One question that’s often asked by those about to retire is: “should I pay off that mortgage before heading into retirement?“.
If you’re about to retire and confused about whether you should pay off your mortgage before retirement or not, then you’re in the right place.
For the average American, owning a home is an essential objective in life from both a psychological or financial perspective. However, it might not be the best decision or the best financial strategy.
Just as it’s with other financial considerations, paying off or carrying a mortgage in retirements depends on a person’s conditions.
What are the terms of the loans? What are their cash-flow needs and goals in retirement? What other assets do they have? What is their tolerance for risk?
By providing adequate answers to the questions, it’ll become easier to ascertain whether it’s best to pay off your mortgage before retirement or not.
The decision to pay off your mortgage before retirement depends on several factors like your cash flow, how your investment accounts are doing, how much you’ve saved for retirements, and so on.
In this article, we’ll be presenting you with some scenarios when it’ll not be a good idea to pay off your mortgage.
Let’s get the ball rolling.
One of the things you’d want to avoid is a scenario where you’ll use all of your savings to pay off your mortgage and then be unable to settle other expenses after retirement.
If you pay off your mortgage and don’t have money allocated for emergencies, you need to get a home equity line of credit or loan to get a new car or put it on a new roof.
For instance, an emergency expense could force you to look for higher interest debts, thus eliminating the benefits of paying your mortgage.
When you use your retirement savings to pay off your mortgage, you can also trigger taxes. For instance, if you withdraw around $70,000 from your retirement account to pay off the mortgage, you might end up with less than $60,000 after taxes.
It might not make any sense to pay off your mortgage from your retirement accounts. Let’s assume that you experience a shortfall after retirement; it’ll be impossible to handle situations because all your money is in your house.
Hence, you’ll have to get a line of credit. In some cases, paying off a mortgage loan before retirement can also affect other retirement objectives.
If you plan to sell your home after retirement, it’s not advisable to pay off your mortgage before retirement.
In reality, many people love to downsize either before or in retirement after discovering that a less expensive and smaller house fits their retirement lifestyle.
To reinstate, if you think that you might be selling your home pretty soon. Then it would help if you thought hard before paying off the mortgage on the house.
When you sell your home, you might get money to repay the home loan without depleting savings.
In reality, not everyone completes their profession with enough money to enjoy a comfy lifestyle after retirement. That’s why many Americans still work even after crossing the traditional retirement age (65 years).
If you’re contributing to a retirement account, such as 401(k) or IRA, it might be more beneficial to use any additional money to build solid retirement savings instead of repaying the mortgage before retirement.
It’s worth noting that retirement accounts are tax-advantaged. So, when you save money in one of these accounts, you’ll be able to lower taxable income and also avoid taxes when you withdraw funds from the retirement account in retirements. Though, this depends on whether the account is traditional or Roth.
If you’re saving up some money for big purchases, then it’s not advisable to pay off your mortgage.
It’s generally essential to avoid a scenario where you go broke after paying off the debt. It would help if you had future cash needs addressed.
For instance, you should plan to cover significant purchases for at least the next 5 to 10 years.
Typical examples of big purchases include car purchases, vacations, home remodeling, and a child’s education.
There’s no point paying off a mortgage only to borrow another loan for a large purchase.
Before paying for that mortgage, it’s essential to ascertain whether there are better ways to spend your money.
For instance, if you’ve refinanced or purchased a home in the past decade, the house will likely have low-interest rates.
If that’s the case, then it’ll be more beneficial to first repay debts with higher interest rates (like credit card debts).
That way, you’ll get to save more money in interest payments over the life of the debt.
When it comes to paying off your debt before retirements, it’s essential to figure out what works best in your situation and is most likely to help you attain your financial goals.
In this article, we were able to present scenarios when it’d not be ideal to pay off your mortgage. We do hope that you’ll find it useful.
That’s all for now.
If you have questions or observations, please drop them in the comments section below.
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