Should You Pay Off Your Mortgage Before Retirement? Not Necessarily.

There are certain broad pieces of financial advice you’ll see often. Aim to save 10 times your salary before your career comes to an end. Withdraw from your retirement savings at a rate of 4% per year. And make certain to kick off retirement completely debt-free.

That last piece of advice isn’t totally off. It’s generally a good idea to shed costly debt before retirement so you don’t have to juggle extra payments when you’re living on a fixed income of savings and Social Security.

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But you may not want to stress out over paying off your mortgage ahead of retirement. Here’s why.

Not all debt is problematic debt

It’s definitely a good idea to get rid of high-cost debt before retirement. But your mortgage may not fall into that category. And if so, carrying it into retirement may not be such a terrible thing.

In 2020 and 2021, when mortgage rates fell to record lows, many homeowners refinanced into sub-3% rates. If your mortgage rate is similar and your monthly payments are very affordable, you shouldn’t necessarily push yourself to pay off your home before you retire.

Let’s imagine you’re seven years from retirement with $100,000 left on your 2.9% mortgage. If you have a $1 million balance in your 401(k) and you’re old enough to take withdrawals penalty-free, you might think it makes sense to use one-tenth of your savings to shed your mortgage debt.

But what you may not realize is that even a conservative portfolio will probably generate a higher return than 2.9%. And if you keep the mortgage and leave your savings alone, you’ll maintain more liquidity as opposed to tying up another $100,000 in your house.

Also, don’t forget that carrying a mortgage comes with tax benefits. If you itemize on your tax returns, getting to write off the interest you pay on that loan could result in a smaller IRS bill or larger refund.

Don’t assume retiring with a mortgage is a terrible thing

If your mortgage doesn’t have such an attractive interest rate and you need to enter retirement completely debt-free for your own peace of mind, that’s a good reason to try your best to pay off your home ahead of retirement. Otherwise, don’t sweat it as much.

If you won’t be mortgage-free in time for retirement, just work those payments into your budget like any other expense. If you can afford them, you may find that you’re better off hanging on to that mortgage and keeping more of your money invested.

And if you’re still inclined to try to get your mortgage paid off before retirement, proceed with caution. When you withdraw a large lump sum from your savings to pay off a house, you shrink the pool of money that needs to support you for the rest of your life. A better bet may be to work longer to get your mortgage paid off rather than take a sizable withdrawal from your nest egg.