Conventional financial wisdom usually encourages soon-to-be retirees to pay off their mortgage and any other debt before putting in their final two weeks notice. Freeing up a mortgage payment each month can reduce the amount of money you need to withdraw from your retirement accounts (or hope to earn in dividends). This can give you some additional flexibility to avoid withdrawing money in a down market or selling your home and downsizing, without taking on another financial obligation. Despite this advice, there are a few situations in which keeping a mortgage into retirement makes more sense. Read on to learn when you shouldn't pay off your mortgage before you retire.
When You Live in a High-Tax State
If you live in a state with high income taxes, but you don't want to relocate to a lower-tax state in retirement, paying mortgage interest can sometimes save you money in the long run. Mortgage interest is deductible if you itemize your taxes, and the ability to deduct up to $10,000 of your state and local taxes (SALT) from your federal taxable income can be enough to keep you in a lower tax bracket. When you're paying taxes on 401(k) and IRA withdrawals at your highest marginal income, debt that's used to keep you in a lower tax bracket can become a valuable tool.
When You're Planning to Move Soon
For those who want to downsize, relocate, or transition to the RV life, putting a huge chunk of your savings into a paid-off mortgage can leave you without much flexibility if your home takes some time to sell. Plus, with mortgage rates continuing to slowly rise, if you do regret your decision to pay off your home enough to refinance or take out a home equity loan, you'll probably be paying a higher interest rate than the loan you just paid off.
On the other hand, if you find it tough to sell your home and are still carrying a mortgage payment, you may be able to rent it out for enough to cover the mortgage, which builds equity without dipping into your cash flow.
When You Have a Steady Source (or Sources) of Income
One of the reasons many financial advisors recommend a paid-off home is because of the vulnerability that comes from retiring and giving up a job or business as your main source of income. But if you have steady and guaranteed income like a pension, Social Security, life insurance, or an annuity, the likelihood of cash flow problems that make it tough to pay your mortgage is significantly lessened.Share