial experts recommend that retirees keep enough cash on hand to cover at least six to twelve months’ worth of living expenses. Depending on your risk tolerance and lifestyle, you may want to keep an even larger cash balance in your emergency fund.
If using cash to pay off your mortgage off before retirement leaves you with insufficient liquid assets, you may want to hold off for the time being. Having an emergency fund is essential in retirement so you can cover unexpected expenses without dipping into your retirement accounts.
#3: Tax Implications
Lastly, consider how the potential tax consequences of paying off your mortgage early can affect your overall financial plan. Mortgage interest is often tax-deductible, which can reduce your overall tax burden.
Moreover, having a mortgage often makes it possible to itemize deductions on your tax return rather than taking the standard deduction. Itemizing can create additional tax savings opportunities such as the charitable giving deduction.
Thus, if you pay off your mortgage off before retirement, you may lose valuable tax benefits.
Additional Factors to Consider When Deciding Whether to Pay Off Your Mortgage Before Retirement
- Interest Rates. Be sure to compare the current interest rate on your mortgage to the potential return on your investments. If your mortgage interest rate is significantly lower than your expected investment returns, it may be more beneficial to continue to invest rather than pay off your mortgage before retirement.
- Time Horizon. At the same time, consider how many years you have left on your mortgage and how close you are to retirement. If you’re nearing retirement and have only a few years left on your mortgage, the benefits of paying it off early may outweigh the potential investment gains.
- Risk Tolerance. Assess your personal risk tolerance and financial goals. If you prioritize financial security and peace of mind, paying off your mortgage early might help you sleep better at night. However, if you’re comfortable with some risk and seek higher returns, it might make more sense to invest your extra funds and focus on other financial goals.
- Overall Financial Picture. Lastly, evaluate your entire financial situation, including your retirement savings, debt levels, and other financial obligations. It’s important to strike a balance between paying off debts and building a robust retirement nest egg. A trusted financial planner can help you find the right balance for your retirement goals.
Chladek Wealth Management Can Help You Retire with Confidence
Deciding whether to pay off your mortgage before retirement is a personal choice that depends on your financial goals, risk tolerance, and overall financial situation. By carefully considering the potential costs and benefits along with your unique circumstances, you can make a well-informed decision that will help you retire confidently and securely.
In addition, consider working with a financial planner like Chladek Wealth Management to develop a comprehensive plan for your retirement. We specialize in the financial planning needs of individuals and families seeking a secure financial future. To see if we may be the right fit for your retirement planning needs, please schedule a Learn More Call.