Should I Pay Off My Mortgage When I Retire?

[MichDad]

My wife is retired. When I retire next March (at age 62), I’ll have a remaining mortgage balance of approximately $22,000 that will be paid off in March 2019 if I make the regularly scheduled payments. The interest rate is 2.49 percent on the five year loan. If I wanted, I could easily pay off that debt, which is our only debt.

My heart tells me to pay off the remaining balance as I enter retirement. My head tells me to keep making the last 12 regular payments and keep my money invested. I’m leaning towards head over heart here.

What are your recommendations?

Thank you.

MichDad

[3funder]

I recommend head over heart. It's a paltry sum at a low interest rate.

[oldcomputerguy]

Mine is paid off, and I’m happy. As a rule, I believe it’s recommended to have your house paid off when entering retirement if possible. In this case, i’d suggest you look at how much of your monthly payment at this specific point is actually interest versus principal. If you’re four years through a five-year loan, then you’re probably paying relatively little in interest. If it’s less than about 2%, i’d Say it would be better to pay the remaining payments as scheduled, and leave your money invested.

Will you be making the payments with IRA draws, or from some other source?

[MichDad]

Will you be making the payments with IRA draws, or from some other source?

If I pay it off in one shot, I'll simply withdraw cash from a bank account. I will not be withdrawing that money from my TSP or IRA accounts.

MichDad

[dharrythomas]

I'd pay it off, but the amount is small to you and the term is short so your risk is minimal. I have no strong feelings either way and recommend you do whatever you want.

Good luck

Harry

[oldcomputerguy]

Will you be making the payments with IRA draws, or from some other source?

If I pay it off in one shot, I'll simply withdraw cash from a bank account. I will not be withdrawing that money from my TSP or IRA accounts.

MichDad

I assume that also goes for making the payments monthly. In that case i’d probably just pay the scheduled payments each month.

[Grt2bOutdoors]

How much cash would you have left in savings account, if you did choose to withdraw and pay off house? The cash account is probably yielding less than after-tax cost of mortgage. I’d pay it off, if I had enough cash in account to meet needs.

[MichDad]

How much cash would you have left in savings account, if you did choose to withdraw and pay off house? The cash account is probably yielding less than after-tax cost of mortgage. I’d pay it off, if I had enough cash in account to meet needs.

It would probably reduce my cash on hand by about 70 percent. That's because in the beginning of 2018, I'll also fund my and my wife's Roth IRAs and my HSA. However, when I retire, I'll begin to collect a pension that will exceed my monthly mortgage payments by thousands of dollars each month.

MichDad

[tennisplyr]

I paid mine off @62 and am satisfied. Mine was 4.25%. Whatever works for you.

[J295]

Pay it off.

[ruralavalon]

My wife is retired. When I retire next March (at age 62), I’ll have a remaining mortgage balance of approximately $22,000 that will be paid off in March 2019 if I make the regularly scheduled payments. The interest rate is 2.49 percent on the five year loan. If I wanted, I could easily pay off that debt, which is our only debt.

My heart tells me to pay off the remaining balance as I enter retirement. My head tells me to keep making the last 12 regular payments and keep my money invested. I’m leaning towards head over heart here.

What are your recommendations?

Thank you.

MichDad

Will you be making the payments with IRA draws, or from some other source?

If I pay it off in one shot, I'll simply withdraw cash from a bank account. I will not be withdrawing that money from my TSP or IRA accounts.

MichDad

How much cash would you have left in savings account, if you did choose to withdraw and pay off house? The cash account is probably yielding less than after-tax cost of mortgage. I’d pay it off, if I had enough cash in account to meet needs.

It would probably reduce my cash on hand by about 70 percent. That's because in the beginning of 2018, I'll also fund my and my wife's Roth IRAs and my HSA. However, when I retire, I'll begin to collect a pension that will exceed my monthly mortgage payments by thousands of dollars each month.

MichDad

Pay off the mortgage note. It's good to be debt free in retirement. You have the cash to pay off the debt. Your cash in the savings account is earning less the the interest rate on the mortgage note.

[SquawkIdent]

Personally, I'd pay it off and be done with it. But more importantly, what does your wife think?

[MichDad]

Personally, I'd pay it off and be done with it. But more importantly, what does your wife think?

I was waiting for that question. She lets me handle all the financial stuff so she'll quite willingly defer to me. However, if it were her decision with no input from me, I'm pretty sure she'd want to pay it off. On the practical side, the monthly mortgage payments are deducted automatically from our joint checking account so, if anything happens to me, the mortgage will be paid without any effort on her part.

MichDad

[SquawkIdent]

Personally, I'd pay it off and be done with it. But more importantly, what does your wife think?

I was waiting for that question. She lets me handle all the financial stuff so she'll quite willingly defer to me. However, if it were her decision with no input from me, I'm pretty sure she'd want to pay it off. On the practical side, the monthly mortgage payments are deducted automatically from our joint checking account so, if anything happens to me, the mortgage will be paid without any effort on her part.

MichDad

That would seal the deal for me. Pay it off and then take her out to dinner and celebrate.

[retiredjg]

There are no bad choices here and it won't make any difference financially in your daily life....so follow your heart. I don't recall ever hearing anyone say they regretted paying off the mortgage. And there are many who have done it and reported being glad they did.

Or flip a coin. If you don't like what the coin says, you know your answer.

[Watty]

The problems with keeping the money invested are;
1) If your normal asset allocation is 50% bonds then you would be buying $11,000 in bonds that likely would be paying a lower interest rate.

2) Six months after you retire about half the remaining amount would be paid off anyway so the money would not be invested very long.

3) You have a lot of sequence of returns risk and stand a large chance that over the next year the investments will do badly just by random bad luck.

If it were me and I had the cash readily available today I would go on and pay it off now just to simplify my life and make my 2019 taxes simpler.

The amounts involved are so small that one factor to consider is if you pay the mortgage with a paper check that you mail each month. If so then the amount you would spend on postage would be a factor to consider.

[TRC]

Pay it off and cross the retirement finish line completely debt free.

[carolc]

I paid mine off just before retirement. I didn’t want any debt heading into my spending years. Psychologically, it felt good.

carolc

[goingup]

Why wait to feel good about something when the price to pay is so small? You will simplify your finances and taxes.

[EddyB]

My existing mortgage will be paid off before I retire under its normal schedule, but if I could get another loan on the same terms as my current one (15 year loan at the conforming limit, at 2.75% and no points), I would refinance a year or two before planned retirement and invest the cash.

[EnjoyIt]

If you choose to arbitrage your 2.49% mortgage and invest instead you may be a little e ahead but not by much. Even if you expect returns of 5% you will arbitrage under $500 of which you will need to pay capital gains on. Is $500 or less worth it to you? Also, if you are just keeping the cash in a savings account then you are making 1.25% at best in interest but paying 2.49% on the loan. That does not seam like a financially wise decision.

Either way, at your point in life and wealth it really makes very little difference what you choose to do. Personally I would choose whatever is easier since it has so little impact.

[mptfan]

Pay it off.

Ask yourself this question...if you did not have a mortgage, would you go out and borrow $22,000 to be paid off in a year and a half with your house as collateral? If the answer is no, why not?

[neilpilot]

It's common for those with mortgage interest, when calculating their taxes, to itemize deductions vs taking the standard deduction. Often they end up with a small difference between the amount itemized and the standard deduction. We decided to pay off our mortgage on retirement. That ended our bank's escrow account, and we can better control when we pay our property taxes. We easily alternate years, paying property taxes for 2 years during the same tax year (January & December) and taking the standard deduction every other year.

That strategy has saved us, on the average, $500-$800 every year in Federal income tax.

If you can do what we did, then your head and heart would be on the same page.

[ThePrince]

My wife is retired. When I retire next March (at age 62), I’ll have a remaining mortgage balance of approximately $22,000 that will be paid off in March 2019 if I make the regularly scheduled payments. The interest rate is 2.49 percent on the five year loan. If I wanted, I could easily pay off that debt, which is our only debt.

My heart tells me to pay off the remaining balance as I enter retirement. My head tells me to keep making the last 12 regular payments and keep my money invested. I’m leaning towards head over heart here.

What are your recommendations?

Thank you.

MichDad

Pay it off and it is no longer a point of concern, worry, or frustration.

[ThePrince]

Pay it off.

Ask yourself this question...if you did not have a mortgage, would you go out and borrow $22,000 to be paid off in a year and a half with your house as collateral? If the answer is no, why not?

++++++1

[ABQ4804]

MichDad, curious what you decided now that you approach that retirement finish line. Are you paying off the $22K mortgage?

[SeeMoe]

We retired 22+ years ago and sold the City house, then paid off the country cottage (10.50% Usery) where we lived for about 15 years before selling it and moving into a nice CCRC. Always “pay as we go “ with no credit card fees ever since, thanks to Vanguard and good pensions. Still invest with excess bucks. It’s a nice feeling to be totally debt free. Even have the burial expenses paid for!

SeeMoe..

[MichDad]

MichDad, curious what you decided now that you approach that retirement finish line. Are you paying off the $22K mortgage?

That's a good question. I haven't yet paid it off. I remain torn by this. I think under the new tax law, my interest payments, low as they are, are not deductible in our situation so that would be a reason to pay it off early. On the other hand, our interest rate (2.49%) is very low to begin with and, with interest rates rising, we may be better off not paying it off early.

One other factor is that we're thinking of purchasing a property in Europe to live in part of each year. I don't know whether it would be easier or more difficult for us to qualify for a home equity loan or a HELOC if we have our existing mortgage obligation or not.

The good news is that we have choices. If I wanted to, I could pay off the loan in less than one week. All I'd have to do is move money from one interest bearing cash account to my checking account and then deduct the remaining mortgage balance from my checking account. My inclination today is to wait until around June of this year and to then pay the remaining mortgage balance in one lump sum. By then, the after tax balance of the $25,000 payment the government will make to me to get me to retire early will cover the remaining mortgage balance.

MichDad

[soccerrules]

$22,000 @2.49 doesn't move the needle much as far as "what is best ?"

Do what makes you sleep better at night.

I lean more toward paying it off, especially if you have plenty of cash and/or Bonds (in taxable) not earning 2.5%. The hassle factor of not having another bill to pay.

Can you increase any tax deferred contributions for the next 12 months with the monthly amount ($1500?) going to mortgage ?(assuming you pay it off).
Then you save more on taxes this year and some next by reducing your taxable income.

[MichDad]

Can you increase any tax deferred contributions for the next 12 months with the monthly amount ($1500?) going to mortgage ?(assuming you pay it off).
Then you save more on taxes this year and some next by reducing your taxable income.

By the time I retire on March 31st, I'll have fully funded my TSP (401(k) equivalent) and my and my wife's backdoor Roth IRAs.

MichDad

[soccerrules]

Can you increase any tax deferred contributions for the next 12 months with the monthly amount ($1500?) going to mortgage ?(assuming you pay it off).
Then you save more on taxes this year and some next by reducing your taxable income.

By the time I retire on March 31st, I'll have fully funded my TSP (401(k) equivalent) and my and my wife's backdoor Roth IRAs.

MichDad

I assume you might be leaning toward paying it off or you wouldn't have asked ?

I am more in the "pay it off" camp for full disclosure.

[jpsc]

Use your mortgage as a deduction when you do RMD and social security. The tax man have it easy
if you don't have any deduction.

[Watty]

One other factor is that we're thinking of purchasing a property in Europe to live in part of each year.

If you do this be sure to check with a lawyer about any estate planning issues since your US will may not be valid over there. A US power of attorney would also likely not be valid there so if you end up in a nursing home it might be difficult to sell that property. These are not a show stopper but you need to be sure to jump through the right hoops to do it right.

[Gill]

I don't see where retirement is a determining factor with respect to a mortgage but is only one factor. I have been retired for a number of years and have had several mortgages on a variety of houses. In all cases I had sufficient assets to well afford the house but much of this was in IRA's or had large capital gains. Over time I have rapidly amortized all the loans without incurring unecesary taxes in the process.
Gill

[Toons]

My heart tells me to pay off the remaining balance as I enter retirement.

Follow Your Heart.
You won't regret it.

[Minderbinder]

MichDad, curious what you decided now that you approach that retirement finish line. Are you paying off the $22K mortgage?

That's a good question. I haven't yet paid it off. I remain torn by this. I think under the new tax law, my interest payments, low as they are, are not deductible in our situation so that would be a reason to pay it off early. On the other hand, our interest rate (2.49%) is very low to begin with and, with interest rates rising, we may be better off not paying it off early.

One other factor is that we're thinking of purchasing a property in Europe to live in part of each year. I don't know whether it would be easier or more difficult for us to qualify for a home equity loan or a HELOC if we have our existing mortgage obligation or not.

The good news is that we have choices. If I wanted to, I could pay off the loan in less than one week. All I'd have to do is move money from one interest bearing cash account to my checking account and then deduct the remaining mortgage balance from my checking account. My inclination today is to wait until around June of this year and to then pay the remaining mortgage balance in one lump sum. By then, the after tax balance of the $25,000 payment the government will make to me to get me to retire early will cover the remaining mortgage balance.

MichDad

2.5% after-tax return for a 1 year return is pretty good. A 1 year Treasury rate is taxable and yielding 2% right now. You would need the Fed funds rate to move about 1.5% just to even be close to breaking even on an after-tax basis, and then move higher yet to account for the fact that you will have maybe 6 months to start to benefit as that move can't happen overnight. Such a move hasn't happened in 40 years since the high inflation days of the 70s.

Personally I see no reason not to pay this off.

[bloom2708]

My heart tells me to pay off the remaining balance as I enter retirement.

Follow Your Heart.
You won't regret it.

+1

My heart told me to pay off our mortgage by 40. Did that. I don't want a mortgage anywhere near my retirement. But, I do know there are a variety of opinions on this. We just need an 80 year old who just got a new 30 year mortgage to add their thoughts as counterpoint.

[RRAAYY3]

Pay it off!

1. You’re debt free
2. You don’t have to touch actual investments in order to pay it off
3. Low interest rate, but paying off is still better than keeping in cash

[grettman]

Technically, the amount is so small and the interest rate is so low it doesn't really matter. HOWEVER,

Why have your life more complicated than it needs to be?

Write that check and pay it off. Celebrate with a nice dinner.

[MichDad]

This is an update from the OP.

I retired on March 31st. Earlier this month, I paid off our mortgage (about ten months early). My sleeping habits haven't changed.

MichDad

[gowest]

This is an update from the OP.

I retired on March 31st. Earlier this month, I paid off our mortgage (about ten months early). My sleeping habits haven't changed.

MichDad

Congratulations! (I was about to vote to pay it off. I enjoyed perusing this thread.) Again, congrats!

[Taylor Larimore]

My wife is retired. When I retire next March (at age 62), I’ll have a remaining mortgage balance of approximately $22,000 that will be paid off in March 2019 if I make the regularly scheduled payments. The interest rate is 2.49 percent on the five year loan. If I wanted, I could easily pay off that debt, which is our only debt.

My heart tells me to pay off the remaining balance as I enter retirement. My head tells me to keep making the last 12 regular payments and keep my money invested. I’m leaning towards head over heart here.

What are your recommendations?

Thank you.

MichDad

MichDad:

In my opinion, it can be a mistake to pay-off a low-interest rate mortgage in retirement. Consider:

* The money to pay-off the mortgage becomes much less liquid tied-up in home equity.

* The money used to pay-off the mortgage can often be used more effectively for investment.

* Our personal decision: Instead of leaving our heirs equity in a paid-off home that may be difficult to sell, we took-out a maximum low-interest (deductible) mortgage and started giving our heirs their equity in monthly payments. They are very grateful.

Best wishes.
Taylor

[ruralavalon]

Congratulations on your retirement .

This is an update from the OP.

I retired on March 31st. Earlier this month, I paid off our mortgage (about ten months early). My sleeping habits haven't changed.

MichDad

Thanks for the update.

I think you did the right thing.

[bltn]

I would personally make the early pay off. Then I would continue to make the remaining payments to my bank account.

[bengal22]

There is no Right or Wrong answer. If you are one that is emotionally opposed to having a mortgage pay it off. I am retired and have a mortgage that is about 5% of my invested assets. I have no problem sleeping at night.

[guyesmith]

If I had the cash available to clear my mortgage without clearing all my cash...I’d write the check in a nanosecond.

You won’t regret the peace of mind.

[Easy Rhino]

so, you'd be 'betting" that you can earn more money than the 2.5% interest rate costs you.

in theory, you'd need to determine if you're comfortable with that bet.

But in practice, it's a relatively small amount to you at a low interest rate.

I suspect the final decision truly won't matter, so either one is correct. congratulations!

[gotester2000]

Does it really matter? The small loan amount, low interest rate and short term say - dont payoff.

[MichDad]

Does it really matter? The small loan amount, low interest rate and short term say - dont payoff.

Basically, I took a little over $20,000 from a bank money market account earning 1.74% APY and paid off the remaining balance on our 2.49% mortgage. I have over $50,000 in the bank money market after having paid off the mortgage. Also, with the new tax law, I don't think we'll qualify for the home interest deduction.

The mortgage payoff was far less than one percent of our entire retirement portfolio -- not including our home equity.

MichDad

[SagaciousTraveler]

This is an update from the OP.

I retired on March 31st. Earlier this month, I paid off our mortgage (about ten months early). My sleeping habits haven't changed.

MichDad

Congratulations!

Two questions if you feel like answering:

1. Saw you reference TSP. Out of curiosity, how long were you with the govt.

2. Any immediate plans in retirement? Live in Ohio and once I retire in 30 years , I'll be up in Glen Arbor, Michigan reading book after book.