Paying Off Your Mortgage for Retirement – Is it Always Best?
When you are planning for retirement, having to add in your monthly mortgage payment can be difficult when you are on a fixed income. For most people, not having a mortgage is ideal as not everyone will receive a tax benefit from it. However, paying off your mortgage in full is not always that easy or even possible by the time you celebrate your retirement. This is why many financial planners will suggest an alternative option so that you don’t put yourself into financial hardship.
Mortgage Free Retirement
The interest on your mortgage is still deductible technically, however you must itemize to get it. Now with the standard deduction being doubled, fewer people are going do this. Regardless of the tax reform, as one ages towards their retirement they are more than likely approaching the end of their mortgage term which is nearly all principal so there is less of an interest deduction anyway. According to the Federal Reserve’s Survey of Consumer Finances, 35% of households that are headed by those ages 65 to 74 still have a mortgage. Twenty three percent of people 75 and older also do as well. Although it may be optimal to not have a mortgage when retired, scurrying to pay it off may also not be your best option either.
Avoid Being House Rich and Cash Poor
While some people have enough money in their savings and investments to pay off their mortgages, others would have to use too large of an amount which would leave them short on money to pay for future living expenses. These withdrawals can also trigger larger tax bills or push people into higher tax brackets. Select financial advisors will suggest spreading the payments over time to keep your taxes down even if you have enough money to pay it off completely. Additionally, sometimes there are better options to invest this money elsewhere for a larger return rather than paying off your mortgage balance especially where mortgage rates are still fairly low.
Minimize Your Mortgage
For many homeowners that paying off your mortgage just isn’t possible, the good news is there are other options. Here are some of them:
Some planners will suggest that you refinance before you retire as it is better/easier when you are still working with a larger income. While this won’t eliminate your monthly payment, it can help reduce it.
2) Reverse Mortgage
Homeowners with a large amount of equity in their homes can choose to do a reverse mortgage. This doesn’t have to be paid until the owner sells, moves out or dies.
Another great option is to downsize into a smaller, less expensive home. Additionally, owning a smaller, more easy to manage property can be a better choice while you enjoy your golden years.