Why You Should Pay Off Your Mortgage. An increasing number of Americans are facing decisions about what to do with their mortgages as they retire. “It’s absolutely imperative to run the numbers,” says Many homeowners dream of hosting a “mortgage-burning” party as they approach retirement. Using your retirement savings to make mortgage payments could also trigger taxes. Regardless of the reason for a retiree to still hold a mortgage, the question arises whether or not it is possible to even qualify for a mortgage after retirement. If you've got all the money you need for retirement, you've got a big pension or you've got a big 401K balance, and you're set for retirement, then sure, you may want to think about paying off that mortgage. When Retirees Should Not Pay Off Their Mortgages Posted . The answer is no.” That’s because you may be subject to a tax penalty of 10% for early withdrawal if you take funds out of an IRA to pay off your mortgage before you turn 59½. Other Debt. But this state of affairs is now not the norm. Jamie Hopkins, You’ve got offense and defense to think about, Callen. Here’s What We Know. Regardless of the reason for a … Is a mortgage-free retirement for you, or … But many would have to take a sizeable chunk of those assets, which could leave them short of cash for emergencies or future living expenses. But paying off the mortgage isn’t always the best strategy. Drawbacks of paying off your mortgage before retirement. “Most Americans generate their income in retirement from social security, a 401(k) or IRA,” Mr. Hopkins says. The reader asked: “I’ve heard some folks say that you shouldn’t pay off the mortgage early if the interest rate for the mortgage is low. Aside from just paying off your existing loan, … Generally speaking, paying off a mortgage prior to retiring is a good idea. But there are still a few pitfalls to be aware of. “Holding debt in the 1980s when rates were in the teens is a lot different than holding it now,” Ms. Molinsky says. Although homeowners will, and should, continue to aspire to pay off their mortgage before retirement, the reality for many could mean having a mortgage for longer. Today, 39% of those over 65 have mortgages compared to 28% who had the loans 16 years ago. So how should homeowners approaching retirement evaluate whether to pay off their mortgages? Through its research, education, and public outreach programs, the Center helps leaders in government, business, and the civic sectors make decisions that effectively address the needs of cities and communities. But another possibility may be to take larger distributions from your retirement accounts over the next few years — just not to the tune of $175,000 all at once. It does not apply to retirement accounts such as IRAs or 401(k) plans. There is a cadence to paying off debt. And, of course, you’ll be depleting your retirement fund. When Retirees Should Not Pay Off Their Mortgages. “The fact that so few people have a written financial strategy is quite alarming,” Ms. Collinson says. Paul Cordero, a financial adviser in San Rafael, Calif., often thinks about his parents, who bought their home in the 1970s and were determined to pay off their mortgage as fast as possible. This is sponsored content for MLC. By Robyn A. Friedman of the Wall Street Journal . Subscribe here. , a senior research associate at the Joint Center. In other cases, paying off a mortgage makes sense, especially when you have ample retirement savings and plan to stay in the home for a while. For example, you could aim to pay off your mortgage in the next three or four years and take money out of your retirement accordingly. Sometimes, it’s better to keep that money in the bank for other purposes, such as building retirement savings or paying down higher-interest debt. Which group should you be in? 87990cbe856818d5eddac44c7b1cdeb8, Copyright © 2021 Dow Jones & Company, Inc. All Rights Reserved. Baby boomers are swelling the ranks of retirees, and more older homeowners are carrying mortgage debt than in the past. Experts point … Why more retirees are still paying off mortgages. Cons to Paying Off the Mortgage Before Retirement. My interest rate is 3.75 percent. Don’t make yourself poorer. Get a weekly briefing on news, trends, insights, deals and personalities with our brand-new newsletter. "When I show clients that they will need to withdraw $130,000 from their IRA to pay off a $100,000 mortgage, it's pretty sobering," said Rick Kahler, president of Kahler Financial Group. I don’t teach people to put less than 15% of their income into retirement in order to pay off the house a little earlier. president of Transamerica Center for Retirement Studies, a division of Transamerica Institute, a nonprofit private foundation funded by Transamerica Life Insurance Co. “Every case is a little different.”. And, of course, while interest rates are rising, they are still low by historical standards. “There are benefits because it does help with cash flow.”. Paying off the mortgage after 30 years adopted by retirement was a ceremony of passage for a lot of. “Most people are better off saving in a tax-deferred vehicle, such as an IRA or 401(k),” Mr. Hopkins says. Being debt-free as you start retirement can make the transition to a fixed-income much smoother. Why Retirees May Have a Mortgage. After retirement… But many would have to take a sizeable chunk of those assets, which could leave them short of cash for emergencies or future living expenses. Withdrawing funds early from your retirement savings accounts can be costly. Pay off the mortgage or not: a guide for retirees Retiring a mortgage before you retire isn't always possible. If you’d like to reduce your mortgage payment, but not pay off the mortgage entirely, you can lower your monthly payments by refinancing and extending the life of the loan. Some people have enough money in savings, investments or retirement funds to pay off their loans. But Paying off the mortgage isn’t always the best strategy. The rule is simple and powerful: If you can pay off your mortgage with no more than one-third of your non-retirement savings, you should consider doing so. Unless you want to delay your retirement, one way to eliminate debt is to take some of your super savings as a lump sum and use it to pay off your mortgage. Those who do not have their mortgage paid off yet sometimes have to dip into their investments to make their payments. Let’s say you’re about to retire with $200,000 still owing on your home and you have $300,000 in super. If you plan to live in your home for a while or to age in place, then paying off your mortgage can bring peace of mind. • Meanwhile, most Boomers who currently own their own houses still owe money on those homes. Conventional wisdom says homeowners should pay off their mortgage before they retire so they do not have to make a large monthly payment on a smaller income. Some people have enough money in savings, investments or retirement funds to pay off their loans. Among all homeowners, about 25% have no mortgage debt, and another 28% say they expect their mortgages to be paid in full within 10 years. You may be able to lock in a lower interest rate. With all the volatility, we’re not sure what it is precisely today, but as of a couple of weeks ago, we hadn’t lost much value. Catherine Collinson, The Coronavirus Is Mutating. In a perfect world, homeowners would have their mortgage paid off long before they hit retirement age. The analysis depends on the terms of your mortgage, the amount of your savings, and your... © 2021 Harvard Joint Center for Housing Studies, https://www.wsj.com/articles/when-retirees-should-not-pay-off-their-mortgages-1534257060?tesla=y. Many homeowners dream of hosting a “mortgage-burning” party as they approach retirement. The analysis depends on the terms of your mortgage, the amount of your savings, and your expected retirement income. No money:If you need to dip into your retirement savings to get rid of your mortgage, maybe it’s best to skip paying it off for now. Mortgage rates are super low so borrowing is cheap so why rush it; … Sometimes, it’s better to keep that money in the bank for other purposes, such as building retirement savings or paying down higher-interest debt. But this scenario is no longer the norm. Baby boomers as a generation have tended to be less debt-averse than their Depression-scarred parents, says Paying off a mortgage can be smart for retirees or those just about to retire who are in a lower-income bracket, have a high-interest mortgage, and don't benefit from tax-deductible interest. However, not all living situations end up like this. We had about $500,000 in retirement savings before the pandemic. The median outstanding mortgage balance for a 50- to 69- … The change has happened for a number of reasons, experts say. “Once you enter retirement, if you find out you don’t have the income you expected or have some surprise financial shock, it’s extremely difficult to get back into the workforce.” A written financial plan for retirement is like a reality check to ensure you’re financially ready to retire. When you were working, the tax deduction you got from your mortgage was a good deal: In essence, the government subsidized your mortgage payment. Our expenses before the pandemic were just covered […] Jennifer Molinsky, Ph.D. Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. But rushing to pay off those mortgages may not be a good idea, either. Becoming a Landlord Looks Good on Paper. For instance, if you withdraw around $70,000 from your retirement account to pay off the mortgage, you might end up with less than $60,000 after taxes. Financial planners recommend creating a Plan … The countdown to retirement is on for millions of baby boomers and, thanks to a lifetime of diligent saving, some have amassed enough wealth to pay off their mortgages and live debt free. Many homeowners dream of hosting a “mortgage-burning” party as they approach retirement. Some retirees find they still need to make a mortgage payment out of necessity, perhaps relocating in order to be closer to their grandkids or family. For example, if you’re investing in certificates of deposit earning an interest rate of 2%, it makes more sense to use that money to pay off your mortgage if the interest rate is higher, Mr. Hopkins says. Target coupon - 60% off Valentine's Day greeting cards, Macy's coupon - Sign up to get 25% off next order, Nike promo: Military members save 20% off, Beddings and bath linen: Extra 10% off with Home Depot coupon, News Corp is a network of leading companies in the worlds of diversified media, news, education, and information services. If you’re not sure you have enough stashed away, consult a financial adviser. Save. director of the Retirement Income Program at the American College of Financial Services. So how should homeowners approaching retirement evaluate whether to pay off their mortgages? https://www.wsj.com/articles/when-retirees-should-not-pay-off-their-mortgages-1534257060. More than 40% of homeowners 65 and older had mortgage debt on their primary residences in 2016, up from 22% in 1995, according to a recent Wall Street Journal article. “The tax deductions are better that way too.” Here are some things to consider if you’re about to retire and still have a mortgage: According to the Transamerica Center for Retirement Studies, only 11% of workers over age 65 have a written strategy or financial plan for retirement. More than 40% of homeowners 65 and older had mortgage debt on their primary residences in 2016, up from 22% in 1995, according to the Joint Center for Housing Studies of Harvard University. So, it appears that at least half of future retirees plan to have no mortgage in retirement. A: Ideally, retirees should strive to have their debts paid off by retirement. By Sam Powell. Through graduate and executive courses, as well as fellowships and internship opportunities, the Center also trains and inspires the next generation of housing leaders. Pay it off and you can take the day, week, and next decade off. If you withdraw $60,000 from your IRA to pay off your mortgage, … Yet, some retirees might find it more beneficial to keep making that mortgage payment. Baby Boomers, Americans born between 1946 and 1965, are carrying extra mortgage debt than earlier generations at … Practically, I can appreciate that doesn’t always happen due to a variety of factors. Experts point to several considerations. “If you’re able to afford to pay off the mortgage, and you’ll have all the retirement assets you’ll need, you might just feel better paying off the mortgage, and that’s OK,” says That can result in higher taxes and less reserves for retirees. That’s especially true if the interest rate on your mortgage is much higher than the return you’re getting on your investments. For real numbers, say you owe $50,000 and have $160,000 in savings. It might not make any sense to pay off your mortgage from your retirement accounts. March 3, 2020 — 12.00am. But paying off the mortgage isn’t always the best strategy. If you’re younger than 59.5 years, you will incur a 10% e… Dear Penny, My husband and I are in our mid-70s and retired. But paying off the mortgage isn’t always the best strategy. In other cases, paying off a mortgage makes sense, especially when you have ample retirement savings and plan to stay in the home for a while. Many homeowners dream of hosting a “mortgage-burning” party as they approach retirement. “Should we be taking large withdrawals from them to pay down a mortgage? When Retirees Should Not Pay Off Their Mortgages Baby boomers are swelling the ranks of retirees, and more are carrying mortgage debt than in the past. Otherwise, you risk outliving your savings. DON’T MAKE YOURSELF POORER. “I've had people ask if they should take out half of their 401(k) to pay off the mortgage, and the answer is no,” says Kristin C. Sullivan, a certified financial planner in Denver. How to Keep Your Art Safe From Damage, Both Natural and Man-made, Virgin vs. Hyperloop TT: The Race to Make Musk’s Moonshot a Reality, House Delivers Article of Impeachment Against Trump to Senate, China’s Comac Aims to Rival Boeing and Airbus in the World’s Biggest Market, The Science Behind How the Coronavirus Affects the Brain. If your money is sitting in CDs, earning 1% and you're paying a 4% mortgage, that may not … Study Concludes Most Retirees Should Pay Off Their Mortgage . A lot of folks are working longer into their golden years because of the mortgage. This is ideal, as a hefty monthly mortgage payment can take a sizable chunk out of a fixed income. Paying off the mortgage after 30 years followed by retirement used to be a rite of passage for many. In Reality, It’s Much Harder. While it’s not a bad idea to use low-earning savings to pay off a higher-interest mortgage, that only applies if you have more than you need for retirement and emergencies. 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