More Americans are heading into retirement while carrying mortgage debt. According to the Federal Reserve's survey of consumer finances, almost 1 in 3 retired households had housing debt in 2010. This percentage has been increasing sharply over the past 20 years, which doesn’t bode well for future retirees.
Why are more retirees now carrying mortgages into retirement? The mortgage interest rate is at a near historic low, so maybe that’s why many people feel they shouldn’t pay off their mortgage early. However, there are some compelling reasons to eliminate this monthly bill before retirement:
Peace of mind. It’s fine to have some debt when you’re still bringing in a paycheck. But wouldn’t you rather be debt-free once you are retired? This housing bill is the biggest monthly expense for many families. If you can get rid of this cost before retirement, it will be much easier to make ends meet on a reduced income. Not having to make a monthly payment to the bank can bring greater peace of mind.
Tax on Social Security benefits. Many retirees will be relying on their Social Security benefit plus withdrawals from tax-deferred retirement accounts like an IRA or 401(k). The Social Security tax is somewhat complicated. If your only income is from Social Security, then you probably won’t have to pay any tax. As you withdraw more from your retirement accounts, more of the Social Security benefit will become taxable. If you have a mortgage, you will most likely be paying a lot of tax on the Social Security benefit because you’ll need to withdraw a large amount from your IRA to pay the mortgage. On the other hand, if you don’t have a mortgage, you won’t need to withdraw as much and you’ll have a better chance to avoid paying tax on those Social Security checks.
Safety net. Your home can be a safety net in retirement. If a home is paid off or only has a small mortgage, then a reverse mortgage can be an option. A reverse mortgage allows you to draw on the equity of your home while continuing to live there. The good thing about a reverse mortgage is that it won’t have to be repaid until you move out permanently. It will allow you to stay in your home and have a little income. It can be a good safety net if you don’t have enough income in retirement. But be sure to research the product thoroughly because the fees can be high, and if you ever move to a new residence the loan becomes due.
Having a mortgage in retirement can be tough because retirees will need to spend some of their savings on mortgage payments. If you still have a few years left before retirement, here are some ways to become mortgage-free:
- Figure out your retirement date and time your mortgage payoff to the same year. This is a good option if you have no consumer debt and are already maxing out your 401(k). Otherwise, work on those items first.
- Plan to downsize or move to a lower cost location after retirement. Selling your house after you retire can be a good option to get rid of the mortgage. If you are lucky, you might have enough equity to purchase another home in a more affordable location.
- Refinance right before retirement. If the home doesn’t have a lot of equity, then refinancing to a better rate might help. You will have to keep the mortgage, but the monthly payment will be lower.
Carrying a mortgage into retirement is getting more common, but it’s not a good idea. Wouldn’t it be great to own your home free and clear? Your expenses in retirement will drop quite a bit if you eliminate the mortgage, and you can use the extra money to travel and enjoy your retirement.
Joe Udo blogs at Retire By 40 where he writes about passive income, frugal living, retirement investing, and the challenges of early retirement. He recently left his corporate job to be a stay at home dad and blogger and is having the time of his life.