Ask ten different people about their dreams for retirement, and you might get ten different answers. But one theme will pop up regularly: Many of us envision a debt-free life. And in particular, paying off the mortgage before retirement is a common goal.
But is it really necessary to pay off the house before you retire?
Necessary, no. Desirable, yes.
For many of us, the mortgage payment is our largest monthly expense. Living mortgage-free seems like an obvious way to free up more room in your budget, so that you can live a more carefree lifestyle.
Plus, as we get older, healthcare expenses do rise. Some retirees even report that their out-of-pocket healthcare spending eventually exceeds their mortgage payment. So it’s easy to see why many would prefer to enter retirement free of that debt.
Plus, any money that you withdraw from your retirement account will be taxed as regular income, according to your income bracket, unless you’re pulling from a Roth account. So for most of us, higher living expenses means larger withdrawals which translates into more income taxes.
On the other hand, mortgage interest is tax deductible. The same can’t be said of debts like credit card payments or car notes. So if you can only pay down one form of debt before retirement, it shouldn’t be your mortgage. Address high-interest credit card balances first.
And finally, you should definitely think twice before taking a large distribution to pay off your mortgage balance. Not only will that distribution trigger higher income taxes, as we previously mentioned; if the money is growing at a faster rate than your mortgage interest rate, it might be better to leave those funds in the account.
Mortgage rates are resting at historical lows, so if paying off the balance isn’t an option, refinancing at a much lower rate could be wise.
Before you make any big decisions, give us a call to discuss your options. We can help you decide if paying off your mortgage before retirement is wise, and identify other possibilities that might better benefit you.