The home mortgage is a wonder of finance. These long-term loans have allowed countless middle-class Americans to realize the dream of owning a home. But a mortgage can also be a retirement nightmare if it’s not properly managed.
The happiest retirees enter their post-career life either mortgage-free or within five years of burning those loan documents, according to my extensive research for my book, You Can Retire Sooner Than You Think.
So should you pay off your mortgage before you turn in your office keys? Financial planners are split. Some money pros think you are better off investing your surplus money rather than using it to payoff/paying down your mortgage. The reason: they believe you will get a larger net return by continuing to pay interest on your house while earning a higher return in the stock market. For example, instead of using $100,000 to pay off a 4% mortgage, these experts suggest, you should instead invest it in the market where you could see a return of, say, 8%. The result: a net 4% gain ($4,000).
While that strategy makes some sense, it fails the real-world test. In the real world, the market could be flat for a decade, as it was in the 2000’s. Or tumble just before you need to cash-in. In that scenario, you’ve been paying 4% on your mortgage with little or no gain on the other side of the equation.
Paying off your mortgage before retirement is more of a sure thing, in my opinion.
So, again, should you pay off your home? My answer is a qualified yes. Making that decision requires some careful calculation. Here are three things to consider as you weigh your situation, and whether to wipe that house payment off your personal books.
Check Out: 4 Ways To Pay Off Your Mortgage Sooner
The Ahhhh factor. I’ve learned from the happiest retirees that there is a real sense of peace and serenity that comes with knowing that you own your house free and clear. It just feels good as you enter a new phase of life that is chock full of changes.
Eliminating a house payment also dramatically lowers your monthly retirement living expenses, thus taking pressure off your nest egg and other sources of monthly income.
Talk about a stress reliever!
Burning the mortgage also leaves you more money to follow your dreams and passions. The money you’ve been sending to Bank of America on the first of the month is now yours to use as you wish – for added vacations, hobbies, or charitable giving. That’s what a happy retirement is all about.
It doesn’t require a bankroll. There’s more than one way to skin a mortgage cat. You don’t have to drop $60,000 all at once. In fact, most happy retirees who have paid off their mortgages did so by paying more than the minimum monthly payment each month over several years. In my experience, probably 70% of retirees who are mortgage-free used this method to reach that goal.
Here’s an example: If you have just started a 30-year mortgage of $250,000 at 5% interest, your scheduled monthly payment will be $1,342. Adding $300 per month to that payment will slice nine years and four months off the life of the loan – and save $79,684 in interest.
You might also consider saving up to make an extra mortgage payment every year. Or structure your payment plan so that you pay 50% of your monthly obligation every two weeks. That’s a painless way to make an extra month’s payment every 12 months.
Use the right money. And the right amount. Never use retirement account (IRA, 401k) money to pay off a mortgage. Never. Remember, paying off your mortgage is about creating peace of mind. Tapping your nest egg won’t do that. First off, withdrawing money from those accounts will likely incur a significant tax bill; comparable to the taxes you’d pay on your earned wages. Second, reducing your hard-earned retirement reserves undercuts your future security by taking actual cash away and by reducing future interest earnings on that account.
So, that leaves your non-retirement accounts – the ones that have already been taxed – as sources for the Big Pay-Off. But be careful here, too. These funds also play an important part in your on going security by providing a source of liquidity to be tapped in case of emergency or opportunity. Depleting them won’t add to your peace of mind.
I’m a believer in the one-third rule. If you can pay off your mortgage with no more than one-third of your non-retirement savings, you should consider doing so. If you owe $50,000 and have $160,000 in savings, drop that bomb on the mortgage. You will still have $110,000 in liquid assets to ease you along the retirement road.
It’s often said a house owns you, not the other way around. Make the right decision about paying off your mortgage and you’ll win back some retirement freedom from that cruel master, Home Sweet Home.