Should Retirees Pay Off Their Mortgages?

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Should Retirees Pay Off Their Mortgages?

For Americans who were close to retirement age, paying off the mortgage after 30 years used to be a rite of passage. However, this situation is no longer typical. According to data from Fannie Mae’s Economic and Strategic Research Group, baby boomers, those born between 1946 and 1965, have greater mortgage debt than prior generations and are less likely than earlier generations to own their houses at retirement age.

Depending on variables including income, mortgage size, savings, and the value of the mortgage interest deduction, it may or may not make financial sense for retirees or those who are approaching retirement to pay down their mortgages.

Key Takeaways

  • If a retiree or someone who is about to retire is in a lower income band, has a high-interest mortgage, or isn’t eligible for the mortgage interest tax deduction, paying down their mortgage may be a wise financial decision.
  • In general, taking money out of a retirement account to pay off a mortgage is a bad decision. That can drastically lower your retirement income.
  • There are other choices to think about if you have a large mortgage, such as downsizing to a property that matches your retirement budget.

Should Retirees Pay Off Their Mortgage?

When to Continue Making Mortgage Payments

For retirees who can afford the monthly mortgage payments without lowering their level of life, they make sense. For retirees or those who are about to retire, who are in the high income band, who have a low-interest mortgage (under 5%), and who are eligible for the mortgage interest deduction, it’s often a wise decision.

  Secondary Mortgage Market Players

This is especially true if paying off a mortgage would prevent you from having a savings account to cover unforeseen expenditures or emergencies like medical bills.

For retirees who can easily afford the payments and benefit from the tax advantage, continuing to make monthly mortgage payments makes sense.

It can make sense to pay off your mortgage if you’re planning to retire soon and have the money to do so, especially if the money is in a low-interest savings account. Once again, this works best for those who have a retirement account that is well established and a sufficient emergency fund.

Paying off the mortgage ahead of retirement can be a real stress reducer. Your monthly expenses will be cut, leaving you less vulnerable to a sudden property tax increase, an emergency repair, or the impact of inflation. You’ll save on the interest you would owe by keeping the mortgage.

Entering your retirement years without monthly mortgage payments means you won’t have to use your retirement funds to pay for them.

Avoid Tapping Retirement Funds

Generally, it’s not a good idea to withdraw from a retirement plan such as an individual retirement account (IRA) or 401(k) to pay off a mortgage. If you withdraw before you turn 59½, you incur both taxes and early-payment penalties.

Even if you wait, the tax hit of taking a large distribution from a retirement plan could push you into a higher tax bracket for the year.

It’s also not a good idea to pay off a mortgage at the expense of funding a retirement account. In fact, those nearing retirement should be making maximum contributions to retirement plans.

  Mortgage Lenders and Mortgage Servicers

Over the past several years, research has shown that the majority of people are not saving enough for retirement. In a September 2018 report, the National Institute on Retirement Security revealed that more than half (57%) of working-age people don’t have aretirement account. The report adds that even among workers who have accumulated savings in retirement accounts, the typical worker had a modest account balance of $40,000.

Strategies to Pay Off or Reduce Your Mortgage

You can use strategies to pay off a mortgage early or at least reduce your payments before retirement. Making biweekly payments instead of monthly ones, for instance, means that over a year you’ll make 13 payments instead of 12.

Downsizing is another option if your house is bigger. You could be able to use the sale’s earnings to pay cash for a smaller house, which would relieve you from a mortgage, if the transaction is structured properly. The hazards include overvaluing your present property, undervaluing the cost of a new home, neglecting the deal’s tax repercussions, and failing to account for closing fees.

Even while buying a house free and clear before retiring might provide peace of mind, it’s not always the greatest option. If you’re retired or not far from retirement, it’s advisable to speak with a financial counselor who can thoroughly assess your situation and guide you toward the best course of action.

Should I Refinance My Mortgage to Lower the Monthly Payment?

When mortgage rates were under 5%, this might have been a possibility. Interest rates started rising slowly in 2022 and reached a high of 7% by the end of the year. It seems improbable that anybody who acquired a mortgage or refinanced one during the period of low interest rates would find a better offer in the near future.

  Using Your 401(k) to Pay Off a Mortgage

Are Many Retirees Still Paying Off Mortgages?

Between the ages of 60 and 70, 44 percent of Americans who are retired are still making mortgage payments. Many of them anticipate having to pay it for the next eight years. You should take note that the majority of those people purchased their houses more than 20 years ago and either financed or refinanced their mortgages during the low-interest years.

Is It Worth Keeping the Mortgage to Get the Mortgage Interest Deduction?

The basic deduction roughly increased and numerous itemized deductions were removed as a result of 2018 federal tax code changes. Since that time, fewer Americans have thought itemizing their taxes is desirable, even if they had mortgage interest to write off.

For 2022 taxes, the standard deduction is $25,900 for joint filers and $12,900 for single taxpayers. You should still take the standard deduction if your interest payment (plus any other possible deductions) is less than that.

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