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  • Writer's pictureJames Veal

Don’t Pay Off Your Mortgage Before You Retire! What?

One piece of advice I share with people approaching retirement is to pay off as much debt as possible. This makes perfect sense when it comes to credit card debt, personal loans, and auto loans. But what about paying off your mortgage before you retire?

Here are some factors to consider when trying to decide if paying off your mortgage is right for you.

1. Your mortgage rate. If you have a fixed-rate home loan with a great rate (say less than 4%), it may not make sense to pay it off before you retire, especially if you plan on pulling money from your retirement savings accounts to do so. If your investments are generating a higher rate of return and you withdraw those funds to pay off your mortgage, you would end up losing money.

2. Tax consequences. If you are thinking about using your 401(k), 403(b), or an IRA to pay off your mortgage, you have to see how that will affect your taxes. If you take out money from these types of accounts, you’ll pay regular income taxes on your withdrawal. You may also be subject to an additional early withdrawal penalty of 10%, depending on your age. Additionally, if you’re taking advantage of the mortgage interest deduction, you will lose that tax benefit if you pay off your mortgage and no longer have mortgage interest to pay.

3. Your other outstanding debt. If you have a lot of higher-interest credit card debt, you should pay that off before you consider paying off your mortgage. Not only are your investments unlikely to generate a higher rate of return, unlike your mortgage, they offer no potential tax benefits.

4. Your emergency fund. If you don’t have at least three to six month’s worth of living expenses stored away in a savings account, make certain you build up an emergency fund before you pay off your house.

5. Your overall retirement savings. If you don’t have enough money to comfortably live in retirement, consider delaying your mortgage pay-off and instead maximize your retirement contributions. You may even want to consider delaying retirement to give yourself more time to save up - and increase the amount you’ll receive in social security benefits.

Yes, it is a great idea to pay off credit card debt, personal loans, and other debt obligations before you hang it up. But, what about your mortgage! Do you believe it’s best to pay off your mortgage before you retire? Why?

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