Imagine this: Brenda, who’s 59, single, and childless, is considering retirement. The catch? She still owes $81,000 on her mortgage. It seems reasonable that she might want to stick with her job until that’s paid off.
If Brenda retires while still having a mortgage, she’d be part of a growing trend among older Americans. Back in 1989, about 24% of people aged 65 to 79 had a mortgage or some form of home debt. Fast forward to 2022, and that figure soared to 41%.
In fact, homeowners in the 65 to 79 age range had a median mortgage debt of $110,000 in 2022—up more than 400% from what it was in 1989. Those over 80 saw an even starker rise, with their median obligations jumping by over 750% during the same time period, reaching $79,000.
So should Brenda keep working to clear that mortgage debt?
Deciding whether to pay off a mortgage before retirement often boils down to personal choice. For many, the comfort of entering retirement debt-free—without worrying about hefty mortgage payments—can outweigh any financial drawbacks.
There’s always a risk involved with having a mortgage; if one loses income after retiring, bouncing back can be tougher.
The choice isn’t straightforward. Paying off the mortgage means reduced home costs, potentially freeing up money for other expenses.
On the flip side, using a significant chunk of retirement savings to pay off that debt might limit monthly withdrawals and strain cash flow, perhaps even more than simply making mortgage payments.
Funds directed at paying off that mortgage contribute to home equity, which isn’t always easily accessible for cash flow needs. Plus, large withdrawals from retirement accounts can push up annual tax rates or even raise Medicare Part B premiums.
Experts generally don’t recommend using temporary pension payments to settle a mortgage. Without directing those funds into an IRA or approved plans, they get taxed as income. To make matters worse, if this occurs before age 59½, there’s a potential for a 10% early withdrawal penalty.
It’s important to assess your specific situation. If your potential investment returns outpace your mortgage interest, paying off your mortgage might not be the smartest move. For instance, why pay back a 5% mortgage when you could be earning 8% by investing rather than repaying that debt?
But there are varying opinions on this topic. Some financial advisors caution that paying off a mortgage during retirement isn’t usually advantageous, indicating that maintaining the mortgage could enhance cash flow. They suggest that mortgage interest deductions might alleviate financial stress while still allowing for savings and investment opportunities.
Your personal financial scenario really dictates the best course. If you solely rely on Social Security for your income, working a bit longer to pay off that mortgage might be worth considering for peace of mind.
As Brenda approaches retirement, if she anticipates trouble carrying a mortgage after leaving the workforce, it might be worthwhile to look into options such as extending her career, taking on part-time work initially, or relocating to an area with a lower cost of living.
A reverse mortgage could be a suitable option for her too, but it definitely comes with its own set of pros and cons.
At 59, Brenda has a variety of options ahead. It may be beneficial for her to consult a financial advisor to figure out the best path forward and establish a solid retirement plan.
