2 Reasons Paying Off Your Mortgage Before Retirement May Not Be the Best Move
It’s generally advised to pay off all your debts — including your mortgage — before you retire. But under certain circumstances, this might not be the right financial decision for you.
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Here are a few reasons why paying off your mortgage before retirement may not be the best move.
You Want To Delay Withdrawing From Taxable Accounts
“The decision to pay off a house, or any debt, should be informed by a well thought out retirement income plan,” said Devin Carroll, owner and lead advisor at Carroll Advisory Group. “While freeing up the cash flow may be attractive, it could be that saving the money could offer a greater benefit.”
For example, it may make more financial sense to keep the funds you would have used to pay off your mortgage in a cash/liquid account to supplement your early years of retirement.
“This could be the difference between pulling money out of your taxable accounts,” Carroll said. “Ultimately, it comes down to making a decision that is based on a plan that compares multiple scenarios.”
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Withdrawing From Other Accounts Would Put You in a Higher Tax Bracket
In some cases, withdrawing from taxable retirement accounts can end up being very costly.
“If most of your retirement assets are in IRAs or 401(k) [plans] (pre-tax money), then taking out money from your retirement account would be fully taxable and may even push you into a higher tax bracket,” said Scott A. Bishop, executive director of wealth solutions at Avidian Wealth Solutions.
“If you are also covered under Medicare, it can also increase the cost of your (and your spouse’s, if you are married) Medicare premiums,” he continued. “That additional cost or ‘penalty’ is called IRMAA — the Medicare Income-Related Monthly Adjustment. Depending on your income level, it could increase the base premium, which will be $164.90 in 2023.”
If the withdrawal brings your income above $182,000 if you are married filing jointly, the premium will rise to $238.10 per month. If your income rises above $750,000, the premium would rise to $578.30 per month.
Your Mortgage Rate Is Particularly Low
Jay Zigmont, Ph.D., CFP, founder of Childfree Wealth, typically advises his clients to pay off their mortgage before retiring, but there are certain circumstances in which saving that money instead could pay off.
“If you are one of the lucky people who got a mortgage rate in the 2’s, then right now, you might make more in a high-yield savings account,” he said.
You might also consider putting this money into Treasury bills.
“Instead of making extra payments towards principal, you can make more money and have more cash in your pocket by just parking your money in a short-term Treasury bill,” said Doug “Buddy” Amis, CFP, CEO at Cardinal Retirement Planning. “This is an opportunity to earn more interest without taking on the risk of losing money if a company defaults or stock prices fall — using Treasury bills and FDIC-insured savings accounts can be smart and safe because they are backed by the full faith and credit of the U.S. government.”
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