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Paying off a house before retirement may seem like a wise move. But today’s retirees are leaving the workforce with historically low mortgage rates, higher home values and longer life expectancies, which could change the picture.
For retirees or soon-to-be retirees who are considering the burdens and benefits of a mortgage, financial experts offer some considerations.
Consider cash flow and income streams
The real question to ask if you retire with a take home payment is whether your retirement income can comfortably support the payment without jeopardizing your long-term security.
“Retirement is about cash flow, not just eliminating debt. A mortgage with a fixed rate and payments that won’t change can be compatible with a strong income plan,” said Greg Reese, CEO and estate planning and investment advisor. AmeriEstate. Retirees need to estimate whether their payout is in line with guaranteed income streams like Social Security or a pension.
Flexibility is also important. “Eliminating that payment reduces fixed expenses and eases financial pressure,” said Andrew Thake, owner and mortgage broker. andrew tired.
Compare your mortgage rate with realistic investment returns
Some retirees believe that they should keep a mortgage if their investments earn more than the interest rate. But that comparison should be realistic.
“Consider conservative, risk-adjusted return expectations instead of the stock-market average. A 3% fixed mortgage is not the same as a 7% adjustable loan,” Reese said. He said clients should compare any returns to their portfolio’s “realistically achievable retirement income”, not previous market highs.
The math works only if the returns are reliable enough to offset the guaranteed cost of the loan.
Understand how a mortgage changes your retirement income needs
A mortgage increases your total monthly expenses, which has a direct impact on how much you need to save.
As Reese explained, each $1,500 monthly mortgage payment requires about $18,000 in after-tax income each year, which will put a strain on your portfolio. “Using withdrawal assumptions, an additional $350,000 to $450,000 of invested assets may be needed for indefinite support,” he said.
That additional liability can increase sequence risk – the risk of withdrawals from investments during market downturns. Paying a 6.5% loan effectively provides a “guaranteed rate of return equal to that rate.”
When does it make sense to pay
There are scenarios where eliminating or restructuring the loan makes more sense.
“If cash reserves are strong, it makes sense to pay a higher loan rate, because it reduces the income needed,” Reese said.
It may also be easier to refinance before you retire while you’re still employed, Reese said, because “underwriting is based on income documents and becomes more restrictive after retirement.”
Don’t forget taxes, insurance, and emotional factors
Thake said that even without a mortgage, retirees still struggle with other housing costs, including property taxes, insurance and maintenance. “These costs should always be factored into retirement planning, not just mortgage payments,” he explained.
In some states, new assessments could increase taxes, Reese said, so be careful if you’re retiring in a different state. He recommended calculating the cost of housing 10 to 15 years into the future, including any needed improvements.
For some, tapping equity may also be an option. “Reverse mortgages may be suitable for some retirees, particularly those with significant home equity and limited monthly income,” Thake said. This allows access to equity without selling the home or making the required monthly payments, but it should be carefully evaluated as part of a comprehensive plan.
Ultimately, numbers aren’t the only consideration. “Many retirees value the peace of mind that comes with not making mortgage payments. Even if keeping a mortgage makes sense mathematically, emotional comfort and reduced stress often play a meaningful role in the final decision,” Thake said.
Retiring with a mortgage requires a realistic assessment of both your finances and peace of mind.