Check out our Video on this topic here!
One question we get asked a lot when working with clients is if they should pay off their mortgage before retiring if they have the means to do so.
It’s a goal for many, but it’s not a one-size-fits-all answer. In this blog, we are going to talk about different situations where it may or may not make sense to pay off your mortgage before retirement in addition to different strategies we’ve seen over time.
Lowering Monthly Expenses
On of the biggest motivating factors we’ve seen with pre-retiree clients is helping to lower their monthly essential expenses in retirement.
Saving anywhere between a couple of hundred dollars to a couple of thousand dollars monthly can have a positive impact on one’s cashflow.
This money can be put toward other discretionary expenses like travel and entertainment or other hobbies you enjoy.
Freeing Experience
The second reason many clients speak about is for peace of mind. Knowing that you own your property and do not owe a lender any money is a feeling that can potentially bring you comfort.
But if it actually makes sense for your financial situation is a totally different question and one that a Financial Advisor should be able to help you plan out.
With that, let’s talk about what we discuss with clients.
What is your Interest Rate?
The first fact we discuss with clients is what their monthly interest rate is.
For today’s purposes, let’s say your mortgage is at 7%.
By paying the mortgage off, you are effectively getting a 7% return on your money. If this is something you’re comfortable with, it may make sense.
Do you have a Variable Rate Mortgage?
Another reason it could make sense is if you have a variable rate mortgage and you think we could see steadily higher rates or even a spike upward in rates in the future.
Paying the mortgage off prior to rates rising could potentially help you save money down the road which you can use for other things.
What is your Cash Reserve?
Something we always speak with clients about is their cash reserve.
When budgeting in a simplistic manner you might say common practice is to keep at least 6 months of cash on hand.
We find that there are some people who feel most comfortable holding onto much more cash than that and others that feel their investment portfolios provide the liquidity they need and therefore keep very little cash on hand. Understanding what cash reserve you feel comfortable with is important before taking the leap to pay your mortgage down.
How are your Investments doing?
Another reason you may not want to accelerate paying down your mortgage has to do with investments and retirement overall.
As we discussed prior in trying to compare annual interest on a loan versus overall returns for your money, another aspect is to consider how much your money is earning.
For this example, let’s say we’re in a very low interest rate environment and you have a 2.5% mortgage.
If you have assets invested that are earning returns dramatically greater than that rate of interest, it may make sense to continue to invest.
There are a few factors in a scenario like this to consider such as calculating your investment returns on an after-tax basis as well as any deductibility associated with your mortgage, and for that reason we suggest you speak with your trusted tax professional to figure that out.
The Final Word:
There is not one perfect answer so please do not get down on yourself if you’re having trouble deciding if you should or should not pay off your mortgage.
There are also options in between fully paying it off where you do not have to go “all-in” on one method.
Strategies such as increasing the number of mortgage payments you make per year or increasing the amount you’re making per payment can help to pay the mortgage down faster.
We always suggest speaking with your tax and financial professionals to see if any of these scenarios may be right for you.
Disclaimer:
Rockline Wealth Management (RWM) is a registered investment adviser located in Plainview, NY. RWM is registered with the U.S. Securities and Exchange Commission. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission.
Rockline Wealth Management does not offer tax or legal services. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's investment portfolio. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses.
The opinions expressed and material provided are for general information, and should not be considered a solicitation of financial advice or for the purchase or sale of any security.
Real-life and fictional examples given in this video should not be viewed as guaranteed outcomes when investing. Past performance is not indicative of future results and every individual’s investment circumstances are different. Individuals should consult their financial professional before implementing their investment plan.