Having a mortgage in retirement: the pros and cons

Retirement planning often includes the goal of reducing mortgage payments before leaving the workforce. This approach is based on the idea that it is easier to be financially stable in retirement by reducing expenses rather than dealing with a mortgage collect on a fixed income.

But getting rid of your mortgage all the time the best way? Some experts say there may be drawbacks to using valuable financial resources to pay off a home loan. What’s more, there may actually be benefits to bringing a mortgage into retirement—including using the interest as a deduction on your annual tax bill.

But, this may not be the best move for everyone. The most important factors to consider are your mortgage interest rates, expected retirement incomeand how much money you have to sacrifice to get rid of your mortgage.

It may not be appropriate to take out a mortgage in retirement

For most retirees, it’s free mortgage payments at the time of retirement it becomes a thing of the past. The oldest group of baby boomers—individuals born between 1946 and 1951—have significantly less mortgage payments before retirement, according to TIAA. And in some cases, it may be a deliberate decision.

About 30% of TIAA customers who are retired or within one year of retirement continue to maintain a mortgage.

“While the goal for many retirees is to reduce the amount of debt they have in retirement, there are pros and cons to having a mortgage in retirement, ” said Jarrod Fowler, head of TIAA’s Investment and Advisory Center.

There are several reasons why paying off your mortgage might not be the best financial decision.

If your mortgage interest rate is lowinvesting may be the best option

Individuals who have purchased a home or refinance their mortgage before the latest interest rate hike it is likely to be locked at a lower level mortgage interest– maybe 3%.

With a low interest rate, using your free cash to pay off mortgage debt may not make the same financial sense as investing money instead of developing a income stream you can count on in retirement. This is especially true considering that the average sales rate of the stock market is in the range of 6.5% to 7%, according to the data from McKinsey & Company.

“For those who are saving money for the long term and can withstand market fluctuations, there can be times when you can get more from your investment than you would pay specifically on your mortgage,” says Courtney Myers, a financial advisor and consultant, investment bank, and insurance company Lively.

The mortgage interest tax deduction it may be less important if you are alone

The amount of deductions you itemize on annual taxes is another factor to consider when deciding whether taking out a mortgage is a good option for you.

The Tax Cuts and Jobs Act of 2017 made it easier to itemize tax deductions. Of the standard deduction It now sits at $25,900 for married people and $12,950 for single filers, making it difficult to qualify for things. Mortgage interest payments, however, can help push retirees above the standard deduction and allow itemization. This plan is appropriate if there are usually other types of deductions each year in addition to the mortgage interest.

“There are a lot of things to consider … and it depends on your unique circumstances,” Myers said. “For example, if your medical bills, expenses, or other deductions are too high … then this may be an option for you. However, if your only deduction is the mortgage interest, you may You don’t exceed the standard deduction amount and you don’t benefit from carrying your mortgage into retirement for a tax deduction.”

Another caveat to note is that mortgages are often structured in a way that reduces the portion of the monthly payment that goes to interest as the loan matures. many years. Depending on how long before the mortgage is retired, this may mean that the tax benefits of keeping the loan are significantly less.

When it makes sense to take out a mortgage in retirement

There are other pitfalls when paying off your mortgage before retirement may not be the most financially beneficial option.

For example, if you don’t have a lot of debt otherwise, and hope to have a guaranteed source of income in retirement, such as a pension, Social Security, or fixed income that includes at least two thirds of your retirement life. expenses, then remove a mortgage payment that may not be significant. This is especially true for those in a high income bracket, as well as those with low mortgage interest rates.

Also, if withdrawing money from a tax-advantaged retirement plan like a 401(k)403(b), or IRA During retirement you will be pushed into the next tax bracket, you may want to stop paying your mortgage and put the money into it. savings. This is probably the smartest way to do it if you don’t have enough financial crisis determine if you are sacrificing your savings in order to pay more on a mortgage.

“It’s important to have an emergency fund for six to 12 months of expenses available,” Fowler said.

If done no It makes sense to have a mortgage in retirement

The decision to take out a mortgage in retirement is very personal and not suitable for everyone. For example, if you expect to have limited income in retirement and may not be able to rely on mortgage payments, then get rid of this debt ahead of time is probably the best move.

Also, if you have a lot of other types of debt and expect to continue paying off these debts in retirement, you may want to eliminate your monthly mortgage payment.

“It doesn’t make sense to have a mortgage in retirement if you don’t have a plan for financing. You have to have enough income for your mortgage and your expenses,” Myers said. “We cannot predict the future and we cannot know when something unexpected will happen. Therefore, it is important to plan for the worst case scenario and determine if you can pay your mortgage at that time. If financing one is going to be a challenge for you, then you shouldn’t carry it into your retirement.”

The removal

There are times when it may not be a good idea to pay off the best mortgage for a long time. This includes if your mortgage interest rate is very low, and the money you can direct to additional mortgage funds can earn you a higher return by investing.

But there is no single answer to this question. Everyone’s situation is unique.

Before making such an important decision, consider working with a financial advisor who can look at the overall financial picture and help determine if it’s worth it. for you to take out a mortgage in retirement.

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