The last thing anyone wants to be when they retire is jobless and drowning in expenses. When you retire, you’re essentially living on a fixed income, unless your spouse is still employed or you have investments you’re getting a return on. If you’re truly looking to reach financial freedom when you retire, perhaps you should consider paying off your mortgage before retirement hits.
Retirement is supposed to be the time in your life when you get to take a step away from all your prior commitments and enjoy life—whether that involves traveling, spending time with the grandkids, or taking up a new hobby.
Reasons you might want to pay off your mortgage before retiring
Most people retire with the goal of being debt-free and with as few expenses as possible. As mortgage payments tend to be some of the largest expenses a person or couple has, they're good to eliminate prior to retiring.
If you’re worried about losing the mortgage interest tax deduction you’ve been receiving, you’ll want to consider how much you’ve actually saved with it and compare it with how much you’d save without a mortgage payment. Remember, the more you pay toward your principal balance, the less you’ll be paying in interest and the less you can receive in deductions.
How to pay off a mortgage before retirement
Whether you’re planning on retiring in five or 10 years, it may not be wise to rely on your retirement savings to cover the remaining balance left on your mortgage. Those who withdraw from their retirement plan before reaching age 59.5 will incur a 10-percent penalty and have to pay income tax on the funds.
Instead of taking a large chunk of cash out from your retirement savings to pay off your mortgage before retiring, you might consider paying more each month so that your principal balance reduces quicker. Using Bankrate’s amortization schedule calculator, you can calculate how much you would need to pay each month in order to retire mortgage-free.
For example, let’s say you still owe $20,000 on your home and you're planning on retiring in five years. Your monthly payments would need to be around $372 to pay the mortgage off in time. Over the course of those five years, you'll pay $2,371 in interest.
Is it always a good idea to pay off your mortgage before retiring?
As everyone’s financial circumstances are different, paying off your mortgage before retiring might not be a suitable option for all. For instance, if you have loans with long lives still ahead of them and interest rates substantially higher than your mortgage’s, you might want to focus on paying them off instead. Otherwise, you’ll be paying a higher interest rate for an expense when you retire.
Retiring without a mortgage could give you peace of mind and fewer financial burdens
With your mortgage payment out of the way when you retire, you may only be left with a few other large bills, such as property taxes and vehicle expenses. If you aren’t sure whether paying off your mortgage before retiring is the best idea, reach out to a financial advisor, who can help you make an informed decision.