Paying off the mortgage after 30 years and then retire, this used to be a coming-of-age gift for many people. This situation is no longer the norm: According to Fannie Mae’s research, baby boomers, Americans born between 1946 and 1965, are burdened with more mortgage debt at this stage of their lives than previous generations. , And compared with previous generations, they are less likely to own a house at retirement age. Mae’s Economic and Strategic Research Group.
For retirees or those who are about to retire, the financial significance of repaying mortgages depends on factors such as income, mortgage size, savings, and the tax advantage of being able to deduct mortgage interest.
- Americans born between 1946 and 1965 have more mortgage debts than any previous generation.
- For retirees or people who are about to retire, have lower incomes, have high-interest mortgages and cannot enjoy tax-free interest, repaying the mortgage may be a wise move.
- It is usually not a good idea to repay the mortgage at the expense of funding the retirement account.
When to continue to pay the mortgage
The monthly repayment is meaningful for retirees, who can spend it comfortably without sacrificing their standard of living. This is usually a good choice for retirees or high-income people who are about to retire, low-interest mortgages (less than 5%) and those who enjoy tax-free interest. This is especially true if paying off mortgages means that there is no savings buffer to deal with emergencies such as unexpected expenses or medical expenses.
It makes sense for retirees to continue paying their mortgage every month, who can easily complete the job and benefit from tax relief.
If you will retire in the next few years and have the funds to repay your mortgage, then it may make sense for you to do so, especially if the funds are deposited in a low-interest savings account. Again, this is best for people who have a well-funded retirement account and still have a lot of savings for unexpected expenses and emergencies.
If the monthly repayment amount is too high to afford the reduced fixed income, it also makes sense to pay off the mortgage before retirement. Entering a retirement year without monthly mortgage payments also means that you don’t have to withdraw funds from your retirement account to cover these expenses.
Should retirees pay off their mortgages?
Avoid using retirement funds
Generally speaking, exiting a retirement plan such as an individual retirement account (IRA) or 401(k) to repay the mortgage is not a good idea. If you quit before the age of 59½, you will pay both taxes and an early payment penalty.Even if you wait, the tax blow to get a large allocation from your retirement plan may push you to a higher annual tax bracket.
It is also not a good idea to pay off the mortgage at the expense of funding the retirement account. In fact, those who are close to retirement should make the greatest contribution to the retirement plan.
In the past few years, studies have shown that most people do not save enough money for retirement. In a report in September 2018, the National Retirement Security Institute revealed that more than half (57%) of working-age people do not have retirement accounts.The report added that even among workers who have accumulated savings in their retirement accounts, a typical worker’s account balance is only $40,000.
Strategies to pay off or reduce mortgages
There are some strategies you can use to pay off your mortgage early or at least reduce your payments before you retire. For example, paying fortnightly rather than paying monthly means that you will pay 13 instead of 12 in a year.
If this helps shorten loans and lower interest rates, you can also refinance the mortgage. Although this may help in the long run, refinancing may also damage your net worth. Remember, new or old mortgages are your household’s liabilities, subtracted from household assets.
If you have a bigger house, another option is to reduce the size by selling your house. If you structure your sales structure correctly, you may be able to use the sales profits to directly buy smaller houses, thereby avoiding mortgages. However, traps include overestimating the value of your current home, underestimating the cost of a new home, ignoring the tax impact of transactions, and ignoring closure costs.
Although paying off your mortgage and directly owning your home before retirement can give you peace of mind, it is not the best choice for everyone. If you are a retiree and/or are still a few years away from retirement, it is best to consult a financial adviser and let them double-check your situation to help you make the right choice.