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Commentary: Should you prioritize paying off a mortgage before retirement?

It is often thought that before reaching retirement, people should strive to be completely debt free. This is a worthy goal and, if achieved, can offer greater peace of mind as you enter retirement. No longer having to make regular payments to pa...

Peggy Webb
Peg Webb

It is often thought that before reaching retirement, people should strive to be completely debt free.

This is a worthy goal and, if achieved, can offer greater peace of mind as you enter retirement. No longer having to make regular payments to pay off a loan can help free up cash as you enter a time where you may be living on a fixed income.

So that means you should do everything you can to pay off a mortgage before retirement, right?

The answer depends on your current situation. It's possible that you could be better off carrying your mortgage with you into retirement rather than paying it off ahead of time. We recommend considering these five factors before deciding if you should pay off your mortgage before reaching retirement.

• Review your current financial situation. Are you currently maxing out contributions to your retirement accounts? Are you on track to save enough to maintain your standard of living in retirement? If you said no to either of these questions, you may benefit from saving more rather than paying off your mortgage at a quicker rate.

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• Evaluate your current mortgage. Whether you have a fixed-rate mortgage or a variable-rate mortgage will impact how quickly you should pay it off. With interest rates so low, it's likely that the interest rate on a variable-rate mortgage will rise in the future. This potential increase in your mortgage payments could come during retirement when you are more vulnerable to higher costs of living.

• Consider the value of a mortgage deduction. Perhaps the biggest benefit of having a mortgage is the tax deduction it offers. If you are in a higher tax bracket, the deduction from the mortgage is likely to benefit you much more than someone in a lower tax bracket. Keep in mind that once you reach retirement, you'll like move into a lower tax bracket, and the value of the deduction will decrease. In addition, this deduction qualifies only if you itemize vs. using the standard deduction on your tax return.

• Estimate your investments' expected performance. Spending more money now to pay off your mortgage doesn't necessarily mean you'll save money in the long run. Based on the rate of your mortgage and how much you expect your portfolio to earn, it may be better to invest that money instead. Let's assume you have a mortgage with a 4 percent interest rate with 10 years remaining. During that same 10 years, you expect your portfolio to earn, on average, 6 percent annually. In this case, it's clear you benefit more from continuing to pay your mortgage at your regular rate while continuing to invest the extra money. Remember that just because you expect to earn 6 percent doesn't mean you will; you may have a rate of return that's less than the rate on your mortgage.

• Remember to consider your asset allocation. By accelerating payments into a mortgage, you risk becoming house-rich and cash-poor. This means even though your home is paid off, you lack liquid assets to help cover day-to-day expenses and any unforeseen costs that may arise. Ask yourself if you will be able to generate enough income to maintain your standard of living in retirement. If not, you may need to work on building up your liquid assets rather than tying that money up in your home.

Like so many financial decisions, there are a number of factors that will impact whether it is a good decision to pay off your mortgage before reaching retirement. While no longer having to make regular housing payments can be a tremendous boon for your retirement income, the opportunity cost of reducing the amount you're saving could limit the size of your nest egg. The information in this article is a great starting point, but we recommend working with an adviser about your specific situation. Plan ahead now to help make sure your mortgage isn't a point of contention in retirement.

By Bruce Helmer and Peg Webb, financial advisers at Wealth Enhancement Group and co-hosts of "Your Money" on KLKS 100.1 FM on Sunday mornings. Email Bruce and Peg at yourmoney@wealthenhancement.com . Securities offered through LPL Financial, member FINRA/SIPC.

Bruce Helmer
Bruce Helmer

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