skip to Main Content
Do You Need To Pay Off Your Mortgage Before You Retire?

Do you need to pay off your mortgage before you retire?

You may want to use your money for other things.

Many near-retirees pay extra on the mortgage each month, avidly working toward having it paid off by retirement. Is this necessary to have a secure retirement? In some cases, yes. In others, not so much. When it comes to paying off the mortgage, a one-size-fits-all answer doesn’t work.

In general, lower income households with total investable assets of less than a million are best served working to pay off the mortgage by retirement.

Higher income households with over $1 million of invested financial assets may want to think about debt more strategically — in much the way a corporation would. Companies use debt to fuel growth. Households can take this approach also, and do it in a way that does not expose them to excessive risk.

“You are a lot better off if you can bring more money to the table through the strategic use of debt and then target a lower, less-volatile return,” says Thomas J. Anderson, in his book “The Value of Debt in Building Wealth,” which discusses the appropriate use of debt for high net worth households.

What kind of returns would a portfolio such as Anderson describes be targeting? About 6% to 7%. Obviously, the cost of the debt would need to be less than this. There are two types of debt where that is feasible in today’s low rate environment; mortgage debt on a primary residence, and a pledged asset line of credit (which is different than a margin loan) that can be established with a portfolio of invested assets as collateral. Pledged asset loans only work if you have investments titled in non-retirement accounts — IRA and 401(k) accounts, and other tax-deferred accounts can’t serve as collateral for loans.

Taxes are also part of the equation. If you itemize deductions, mortgage debt can help reduce taxable income in retirement….

Leave a Reply