For many approaching retirement, the goal of being debt-free often includes having their mortgage paid off. But in today’s world of rising home values, refinancing and re-locating, more retirees are finding themselves crossing into retirement with a mortgage still on the books.
While carrying some mortgage debt into retirement isn’t automatically a deal-breaker, it’s worth examining how it could impact your income needs, cash flow, and peace of mind.
The Rise of Retirees With Mortgages
According to the Center for Retirement Research at Boston College, the percentage of U.S. households over age 65 with some form of debt has increased from 38% in the late 1980s to 63% today — and mortgage debt makes up the lion’s share.
While the trend of delayed home ownership is expected to impact future retirees, the trend is still emerging. Many of today’s retirees have refinanced for renovations or lower rates, utilized a HELOC, or moved to be closer to family or for a change in climate. In many of these cases, homeowners are choosing to re-start the 30 year clock tied to standard mortgage terms.
Remote work has also given people more flexibility that can lead to relocating prior to retirement. The result? Well, it’s no surprise a growing number of retirees are entering retirement with a monthly mortgage payment to account for.
Is It Okay to Retire With a Mortgage?
The answer depends on several factors, including your overall financial picture, your retirement income sources, and your risk tolerance.
If your mortgage is low-interest and fits comfortably within your retirement budget, continuing payments into retirement may be a reasonable choice. In fact, some retirees intentionally keep a mortgage because the funds they’d use to pay off the debt are working harder elsewhere.
Example: A home owner has $150,000 in savings. This is enough to pay off their mortgage that has a 2.75% interest rate. Instead, they chose to invest the money in the stock market where they hope to see a 10% return. If the stock market returns out performs the interest rate, they ultimately come out ahead. Of course, there is no guarantee, but this is a scenario leading some to not pay off their mortgage early. At Foundation Wealth Management (FWM), we prefer to look at current interest rates on CDs, Treasuries or money market accounts. Since there is limited risk in these investments we think they are a better comparison than the stock market. If you can earn more interest on your CD or treasury investment than you are paying in mortgage interest then it may make sense to keep the funds there. You know you are earning a return higher than your debt and there isn’t any risk that this will change since the interest rate is guaranteed for a time period. We do not recommend using the stock market to evaluate if you should pay off your mortgage. Don’t forget stocks can have a negative return and take a long time to recoup those losses.
However, if that monthly payment squeezes your cash flow, forces you to draw down retirement accounts too quickly, or adds unnecessary stress, it’s worth reevaluating.
Before you commit to retiring with a mortgage, consider these questions:
- Can I comfortably afford the payments on my fixed income?
- How much of my retirement income would go toward housing each month?
- Would paying off the mortgage early significantly improve my monthly budget?
- What’s the interest rate and could my investments potentially outperform it?
- Would eliminating the mortgage allow me to retire earlier, work less, or feel more secure?
- If I use funds to pay off the mortgage will I have enough liquid assets to enjoy my retirement?
There’s no one-size-fits-all answer. At FWM, we believe your retirement plan should reflect the reality of your monthly obligations and account for some flexibility.
Strategies to Lighten the Load
If retiring mortgage-free isn’t realistic, consider these strategies to make it more manageable:
- Refinance (if it makes sense)
If you’re still working and eligible, refinancing to a lower interest rate or longer term might reduce your monthly payment. On the contrary, it may extend the life of the loan. - Make extra payments while you’re still earning
Applying bonuses, tax refunds, or side income to your mortgage before you retire can reduce the principal and shorten your payoff timeline. Living under your means may be necessary to make significant headway. - Downsize or relocate
Downsizing or relocating to a more affordable region may allow you to eliminate the mortgage entirely and free up equity. - Budget with housing in mind
Factor your mortgage into your retirement spending plan. Be conservative with your income assumptions and build in a buffer for taxes, maintenance, and insurance.
When to Pay It Off — and When Not To
It can be tempting to use a lump sum from a retirement account to pay off the mortgage before you retire. But be careful. That withdrawal may trigger a big tax bill and potentially diminish your future growth potential. Always weigh the pros and cons with a financial advisor who understands your full financial situation and goals.
For some, the emotional payoff of owning their home outright outweighs the financial trade-off. For others, the math favors keeping the loan in place and preserving liquidity.
Let’s Make the Numbers Work for You
At Foundation Wealth Management, we help pre-retirees navigate real-world decisions like whether to keep or pay off a mortgage in retirement. It’s not just about the math; it’s about your lifestyle, your goals, and your long-term security.
You’ve worked hard to build your retirement. Now let’s make sure it supports the life you want to live. To learn more about how we can help, schedule a meeting with one of our Financial Advisors today.
About Foundation Wealth Management
Foundation Wealth Management is a CPA-led organization, that provides financial planning services and tax planning support; services and outcomes vary based on each client’s circumstances. Our team includes qualified professionals, such as CPAs and CFP®s, who are integral to our service offerings. Our team includes 3 Certified Financial Planners: Burt Hutchinson, CPA, CFP®, Paul LaViola, CFP®, and Stephen McDade, CFP®.
As Fee-Only planners, we are compensated directly by clients rather than through commissions from brokerage or insurance products, which we believe helps align our services with client goals.
Sources:
- https://crr.bc.edu/profiling-retirees-who-carry-too-much-debt/
Disclosure Statement:
This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax, or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice. All investments are subject to risk, including the possible loss of principal.
The client scenarios presented in this blog are entirely fictional and created solely for illustrative purposes. Any similarities to actual persons, entities, or events are purely coincidental and unintentional.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website, Past performance is not a guarantee of future results.
