For decades one of the dreams that almost everyone had was to be able to be debt free by the time they retired and, for quite a few decades, this was the case and many people’s dreams did come true. Today that’s changed however and, according to the Federal Reserve Board, nearly 25% of all households where the head of the household is 75 or older still had a home mortgage when they retired. When you compare these 2010 numbers with the 5.8% of retirees in the same situation in 1989, you see just how big the situation has grown.
In simple terms, retiring with any type of large debt can be a problem and retiring with a mortgage that still needs to be paid can be even worse. Many retirees just won’t have the type of income needed to be able to pay their mortgage and pay for all of the other expenses that they’ll have on their retirement savings and Social Security alone. It’s for that reason that we put together this blog today with reasons, advice and tips on why you should pay off your mortgage before you retire. We believe that some of them will be quite helpful. Enjoy.
One of the best things that you can do is opt for a shorter fixed-rate mortgage. The reason; since the mortgage payments will be higher, you’ll more than likely be forced to purchase a smaller home. With a smaller home comes lower property taxes, fewer maintenance bills and, since you’ll have less square feet to heat and cool, lower energy bills. Although your mortgage will be higher, these extra savings should be big enough to allow you to put more money into your retirement savings.
If you want to be able to increase your retirement withdrawal rate, not having the fixed expense of a big mortgage can be very helpful. In fact, one of the best ways to increase your safe withdrawal rate is to have flexibility with the withdrawals and, by cutting back on withdrawals when the market is down, the chance that your retirement income will last through your retirement increases substantially. Without a big mortgage bill every month you’ll have much more flexibility and be able to much better control your spending and investment account withdrawals.
Many people invest the money that they get from their mortgage in risky assets but the fact is that there are few guarantees that this will make them more money. Indeed, most people’s actual returns are far below what the market promises. Rather than do this, better to take a lower mortgage or pay it off faster and use the money you’re now saving towards retirement instead. Yes this is the safe play but, as you get older, you’ll definitely be thankful to not have the stress of worrying about whatever it is you’ve invested in.
Speaking of lowering your stress, just the fact that you don’t have a huge mortgage payment looming every month can help many retirees to sleep much better at night. Without the worry of the mortgage there are also fewer worries about employment because you’re spending much less money. Even better, a retiree in control of their finances who chooses to continue working will have the freedom to work wherever they choose. (Say that five times fast!)
At the end of the day there certainly will be a few people that can retire comfortably with a mortgage but, statistically speaking, it’s certainly not the majority. Besides the fact that it’s going to be much easier financially, the feeling of being debt-free in retirement can be a good one and so, if your goal is to retire comfortably, part of that goal should definitely include paying off your mortgage before you retire.