Should You Keep Your Mortgage In Retirement?

It’s been said that owning a home is realizing the American Dream. But what most homeowners really dream about is the day their mortgage is finally paid off! mortgage-in-retirement-672x372The financial benefits of not having a mortgage in retirement are hard to ignore. But is it always the smartest thing to do financially? Here are some reasons why your mortgage should retire with you—and some situations where perhaps it shouldn’t.

To keep the cash flowing

When the paycheck stops, the cash flowing in to your checking account may slow considerably. A monthly mortgage payment can represent a big chunk of that incoming money. Eliminating the mortgage payment can greatly reduce the amount of cash you need to meet monthly expenses. This matters most when the cash needed for the mortgage payment comes from your savings and investments.

To stabilize risk

Some argue that keeping the loan and investing your money elsewhere makes the most sense, because the potential upside of the investments outweighs the interest cost of the mortgage. This argument holds the most weight when mortgage rates are low and stock market returns are high (which is exactly what we’ve been seeing for the past eight years).

However, this simple match ignores the risk created by the timing mismatch between the two. On one side is the mortgage payment, a steady, fixed amount due every month. On the other side are the funds for paying off the mortgage, which if invested for high return are subject to market fluctuations. If the invested funds lose value for an extended time, you’ll still have to make the same payments to the mortgage lender. If you’re retired and the money for those payments is coming from the invested funds, it can mean being forced to sell investments at a distressed price in order to meet the mortgage payments. This result can be a real destruction of your wealth.

To lock in returns

Another way to look at the equation is to see the mortgage interest payment as a negative return. That is, a return that the bank is earning from lending you the money, and therefore, a return that you wouldn’t have to be paying someone else if you did not have the mortgage. By paying off the mortgage, you can stop making that interest payment, which makes you a lender rather than a borrower. As a lender (a lender to yourself in this case) you are earning the equivalent of the rate of interest you would have been paying someone else if you were borrowing the money.

This interest you are keeping rather than paying a lender may not seem like much, but keep in mind this is a “low risk” loan. If you are a stable borrower, there isn’t much risk that the lender isn’t going to get paid. And interest can really add up over time. Over tens of years, you may pay tens of thousands of dollars in interest on a mortgage.

For peace of mind

The numbers aren’t everything—even in finances. There is a real emotional benefit from being debt free in retirement, and that benefit is peace of mind. It can’t necessarily be measured in dollars or added to your balance sheet, but it can be of great value to you in retirement. After all, retirement is a time to relax and enjoy life, not fret over your finances. What good is financial wealth if it can’t bring you peace of mind?

Managing low liquidity

Many retired Americans are “house-rich and cash-poor.” Most of their wealth is tied up in real estate equity, which cannot easily be turned into cash for paying for living expenses and emergencies. If your liquidity is low, using a chunk of the liquid funds you do have to pay off the mortgage may only make the problem worse. However, for those with low liquidity, keeping the mortgage may not be a good long term solution either; only a temporary measure until you can sell real estate and increase your liquid assets.

A mortgage is only one part of your retirement plan equation

Whether keeping or paying off your mortgage in retirement makes sense for you really depends on your own personal circumstances and preferences. Your tax, cash flow and liquidity picture are key to the decision. Your tolerance for investment risk and your desire for stable returns during retirement are also very important. Viewed within the framework of all these other factors, deciding to pay off your mortgage when you retire becomes a much easier decision to make. Contact us to learn more about how we can help you make sound financial decisions for your transition into retirement.

About Jon Beyrer

Jon Beyrer, EA, CFP® is a partner of Blankinship & Foster LLC and is the firm’s Chief Compliance Officer. As a lead advisor, he focuses on helping families achieve their goals with sound wealth planning. In the community, Jon serves on several boards and is co-founder of the Professional Alliance for Children, a legal/financial charity for families of ill children. He has been quoted in The Wall Street Journal, The New York Times, and the Journal of Financial Planning. Jon lives in San Diego with his family.

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