Retirement Planning: Paying off Mortgage vs Investing in Retirement

Considering Retirement:

Jessica Cannella: If you are thinking about retiring, has the thought crossed your mind, “Maybe I ought to take a big chunk of that money that I’ve been saving up, accumulating during my working years for the last 20, 30, maybe 40 years, and just pay off my mortgage.”?

Paying off your Morgage:

Jessica: I’m Jessica Cannella, Co-founder and President of Oak Harvest Financial Group. I get this question so often in visits with my clients, “Jessica, should I go ahead and pay the rest of my mortgage off? I bought the house for $300,000. I owe about $175,000. I’ve got that much. I’m going to be getting a lump-sum opportunity. Do I take that money and pay off the mortgage, or do I take that money from savings or my non-qualified account?” The answer often is, it depends.

I know that folks like Dave Ramsey and other professionals recommend strongly not carrying any debt whatsoever, especially in retirement. I would like to give you a little bit different perspective and share that it really depends on the interest rate that you were paying for the mortgage and how long you’ve been paying your mortgage payments. In my example of purchasing a home that was $300,000 initially and now there’s a balance of about $175,000, if your interest rate is 3%, 4%, south of 5% really is the number, it might make a lot of sense to continue to make those monthly payments.

Happy senior couple enjoying a breathtaking view

  • Maybe consider accelerating the mortgage payment if it’s something that is going to make you queasy to think about writing those checks out once you have drawn the line in the sand and you’re no longer receiving your earned income.

If you work with a retirement professional, they should be writing you a written income plan so that you are, in fact, replacing your checks that you had been enjoying while you or your direct deposits while you had been enjoying while you were working, now it’s time to pay yourself back in retirement. As it relates directly to your house, the interest rate is really the most important consideration.

Why is that?

Well, the primary reason is if your interest rate, in my example, is 3% on a $175,000 mortgage, and you’re thinking about taking that large chunk of change, $175,000, and just paying it off and being done with it, you ought to think, “What is the potential cost in doing so?” What I mean by cost is opportunity cost. For example, there are fixed annuity strategies right now that work just like a CD. Heck, CDs are even coming on the rise with their interest rates.

I recently saw the rate for a fixed annuity that had a three-year term and it was paying 4%. If you were to take that same $175,000 and stick it into a tool that’s going to earn a guaranteed 4%, and your interest rate is 3% on your mortgage, you can do some quick math there and understand that you are going to be earning yourself an additional 1%, on that $175,000, and writing out that monthly check every month might feel a little bit less daunting when you can flip the perspective on and look at it through the lens of an interest rate.

I am not recommending that you go and put your funds into a fixed annuity. That is a conversation that you absolutely have to have with an accredited financial advisor, or a retirement planner. I’ll end with saying that mortgage debt is not necessarily a bad debt. It’s actually a good debt to have. Credit card companies love to see, especially when you don’t have earned income, that you have good payment history, that you are capable of keeping up with those payments, that they are not late. Your mortgage is a wonderful way to do that.

House isolated in the field

The last point that I’ll make is that your households equity, and so you can think peace of mind, especially when you get to the point that you’re paying mostly principal, you paid the interest upfront on the house through your payments the first maybe 15 years. If it’s a 30-year mortgage, first 20 years depending. Now, you’re in the bottom of the ninth and you are actually paying mostly principal.

Every time that you write that check, I want you to think, “Can I be making more interest than the 3% that with the lump sum that I’m considering putting down on the house to get rid of it?” Think of it like this, yes, you’re paying a little bit of interest, and also the rest of that check is going into a savings account, and that is the equivalent to the equity in your home.

I hope that you found this information valuable. If you’d like to continue with the conversation, I encourage you to drop a comment or, of course, set up a discovery call with one of our financial advisors. They’d love to talk to you, with you, specifically about your situation, and if you ought to consider paying your mortgage off in full at the time of your retirement.

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