Should You Pay Off Your Mortgage Before You Retire?
There isn't one right answer: mathematically, keeping a low-rate mortgage may make sense, while emotionally, entering retirement debt-free can be worth more to someone than the spreadsheet suggests.
This Is One of Those Decisions People Ignore Me On
There are probably two areas where people ignore my advice more than anywhere else in retirement planning: when to take Social Security and whether to pay off their house.
And I understand both of them.
My job as a financial advisor is to explain the math, show people the tradeoffs and make sure they understand the consequences of the decision they're making.
But ultimately, it's their money and their retirement. They get to decide.
And when it comes to paying off the mortgage, I'm probably the perfect example.
I'm Doing What the Math Says I Probably Shouldn't Do
My mortgage rate is around 3.5%.
If you asked me for the purely financial answer, I probably shouldn't be paying an extra dime on it.
It's cheap money. I could take those extra dollars, invest them and, over a long enough period, have a reasonable expectation of earning more than 3.5%. There's also value in keeping that money liquid rather than converting it into additional equity in my house.
That's the financial advice.
I'm paying extra on my mortgage anyway.
Why? Because I want the thing paid off.
I completely understand the psychological satisfaction of knowing that you own your house outright and don't have a mortgage payment anymore.
So I'm not going to sit here and tell you that paying off a 3.5% mortgage is stupid.
I'd have to call myself stupid.
The better question is whether you understand what you're giving up to get that mortgage paid off—and whether it's worth it to you.
The Interest Rate Matters. A Lot.
A 3.5% mortgage and a 7% mortgage are two completely different conversations.
If you're paying 7%, eliminating that guaranteed cost becomes pretty attractive. An investment would have to earn more than 7% before taxes and risk to clearly beat paying down that debt.
At 3.5%, the hurdle is obviously much lower.
That's why I have a hard time telling somebody with a very low fixed mortgage rate that paying it off is the best financial move.
But "best financial move" and "decision I want to make" aren't always the same thing.
I'm living proof.
Where Is the Payoff Money Coming From?
Consider taxes and investment opportunity cost
This may be even more important than the interest rate.
Let's say you owe $300,000 on the house.
If you have $700,000 sitting in a bank account because you just sold another property, paying off the mortgage is one conversation.
If you're going to pull $300,000 out of a traditional IRA to do it, that's a completely different conversation.
That $300,000 withdrawal may be taxable income. Depending on everything else happening that year, you could create a significant tax bill just so you can say the house is paid off.
That's the kind of decision where I want people to slow down.
You may be solving a 3.5% mortgage problem by creating a much larger tax problem.
Don't Make Yourself House Rich and Cash Poor
There's another thing people forget when they're racing to pay off a mortgage.
Home equity doesn't buy groceries.
If you have a $1 million house with no mortgage and almost nothing available outside of retirement accounts, you're technically worth a lot of money.
But the house doesn't send you a monthly check.
I would much rather see someone enter retirement with a manageable mortgage and plenty of liquidity than throw every available dollar at the house and suddenly have no flexibility.
A paid-off house feels safe. Liquidity is also safe.
You need to think about both.
But Getting Rid of the Payment Has Real Value
Now let's make the argument in the other direction.
Suppose your mortgage payment is $3,000 a month.
That's $36,000 a year your retirement income has to support.
If paying off the mortgage eliminates that expense, suddenly the amount of income your portfolio needs to produce every year may drop substantially.
That matters.
There is a psychological benefit too. For some people, knowing the house is paid for changes how they feel about retirement. They sleep better. They worry less about the market. Their required monthly spending is lower.
I'm not going to pretend that has zero value because I can't put it neatly into a spreadsheet.
It has value.
The question is how much you're willing to pay for it.
Sometimes Peace of Mind Wins
This is where financial planning becomes more personal than mathematical.
I know what the spreadsheet says about my 3.5% mortgage.
I'm still paying extra on it.
That's not because I don't understand the math. It's because I understand the math and have decided there is value to me in eventually not having a mortgage.
Those are two different things.
I think people sometimes believe that hiring a financial advisor means handing over every decision and doing whatever the advisor says.
That's not how I look at it.
I can tell you what I think is financially optimal.
You can tell me you'd rather sleep at night knowing your house is paid off.
Both things can be true.
Don't Sacrifice Your Retirement to Pay Off the House
Where I start pushing back is when paying off the mortgage jeopardizes everything else.
If paying off the house means draining most of your liquid savings, taking an enormous taxable distribution, or leaving yourself without enough money invested to support your retirement, then peace of mind can become very expensive.
I don't want you entering retirement saying, "Great news, the house is paid off," while we're wondering how you're going to fund the next 25 years.
The house is one piece of your retirement.
It isn't the retirement plan.
My Job Is to Give You the Advice. You Still Get to Retire Your Way.
There are two areas where people probably ignore my advice more than any others: when to take Social Security and whether to pay off their mortgage.
And I'm okay with that.
My job isn't to make every decision for you. My job is to make sure you understand the financial consequences of the decision you're making.
If I show you why I think waiting on Social Security makes sense and you tell me, "Brandon, I understand. I'm taking it anyway," that's your decision.
If I show you why keeping a 3.5% mortgage and investing the extra money is probably the better financial decision and you tell me, "I understand. I still want this house paid off," that's your decision too.
In fact, I'm doing the same thing.
Retirement planning shouldn't be about squeezing every last dollar out of a spreadsheet. The math matters—a lot—but so does what makes you comfortable.
Sometimes the financially optimal decision and the decision that lets you sleep better at night are different.
You should understand which one you're choosing.
