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Should I Pay Off My Mortgage?

Should I Pay Off My Mortgage?

January 09, 2019
As many clients are approaching retirement they would like to know if they should pay off their mortgage? The goal is to cut monthly expenses by getting rid of principal and interest payments throughout their retirement years. This can typically save a family anywhere from $10,000-$20,000 per year of cash flow annually, depending upon the size of their current mortgage payment. It should be noted, that the escrow portion of your mortgage payment, including property taxes and homeowner's insurance will continue as expenses going forward.
In general, this seems to be a good idea. As I have often said to clients, I have never met anyone who didn't sleep better at night being debt-free. However, there are a few considerations to think about when trying to aggressively pay down the mortgage as you head toward your retirement years.
The first consideration is income taxes as lump sum withdrawals from tax qualified retirement plans like IRAs and 401(k)s. Large withdrawals from these assets can have equally large income tax consequences. They can also significantly reduce the assets that will help fund your retirement income over the years. Before making such a move, please have a conversation with us. We would need to do an analysis to determine whether it makes sense to pay income tax at a 15-25% combined federal and state bracket to pay down the mortgage that may have an interest rate of 4% or less.
The second consideration is the interest rate on the mortgage, compared to what the expected rate of return on the investments that are being used to pay down the mortgage. With the new tax law and a larger standard deduction, many clients will no longer be itemizing deductions. We also know that expected rate of return is only an estimate and certainly cannot be guaranteed against the known cost of the mortgage interest.
The third consideration is liquidity. We know that taking money out of investment funds to pay off the house, can create liquidity crunches down the road. This risk can be mitigated by opening a home equity line of credit. This would give you access to the funds utilized to pay down the mortgage if needed, or an emergency arose at some point down the road. Since none of us know what the future holds, it is generally better to have liquidity options that are not utilized than to need funds and not have availability.
As you think through these issues and considerations, please reach out to us and have a conversation. There are no one-size-fits-all, cookie-cutter answers. However, we enjoy helping clients determine the best strategy for managing their cashflow to reach their retirement income goals. We also love to help clients become debt-free. We look forward to having this conversation and tailoring a solution for you and your family as we all are "Moving Life Forward" together.