Should You Pay Your Mortgage Off Before Retirement?

One of the issues that comes up frequently among business owners planning for their retirement is whether they should pay off their mortgage before they retire. Of course, the short answer is: It depends. Many factors must be considered, including your cash flow and liquidity needs in retirement, how your assets are allocated, your tax situation, and your general attitude about debt. While there are several advantages to paying off your mortgage, there may be situations when keeping it can provide more benefits. Here’s a look at both sides:

When You Should Consider Paying Off Your Mortgage

You don’t like debt. Some people have an aversion to debt, which is as good enough reason as any to pay it off. Past generations, especially those that grew up in the Great Depression, avoided debt as a matter or principle, viewing it as a direct threat to their financial security. That’s motivation enough for some people who want to be debt-free in retirement.

You need more cash flow. Using cash flow to pay a mortgage means less is available for other lifestyle needs. If you are concerned about having enough cash flow to meet your monthly needs, especially later in life, paying off your mortgage makes sense. It could also help you avoid liquidating assets to cover your expenses.

You want to reduce your interest expense. Paying off your mortgage early could result in saving a significant amount of money in interest expense, with the savings applied to your retirement income.

When You Should Consider Paying Off Your Mortgage Early

You would rather invest your money. Maintaining a low-interest mortgage allows you to free up assets that can be invested for higher returns. A properly diversified growth portfolio can generate returns greater than your mortgage rate.

You still need the mortgage deduction. With the higher standard deduction in the new tax law, an increasing number of people may not realize the benefit of deducting their mortgage interest. If your itemized deductions will exceed the standard deduction, you could still benefit from the mortgage deduction.

You like liquidity. A low-interest mortgage provides the leverage to keep your cash flow and assets working for you in more liquid investments. While you can have a lot of equity in a mortgage-free home, it could be more expensive to tap should you need to access it in the future.

There is no single right answer to the question of whether to pay your mortgage off before retirement. It depends in large part on your circumstances, preferences, priorities and needs. It’s a decision that requires in depth analysis to determine if the math works one way or the other.