The Strategic Advantage of Paying Off Your Mortgage Before Retirement
As retirement approaches, the checklist of financial preparations often includes bolstering savings accounts, fine-tuning investment strategies, and choosing the right healthcare plan. However, one financial strategy that can significantly influence your lifestyle in retirement is paying off your home mortgage.
It is presumably common knowledge that maximizing one’s retirement contributions while in their 50s and 60s is the most sensible thing a pre-retiree can do to prepare for their third act. However, less is said about the impact of being debt free prior to retirement.
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The value of retiring debt-free can never be overstated, especially when referring to unsecured, high-interest credit card and personal loan debts which are unproductive and do not provide any valuable tradeoffs. Nonetheless, it is also important to focus on so-called "good" debt that is bound to an asset, such as a home mortgage.
Some often argue that by paying off a mortgage early, valuable tax benefits are forfeited. While mortgage interest is often tax-deductible, many retirees find that the standard deduction offers greater tax savings than itemizing deductions, which includes mortgage interest. Thus, the tax benefits of carrying a mortgage into retirement are often exaggerated. This is especially true since the passage of the 2017 Tax Cuts and Jobs Act, which considerably increased the standard deduction, making the home mortgage interest deduction insignificant for many homeowners.
Additionally, the decision to pay off your mortgage prior to retirement is not entirely a mathematical calculation. While one can certainly argue the financial benefits of maintaining a mortgage indefinitely, the psychological relief of owning the roof over your head, without exception, cannot be overstated. This is especially critical during a life stage when income is typically fixed.
For most homeowners in the US, mortgage accounts for more than 40% of the overall household budget, making housing the largest living expense by far. So, cutting that cost would have a considerable impact on someone's ability to sustain their lifestyle on a fixed income.
Of course, there are other expenses associated with owning a home that continue even after the mortgage has been paid off, such as taxes, insurance, and general maintenance. However, those pale in comparison to the tens of thousands of mortgage dollars that could either be saved or repurposed elsewhere each year.
The dream of retiring early is closely linked to financial readiness. And without the burden of a mortgage payment, the amount required to maintain your home each month is considerably less, which also means the amount necessary to have saved up before retiring is less. As such, you could reasonably expect to make full-time work an option rather than a requirement several years earlier than the government’s pre-determined age of 65 simply by paying more toward your mortgage principal every month.
There are many factors to consider when developing a retirement income plan, such as the cost of living in the intended retirement area, whether you will receive a pension or other lifelong income stream, and your expected lifespan. The latter is vital, as many retirees worry about the possibility of outliving their savings and maintaining their desired quality of life during their golden years.
If you are gearing up to retire within the next few years, paying off your home mortgage is one simple thing you can do that will have a major impact on your retirement plan and its success. Considering the peace of mind and financial freedom that comes with owning your home outright, this decision could redefine the quality and stability of your retirement altogether.
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Malcolm Ethridge, CFP® is an Executive Vice President and fiduciary Financial Advisor with CIC Wealth Management, based in the Washington, DC area. He is also the Managing Partner of Capital Area Tax Consultants.
Malcolm’s areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
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Disclosures:
CIC Wealth, LLC does not provide legal or tax advice. Be sure to consult with your tax and legal advisors before taking any action that could have tax consequences.
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