Should I pay off my mortgage? Why or why not? | Retire Debt Free

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A common question we hear is, “Should I pay off my mortgage?” Paying off your mortgage definitely has benefits that you should consider based on your financial situation. If you are retiring in a few months and have a $150,000 balance on your primary home, do you use your retirement funds to pay off the balance of your home, or do you keep paying the mortgage payment during retirement?

SUMMARY

Cash Flow Management During Retirement
One of the biggest questions when deciding the right time to retire is, “How much cash flow do you need to live on comfortably during retirement?” In our example, a $1,100 per month payment could be significant in a retiring middle-class household. The $150,000 left in investments actually would have to produce a return of 8.8% for 15 years to maintain the principal until the home was paid off. Instead, by paying off the home, the retiree’s cash need would decrease by $1,100.

Should I pay off my mortgage?
I often hear of advisors telling their clients not to pay off their home because it would mean losing their tax deduction for the mortgage interest. Let’s look at the math behind this advice. If you have a home with a monthly payment of $1,100, and the interest portion is $400 per month, you have paid around $4,800 in interest that year, which creates a tax deduction. If your home was paid for, you would lose this deduction.

Retirement Tax Strategy
If you don’t have the $4,800 tax deduction, and you’re in an 18% tax bracket, you will have to pay $864 in taxes on that $4,800. According to the mainstream advisor’s math, we should send $4,800 in interest to the bank, so we don’t have to send $864 in taxes to the IRS. I think the client should live mortgage free and not make an $864 trade for $4,800.

Debt for Investing
If your house was paid off, would you take out a loan to invest it in the stock market? Amazingly, many people reading this would actually pause to think about it. The answer should be no. Why would you risk your house to make more money? Greed. So by not paying off your mortgage, you are essentially putting your home at risk, or at the very least, your retirement income.

Making an IRA Withdrawal to Pay off the Mortgage
If all your retirement money is inside a tax deferred account, paying off the home in stages may be the best option. If you retire in November, you could pull out one half the payment immediately and withdraw the other half in January of the next year, keeping your withdrawals taxed at a lower rate in each year. You can take the funds out over a three-year period or more depending on your tax situation. Planning for tax efficient withdrawals is different for every client. You should discuss this type of strategy with your tax advisor. Also, your portfolio manager should keep the funds allocated for home payoffs in a CD or a short-term financial instrument because you do not want to put these funds at risk.

Peace of Mind
When the world news cycle and noise is rocking your portfolio with volatility and markets are hitting 52-week lows, many individual investors tend to get very conservative or even move to cash. A good financial advisor can help you keep your eyes on the big picture, but in the end, it is the client’s decision on what action takes place. If the client feels better paying off the mortgage at this point, then he or she has sold their portfolio at a rock bottom price to have the peace of mind that at least their house is paid for. The problem now is that there is less of a portfolio working to generate income and growth for retirement. We want clients to remain invested in the stock market while also setting aside additional money to pay extra towards the mortgage. Paying off the home by retirement allows the client to have the peace of mind at the start of the retirement journey, better long-term investing behavior and hopefully a larger nest egg for themselves.

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Are You Debt Free if You Have a Mortgage, Should I pay off my mortgage? Why or why not? | Retire Debt Free.

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