Should You Pay Off Your Mortgage Before You Retire?

For years, retirees have heard a familiar piece of financial advice.

Pay off your mortgage before you retire.

I understand the appeal.

There is something incredibly comforting about entering retirement knowing the house is yours, and you do not have a monthly mortgage payment.

But I think we need to separate two questions.

The first is, "Do I want to pay off my mortgage?"

The second is, "What is the smartest way to do it?"

Those can have very different answers.

Is Paying Off Your Mortgage Before Retirement a Good Idea?

It certainly can be.

I recently had a conversation with a friend in Florida who told me she left her financial advisor after he called her decision to pay off her mortgage stupid.

First, I would suggest never calling your client stupid.

But more importantly, I wanted to understand why paying off the mortgage mattered to her.

She and her husband did not like debt. Their philosophy was to spend what they could afford, and they wanted to enter retirement knowing their home was paid for.

That gave them a clearer idea of how much money they could spend on travel, leisure, and other things they enjoyed.

I think that is a perfectly responsible goal.

The question is how you accomplish it.

Should You Use Your 401(k) or IRA to Pay Off a Mortgage?

This is where things can get complicated.

Imagine you have a large mortgage balance and decide to take the money from a traditional IRA or 401(k) to pay it off.

Remember that money in many traditional retirement accounts has not yet been taxed.

Taking a large distribution could create a substantial amount of taxable income in a single year.

Suddenly, paying off a $150,000 mortgage may have financial consequences well beyond that $150,000.

That does not necessarily mean paying off the house is a bad decision.

It means we should understand the total cost before doing it.

Could You Pay Off the Mortgage Gradually?

Sometimes the goal makes sense, but the strategy can be improved.

Could you pay off part of the mortgage this year and the remainder in another tax year?

Could money from different types of accounts be used?

Would it make sense to wait?

How would the withdrawal affect the amount of retirement savings you have available to create future income?

These are the conversations I believe people should have before moving a large amount of retirement money.

Your Retirement Plan Belongs to You

There is something else from that conversation that really bothered me.

Financial advisors are advisors.

We are not dictators.

When I work with families, I remind them that this is their retirement plan. They are the ones who have to live with it.

My job is to bring experience and information to the table. I can explain consequences. I can show alternatives. I can identify potential issues someone may not have considered.

But if being debt free is one of your most important retirement goals, then I want to figure out whether we can create a plan that helps you accomplish it efficiently.

Should You Retire With a Mortgage?

There is no universal answer.

For some families, eliminating the mortgage can dramatically reduce monthly expenses and provide tremendous peace of mind.

For others, taking a large taxable distribution to eliminate a relatively inexpensive mortgage may not make sense.

The answer should come from looking at your mortgage, taxes, retirement accounts, income needs, and personal goals together.

Retirement planning is personal.

If paying off your house helps you sleep better at night, that matters.

We just want to make sure we understand the financial consequences and find an efficient way to pursue the goal.

If paying off your mortgage is part of your retirement plan, consider the full financial picture before making a large withdrawal. Our team at Legacy Retirement Group can help you walk through the numbers and consider your options. Visit LegacyRetirementGroup.com or call our office at 614 336 7660.