Why You Should Retire Mortgage Free
Often one of a client’s biggest assets, as well as expenses, is their home. Whether they decide to move during retirement by “downsizing” or stay put in their current home, they need to make sure that they are mortgage free when they enter retirement. At Wiser Wealth Management, we advise our clients who are retiring to have all liabilities paid off and be mortgage free. This can be accomplished early on, as we have discussed in the past, by only taking out a 15-year mortgage or if a client is younger, a 30-year and making additional payments to the principal on the home.
If you are close to retirement and not in a position to refinance, then you should allocate additional money monthly or a lump sum preferably with non-qualified assets to have the mortgage paid off by retirement. This not only frees up thousands of dollars per month, but also provides peace of mind knowing you no longer have the obligation of sending money to someone else and can spend your hard-earned money on yourself and your family instead. Fewer obligations mean more peace of mind.
Recently, though, we hear a lot of people saying “well the rate is so low. If I’m only paying 2.5%, why would I want to pay it off?” It is true that rates are historically low, but your payment is still usually over a thousand dollars. In retirement, you are no longer investing the money and return on your cash with the low rates is less than 0.5%. Rather than making banks wealthy and paying them interest, you could be keeping that amount invested and allowing it to give you more to live on down the road. Also, mortgage interest is still technically tax deductible, but fewer people itemized it after 2017, when Congress doubled the standard deduction. According to the IRS, only 13.9 million tax returns claimed the mortgage interest deduction in 2018, compared to nearly 34 million in 2017.
Also, state and local taxes (SALT) deduction now caps out at $10,000 so a big mortgage does not provide the benefit it once did. Unfortunately, in the U.S., over 9 million homeowners over age 65 have mortgage debt, according to federal data analyzed by the Urban Institute. That number is up almost 60% from a decade ago. Homeowners age 65 and over who have mortgage debt owe a median of $72,000 and about 26% of homeowners age 80 and over have mortgage debt, up from about 11% roughly a decade before. They owe a median of $43,000.
This is certainly not the trend we are striving for or want you to be part of. Last year was a perfect example of the mortgage issue. We received many calls during the COVID sell off in March last year, not because of concerns that the market was down over 30%, but because retirees were happy to not have a mortgage payment and other liability payments due when the market was down. They were able to ride out the down turn without debt hanging over their head. Living mortgage free in retirement is one of the best steps you can take to achieve financial success and enjoy withdrawals for expenses and travel, and not for bills.
Matthews Barnett, CFP®, ChFC®, CLU®
Financial Planning Specialist