Should You Have a Mortgage in Retirement?
July 27, 2009 by MJP
Filed under Mortgages, Debt, and Credit
It used to be uncommon to retire with debt. Even less common was retiring with a mortgage. Not any more.
According a new report from the Center for Retirement Research, in 2007 41% of households aged 60-69 had a mortgage. Remarkably, half of those mortgage debtors had sufficient assets to pay off their mortgage.
Let’s consider the possible arguments.
1. I can earn more with my money in the stock market. I don’t believe this is a reasonable position for a baby boomer to take. Your return on investment in a mortgage pay-off is the interest rate on your mortgage. This is a guaranteed return. (Yes, there are some tax benefits from a mortgage but those are minimal for retirees – see below.)
Assuming that you have a 6% mortgage interest rate, do you really think that you can earn 6% year after year in today’s stock market? Recent events suggest otherwise. Also, what happens if you make a huge investing mistake and lose a lot of needed retirement income from those invested funds? You place your home at risk if you can’t make the payments.
If you want to compare apples-to-apples in the “invest vs. mortgage payoff” equation, use risk-free Treasury bonds or CD’s. In other words, compare a 6 percent mortgage with a five-year bank CD yielding less than 3 percent or a 10-year U.S. Treasury bond yielding 3.5 percent. Bingo – mortgage pay-off wins.
Adjusting potential market returns for risk, the mortgage payoff seems like a slam dunk. The article I cited reached the same conclusion.
2. I need financial liquidity. Some folks hesitate on a mortgage payoff so that they can have money in more liquid assets, “just in case.” My question is: In case of what? If you are planning for retirement, you want cash flow freedom, meaning low recurring expenses in retirement that require income to meet. A paid-for house provides that, netting you tax-free phantom income (shelter services) at no monthly mortgage cost to you. If you ever have an emergency need for funds or income, you can probably obtain a HELOC or a reverse mortgage.
3. I can save on taxes by keeping my mortgage. Maybe – but probably not enough to justify keeping the mortgage. First, your marginal tax rate in retirement is likely to be lower. Second, most baby boomers are probably well into the length of their mortgage, meaning that the amount of deductible interest you are paying has declined. Third, a married couple in retirement receives at least $11,400 in standard deductions. Will your mortgage interest exceed that? Probably not, or not by much.
Final Thoughts on Mortgages in Retirement
Many financial planners believe that retiring debt-free is so important, they recommend that we work longer just so we can make that happen. The arguments in favor of keeping a mortgage are weak. Add in the emotional well-being associated with a stress-free, mortgage free life, the pay-it-off option is a winner in my book.
Photo credit: Aaron-H
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I just did my mortgage payoff calculations and while I agree with some of your points here are a couple of things I found out.
1. You need to look at not the overall interest rate of your mortgage, but, instead the actual interest you are paying in the last few years of your loan. Since, in the last few years of your mortgage you are paying primarily principle. In my case, it turned out that my effective interest rate was only 3.4%
2. In order to payoff my house, it meant that I had to take money out of my 401K for that year. This mean that the year I would take out the money my effective tax rate would go from 21% to 29%. So, I would have to give the government a nice chunk of change that year for the “right” to pay off my mortgage early.
While I would love to retie debt free. I only have to earn about 2.5% on my money to make more not paying off my house than paying it off. Did I miss something here?
BTW, love you site!!!