Should you pay off your mortgage before you retire?
Whether you’re new to home ownership or close to paying off your mortgage, determining where you should focus your finances is a major decision. This extends beyond the numbers; it’s about understanding why this step matters to you.
Starting retirement with a paid-off mortgage may sound appealing, but so does having a large retirement fund or extra cash in the bank. Each option offers its own path to financial security and peace of mind. Let’s explore the pros and cons of paying off your mortgage and see what might make the most sense to you.
Reasons to pay off your mortgage early
Peace of mind: If debt feels like a burden to you, paying off your mortgage could bring greater peace of mind. It’s more about how you feel when you wake up each morning than it is about money.
Cash flow: Without a monthly mortgage payment, you may have more flexibility in your budget. The additional monthly cash flow could give you the freedom to boost your savings, travel, support your family, or strengthen your emergency fund.
High interest rates: If your interest rate is high, paying your mortgage faster could save you significant amount of money in interest. Even an extra payment per year can cut years off your loan term.
Investment opportunities: Your money should work for you. Scarborough can help provide guidance by evaluating an early mortgage payoff with the potential earnings from an investment to see which option is better for you.
Why you might not want to pay off your mortgage early
Tax Implications: If you need to make a withdrawal from your retirement account to pay off your mortgage, this will be taxed as ordinary income, potentially pushing you into a higher tax bracket. Additionally, if you’re under age 59½, you may face a 10% early withdrawal tax penalty.
Catch up on retirement savings: If your retirement fund needs to grow so you can be in the right place at retirement, it might be wiser to direct your funds to savings rather than increasing your mortgage payment to pay it off early. Many employers offer pre-tax and Roth accounts that help your money grow tax-deferred or tax-free. If you’re not sure how much you need to save to meet your goals, please reach out to your Scarborough representative.
Cash is king: It’s important to have cash on hand in case of an emergency. In general, you want 3-6 months of living expenses available. If paying off your mortgage early would leave you low on cash, consider setting funds aside for emergencies.
Investment returns: With a low interest rate, your money might work harder for you in investments. It’s not just about paying off debt; it’s about growing your wealth.
Other debt: If you’re carrying high balances on credit cards, student loans, or other high- interest debt, paying those off first may be a better choice. Reducing these expenses could put you in a stronger financial position when you retire.