There’s a lot of satisfaction in making your last mortgage payment. Your budget suddenly opens up, and you may be able to start funneling more money into your savings for long-term goals.
But rushing to pay off a mortgage in retirement may not be the right move. Higher living costs, volatile markets and longer life expectancies may mean you need to have more liquid cash at your disposal.
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Why paying off the mortgage still feels like the safe move
A mortgage is often one of the last monthly debt payments people contend with before they retire, and it’s typically a homeowner’s largest expense. Knocking it out before retirement means allowing more room in your budget for new hobbies in retirement, travel and more. It also means you don’t need to consider putting any of your Social Security benefits towards paying off your mortgage.
A debt-free home can also help retirees navigate stock market corrections with more patience. The lack of monthly mortgage payments can decrease the need to withdraw more money from your portfolio to keep up with living expenses. All these reasons are why the common advice is typically to pay off your mortgage before you retire.
Why early payoff can backfire for retirees
As with all things personal finance, the choice to pay off your mortgage before retirement isn’t one-size-fits-all. When choosing when to pay off your mortgage, it’s important to consider your specific situation.
Paying off your mortgage early offers immediate short-term benefits that can compound in the long run. However, a messy middle can result in an early payoff backfiring on your finances. If paying off your mortgage before retirement will leave you cash poor and make it more difficult to keep up with medical bills, home repairs and other expenses, you may want to reconsider the move.
You can tap into home equity, but it’s not as easy to access as cash in a more liquid account. You should also consider your mortgage rate. For instance, if you secured a low interest rate before the pandemic, it may not make sense to rush to pay off your mortgage.
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How retirees should make the decision now
There isn’t a universal answer that determines if you should pay off your mortgage early, but you can consider a few factors. It often makes more sense to pay off your mortgage early if you have a high interest rate. Paying off a mortgage early should not deplete your savings, as doing so can leave you financially vulnerable in the event of an emergency.
If you want to pay off your mortgage early, make sure you have an emergency fund that can cover any surprise expenses that arise. Many financial advisors recommend emergency funds that can cover a year to two years of living expenses once you're in retirement. You don't want to deplete your savings accounts to pay off the mortgage, get hit with an expensive emergency expense and have to take out loans equivalent to the money you previously had in your savings accounts. A good financial buffer can remove this risk.
You should also assess what your income will look like when you retire. Social Security benefits will help with some expenses, but if you have to operate under very tight margins, accelerating your mortgage payoff may be the right approach. It may also be worth picking up a part-time job or a seasonal gig to bring in some extra money to pay off the mortgage faster. That way, you still make some money but don’t have to commit to the schedule of a full-time job.
