Retiring with a mortgage: It’s not always a bad idea

Man who considered whether retiring with or without a mortgage would help him achieve his financial goals.

As you approach retirement, chances are one of your main goals is cutting debt. And one of your biggest debts is most likely your mortgage.

In many cases, people work to pay off their mortgages at retirement, to help simplify their monthly expenses. However, it may be better to continue paying your mortgage each month.

Review these tips to help you determine the smartest move for your finances.

The impact of the payoff

Paying off your mortgage prior to retirement may be a sensible option if you’ll have enough savings left over to last you through retirement.

But before you make a final decision, keep these factors in mind:

  • Interest: If you continue to make monthly payments, the interest you pay on your mortgage may be federally tax-deductible. That could help reduce your taxable income in retirement.
  • Growth potential: If the growth potential of your retirement savings is low compared to the interest rate on your mortgage, paying off your mortgage may be a good idea. But your retirement savings may offer better growth potential along with the possible tax benefit.
  • Taxes: Before using pre-tax retirement funds for a payoff, check with your tax professional. You may owe taxes (and potentially a penalty) on pre-tax retirement funds at withdrawal.*
  • Risk and return: Revisit your risk tolerance and asset allocation to maximize the growth potential of your retirement savings.

Continuing monthly mortgage payments

It may make sense to continue making your monthly mortgage payments if paying off your mortgage will exhaust—or nearly exhaust—your retirement savings.

Or you may need to preserve your savings to help create monthly income—and as a rainy-day fund in retirement.

If you think a monthly mortgage still fits into your retirement strategy, yet your monthly expenses are a challenge, consider the following options:

  • Earn additional income through part-time work.
  • Look for lower-cost alternatives on necessary expenses.
  • Reduce or eliminate unnecessary spending.
  • Consider working with a mortgage professional to refinance if you plan to have your mortgage well into retirement, and if it lowers your interest rate.
  • Downsize to lower housing-related expenses.

Review your options

Speak with a financial professional to compare both scenarios—one where you keep your mortgage, and another where you use your retirement savings to pay off the mortgage. You may be surprised by the results.

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*Your distribution of pre-tax retirement funds will be subject to ordinary income taxes (20% will be withheld for federal taxes as required by law). A cash distribution is also subject to a 10% federal penalty unless you are age 59½, age 55, or more when you separated from service. Some states may require state income tax withholding. You may want to consult with your tax advisor before taking a distribution in cash.