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Should You Pay Off Your Mortgage Before You Retire?
Entering retirement with no mortgage payment is a goal for many people, and it is easy to see why. A big monthly expense disappears. But paying off a mortgage early is not automatically the best move, because that money could be used in other ways. Here is how to think it through.
The case for paying it off
- Lower monthly needs. If your mortgage payment is $1,800 a month, paying it off reduces the income you need by $1,800. Under the rule of 25, that can reduce the savings you need by roughly $540,000 ($21,600 a year times 25), though the principal you pay off also uses up savings.
- A guaranteed result. Paying off a loan that charges 6% is like earning a guaranteed 6% on that money, with no market risk.
- Peace of mind. Many retirees value the security of owning their home outright.
- Less sequence risk. Lower fixed expenses mean smaller withdrawals during bad markets. See our guide on sequence of returns risk.
The case for keeping it
- Low interest rate. If your mortgage rate is low, perhaps lower than what a balanced portfolio may earn over time, it may make sense to keep it, though investment returns are not guaranteed.
- Liquidity. Money put into your house is hard to reach. You cannot spend home equity without selling, borrowing or downsizing, so keep enough in accessible savings for emergencies.
- Taxes. Pulling a large sum from a traditional 401(k) or IRA to pay off the loan can create a big tax bill and might push you into a higher bracket, which can make the move much more expensive than it looks.
- Mortgage interest deduction. If you itemize, interest may be deductible, though many households no longer itemize.
Questions that help you decide
- What is my mortgage interest rate compared with the return I can reasonably expect?
- Where would the money come from? Savings in a taxable account, or retirement accounts that trigger tax?
- After paying it off, would I still have an emergency fund of several months of expenses?
- How many years are left on the loan? If only a few payments remain, the question may not matter much.
- How would I feel if I kept the mortgage into retirement?
Middle paths
- Pay extra gradually in your last working years rather than all at once.
- Downsize and use the equity to reduce or remove the loan.
- Refinance if rates and costs make sense for you.
Using the calculator
Run your plan twice: once with your mortgage payment included in the desired monthly income, and once with it removed along with the savings you would use to pay it off. Compare the results, including the chance your money lasts.
Use the free calculator to see whether you are on track.Open the retirement calculator
This article is for general educational purposes and is not financial, tax or legal advice. Rules and limits change; confirm details with official sources or a qualified professional. See our Disclaimer.