Retiring with a mortgage
Should you pay off your mortgage before retiring or continue the monthly payments?
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. Either way, it’s important to make an informed decision.
The impact of the payoff
To pay off or not to pay off—that is the question. 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:
- If you continue to make monthly payments, the interest you pay on your mortgage may be federally tax-deductible. That could help you reduce your taxable income.
- 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 if you feel your retirement savings offers better growth potential than the mortgage interest rate (and potential tax benefit), you may be better off keeping the mortgage.
- 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.
- As you consider withdrawing retirement funds to pay off your mortgage, it's a good time to revisit your risk tolerance and asset allocation.
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 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.
Contact your financial professional
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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 59 ½, 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.
The subject matter in this communication is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.
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