There is a lot of satisfaction in making your final mortgage payment. Your budget suddenly opens up, and you may be able to start putting more money into your savings for long-term goals.
But rushing to pay off a loan in retirement may not be the right move. The high cost of living, volatile markets and longer life expectancy may mean you need to have more liquid cash on hand.
Why paying off a mortgage still feels like a safe move
A mortgage is often one of the last monthly debt payments people face before retirement, and it’s often a homeowner’s biggest expense. Taking it out before retirement means allowing more room in your budget for new hobbies in retirement, travel and more. It also means you don’t have to consider putting any of your Social Security benefits toward your mortgage payment.
A debt-free home can also help retirees navigate stock market corrections with more patience. Lower monthly mortgage payments can reduce the need to withdraw more money from your portfolio to keep up with living expenses. All of these reasons are why the general advice is to pay off your mortgage before you retire.
Why early retirement can backfire on retirees
As with all personal finance matters, choosing to pay off your mortgage before retirement is not a one-size-fits-all decision. When choosing when to pay off your loan, it’s important to consider your specific situation.
Paying off your home equity early offers short-term benefits that can compound over time. However, a messy encounter can lead to early repayment of your funds. If paying off your mortgage before retirement will leave you poor and make it more difficult to keep up with medical expenses, home repairs and other expenses, you may want to reconsider moving.
You can tap into home equity, but it’s not as easy to access as cash in a more liquid account. You should also consider your mortgage rate. For example, if you received low interest rates before the pandemic, it may not make sense to rush to pay off your loan.
How retirees should decide now
There is no universal answer to whether you should pay off your mortgage early, but you can consider several factors. It usually makes sense to pay off your loan early if you have a high interest rate. Paying off your loan early should not deplete your savings, as doing so may leave you financially vulnerable in the event of an emergency.
If you want to pay off your loan early, make sure you have an emergency fund to cover any unexpected expenses that arise. Many financial advisors recommend emergency funds that can cover one to two years of living expenses in retirement. You don’t want to empty your savings accounts to pay off the loan, have emergency expenses and have to take out a loan equal to the money you previously had in your savings accounts. A good financial planner can eliminate this risk.
You should also assess what your income will look like in retirement. Social Security benefits will help with some expenses, but if you have to work under tighter restrictions, accelerating your loan payments may be the way to go. It may also be worth taking a part-time or seasonal gig to bring in extra cash to pay off the loan faster. That way, you’re still making money but you don’t have to commit to a full-time work schedule.
