Should You Have a Mortgage When You Retire?

This piece says that four in 10 households aged 60 to 69 in 2007 have a mortgage. Of those, one in two have enough to pay off their mortgage. But should they get rid of it?

The article notes that "in the current environment, your mortgage provides a better return on your money than other risk-free assets" and thus advocates paying a mortgage down. But what about having the flexibility that liquid assets provide? There's value to not tying up all your assets in a house, right? So maybe you shouldn't pay it down. But then again you can access any funds with a reverse mortgage, correct? So maybe you should pay it off. As you can see, the arguments, both pro and con, go back-and-forth rather easily.

I'll leave the debate to you all in the comments below. But here's my personal take on the issue of having a mortgage when you retire:

1. It doesn't impact me. I've had my mortgage paid off for over a decade now and I don't plan on going back.

2. If you buy your house using the proper financial guidelines, you should have no problem paying it off well before you get to retirement.

3. Personally, I think it should be a goal of every person to enter retirement with no mortgage whatsoever.

4. I'm surprised that so many have a mortgage at retirement. I would have guessed three in ten at most would have one. Then again, I'm regularly surprised by the (usually negative) financial habits in this country.

What's your take? Should not having a mortgage at retirement be a financial goal for all of us or is that too strict of a requirement?

Comments

[LotharBot]

Paying off your mortgage SHOULD give you a higher return than "safe" investments, because many of those investments are essentially based on mortgages. Your mortgage pays off someone else's CD plus the bank's overhead. So paying it off early is like buying a CD and getting the bank's cut too.

This is provided that your mortgage is at a rate comparable to (or higher than) current mortgage rates. If you get a mortgage at a low rate and then rates on everything go up (like I expect they will in the next 3-5 years) then it may make more sense to lock in higher rates on CDs rather than paying down your mortgage.

[Moneymonk]

I agree with # 2 , when you do things right with your money, having no mortgage should be automatic

[Ike]

What an arrogant list of reasons you gave. I am so happy that you are so well off that you don't need a mortgage. Do you have any advice for us less fortunate and way less arrogant?

[JEM]

FMF, I don't think you are arrogant but this post does sound it. There are lots of circumstances in life and you never know what may happen. I think it is ideal to not have a mortgage at retirement but not everyone can get there and not everyone wants to.

[FMF]

Ike --

You sound arrogant to me.

[nooney]

Personally, I'd rather have a giant cash balance in investments than pay off a mortgage that has an effective interest rate of 3% after tax deductions.

Mortgage rates haven't been this low for 50 years. They ranged from about 8% to 15% in the 70's and 80's, so no wonder why people wanted to get rid of their mortgages early. You never know what the future holds with interest rates, but it's not a bad idea to invest some of the money now and let it compound for a little while.

[FMF]

JEM --

Maybe it's in the reading. What part specifically is arrogant? The fact that I don't have a mortgage? The fact that if people buy a house they can afford, maximize their careers, and spend less than they earn then they can pay off their mortgages? Something else?

I'm not arguing, just seeking to understand.

And, BTW, I am a bit arrogant. But sometimes (much of the time actually) I have turn up the pressure a bit to make a point and make people take notice. I've counseled so many people with the WORST financial habits (and the excuses that go along with them) that I am a bit jaded when it comes to the way many people handle their money.

That gives me an idea for a post...hmmmmmmmmm...maybe "the worst money excuses I've heard" will work.

[MC]

I don't think the question should be about having a mortgage or not, I think the question should instead be about having equity.

If I stayed in my house, my mortgage would probably be paid off when I retire. But why would I need such a big place when my kids are gone? I intend to sell and buy something much smaller before I retire.

[Dave Farquhar]

I agree, it's much better not to have a mortgage. I would instead advocate paying the mortgage off as quickly as possible, then plowing that mortgage payment into IRAs instead--then you can retire earlier.

So how do you do it?

Paying off a mortgage early requires some discipline. It doesn't require huge salaries. My in-laws did it in the late 1980s/early 1990s while raising three daughters. She was a teacher. He wasn't college-educated, so he wasn't paid highly either. It took them seven years.

There are several methods out there, but basically it comes down to snowballing debt. Take one debt. Take 10% of your income (or whatever you can scrape together to start). Use that extra money to pay extra toward that debt. Once you pay that debt off, take what you had been paying on it and apply it to another debt.

My wife and I did this with our two car payments and our mortgage. We've been mortgage-free for about a year and own two Hondas outright.

Even small amounts help to knock down debt. I did the math and found that just paying an extra 10 dollars every month would have paid off our 15-year mortgage a full month faster. I was surprised such a small amount could make any perceptible difference.

[Lord]

A few people should have mortgages in retirement. Those with a large fixed pension should have a mortgage to counter inflation diminishing that pension. Those with high levels of income in retirement may be better off with one if they are unable to access the funds to pay it off such as a large pension even if adjusted for inflation.

One should not have a mortgage if the money to pay for it comes from anything other than a steady source of income. In particular, one should not borrow to invest if the borrowing must be paid for out of investment returns which can only provide 4% safely.

[[email protected]]

My experience is that the people who have a mortgage in retirement don't have one because they planned it that way.

They have a mortgage because they didn't plan or didn't take action on their plan or maybe they couldn't take action because of other reasons.

I've never met anyone - retiree or otherwise - who wanted a mortgage. Maybe it makes sense financially, but the emotional payoff of not having one is much greater for most of us.

[Harry Crawford]

I am 100% in favor of paying off a mortgage under almost all circumstances. If you have a mortgage, you only save about 25% of the interest you pay each year (depending upon marginal tax bracket), meaning you spent the other 75%. Once my wife and I reached the point where we weren't paying so much in interest each year that we couldn't itemize, we paid our mortgage off entirely. I look upon the standard deduction as a profit center. The basic deduction for a married couple is about $10,600 plus $1,050 for each person over 64. So if I can keep expenditures of itemized items below those numbers, I look upon the difference as a profit. (i.e. reduces taxable income).

I can't begin to tell you how much peace of mind one has from not having to make a monthly payment for mortgage or rent and if you can, it's even more peaceful not to owe anything to anybody.

It sure helps being debt free when your job security is low or you are unemployed.

[Always Asking]

If your home was mortgage free today would you borrow money against it tomorrow to buy stocks or other investments? Your answer might provide you with the real answer for what is right for your situation.

[uncle john]

FMF,

I'm with you. Quit whinning, people. Be diligent.

[aaktx]

I am 38 years old and paid my mortgage off two years ago. In retrospect it was a smart move because the market tanked to its lows, and my cash-flow is awesome now.
I believe this issue has no right answer, though, and should be made based on one's risk tolerance. If you feel the market will be ahead in the long run(maybe very long), then keep the mortgage and hope your investments appreciate.
I am chicken-hearted and happy with the guaranteed 5.75% that I returned on the money paid on the house.
I would have felt horrible to see fourty percent of it evaporate in the market crash.

[Eugene Krabs]

Hmm? I didn't sense any arrogance when I read that. But perhaps I too am quite the arrogant SOB that my ex believes that I am. :D

I would be pretty scared to have a mortgage by the time I retire. After all, the idea is that I would no longer have a full-time job with full-time pay to help float a mortgage payment. Even if my nest egg is big enough to accommodate a mortgage (and that would have be a very large amount), it would not be a good idea because you have enough risk being introduced by retirement to worry about besides your mortgage.

Thus, the way I read it, it would be ideal to not have a mortgage by the time you retire. Sounds like a good idea to me. Heck, that's what I am shooting for as well.

[Cyn94601]

I'm not sure I really have an opinion. Seems to me not having a mortgage would be better than having one.

But I will say, a reverse mortgage is crazy expensive! I looked into it for my m-i-l, when my f-i-l got very sick and it costs over 20k at the front of loan. Alot of the plans then pay out a monthly amount to give income to the owner, but when you are advanced in years, who knows if you will make it long enough for the fees to make sense? They are then the lien holder of the home and should you pass away, they will take the cash and leave the balance for your estate.

If the idea of having a paid off mortgage is so you can use it as an assest later - then I'm not sure you are better off. It could make sense, assumng you have discipline, to just have cash available in the event of an emergency.

My problem, is that I tend to have more emergencies when I have cash then when i don't. ;-)

[JerryB]

I for one cannot fathom the thought of having a mortgage in retirement. My house will be paid off in less than 33 months and THEN I can begin planning my retirement.

[Todd]

Not only do I believe that it would be wise to avoid a mortgage at retirement, I would take it a step further. Do you have good reliable vehicles that are going to last for several years? Is your house in good working order (Is your home going to need a new roof, wiring, plumming, etc)? I would make sure that all of my ducks in a row, so to speak. It's the unexpected things in life that turn unplanned occurrences into catastrophes when budgets don't have room for these events if they are paying for the mortgage...

Of course, there are circumstances such as a major medical that can make paying off the mortgage more challenging but the goal should be to retire debt free if not accomplished earlier.

[kitty]

I believe that it is the matter of preference and individual circumstances.

In general, it is a good idea not to have mortgage in retirement. However, as LotharBot said, if you expect double digit inflation in the near future, there are advantages in keeping mortgage around. Even if you are 60, if you have enough money in your savings, some nice income from tax free municipal bonds -- I have a couple of AA and AAA issues that pay me 5% and 5.25% interest (not to mention that I bought them at a discount a few months ago). So if, hypothetically speaking, I had 4.5% mortgage and could deduct it - and by the way Harry Crawford, for those of us in high tax states and 28% tax bracket, it's not 25%, it's more like over 35%. Let's see 4.5% tax deductible in a state like NY vs 5% tax free income... Nope, municipal bonds aren't insured, but the defaults on AA and AAA munis are very very rare. They are possible, so don't put all your money in one municipality and choose GO rather than revenue bonds. Unless you are in California :-) though so far they haven't defaulted on munis.

If your income drops in retirement - then it's the issue of how much money you have, and what you expect in terms of interest rate.

In terms of peace of mind -- it depends on how broke or how rich you plan to be in retirement. If you have enough savings that you can pay off your mortgage in full tomorrow and just choose not to do so because you believe will have 80s-type double digit interest rates on CDs, why wouldn't you feel secure? Why wouldn't you feel secure if you have, for example, 200K in different CDs, maybe additional few hundred thousand in munis, some other investments while making payments on some 100K mortgage at 4.5%? Now, at the moment the interest on your CDs is very low, but if you have a strong belief they'll go up?

There are plenty of reason for rates to go up. If the economy improves, all the money the government printed may cause inflation and the government will have to raise rates to fight it. Even if we continue with recession, for how long will the world be happy to lend the US government money at today's low rates?

Dave Farguhar -- not everyone who has mortgage is in debt or struggling or needs "snowball" method's type of "psychological help" (even if it costs $$$ - really, if I ever find myself in debt e.g. because of some illness I sure as hell am not going to use snowball... ). Some of people with mortgages actully have seven digit net worth and no other debt and could pay off mortgage tomorrow. Now, I don't have a mortgage because in 2004 when I got a nice amount of cash from the sale of the condo I was renting out paying off 7% mortgage made sense financially. But if I were to decide to upgrade now to, I'd take mortgage even though I could pay cash given the price difference. BTW I know some fairly well off people who can pay off their mortgage tomorrow buy choose not to specifically because of their strong belief in inflation.

It's really a personal choice.

[Not to do?]

Plan to retire soon, debt free.Have two homes paid off, only because we lived within our means.We didn't over extend ourself. We enjoy our life&have traveled.This was done on a moderate income.I don't understand, why a person would choose to be loaded down with debt at retirement, unless it was unavoidable?? Doesn't that go against everything they say, "Not to do,at retirement?"

[Mike Hunt]

FMF,

In addition to total investment return, you need to highlight another major point- CASH FLOW!

By paying off your mortgage one really frees up his or her cash flow and this can mean the difference between selling illiquid investments at a loss or riding them out. I paid off my mortgage early, actually bought my first house (a modest 900 sq ft condo) in cash and have been living there the past 4 years. This frees up a huge amount of cash each month that can either go into savings or investments.

In retirement do you really want to have a monthly committment draining your incoming cash flow (presumably from pension + social security + recurring investment income)?

I always thought retirees like to have income every month they can use as disposable income. But hey, maybe I have a different expectation of what goes on during retirement.

-Mike

[Mark]

I have recently wrestled with this exact question. I sold my last home 5 years ago and have lived in either company-paid or rented places due to being highly mobile.

Now I am ready to buy again, and have a choice - cash or mortgage. Last June, I intended to pay cash, but now interest rates are lower, future inflation rates are likely to be higher, and future market returns are likely to be higher than they have been in the past 12 months.

I am leaning heavily towards the mortgage. I have my peace-of-mind because I KNOW I can pay it all back in a heartbeat if I need to. (Yes I am fortunate to have that choice.)

So I am CHOOSING to borrow money at a low FIXED interest rate.

By the way - in the 20-plus comments posted above, I think there are two useful nuggets:
1. A mortgage is a great inflation hedge if you have a fixed or guaranteed pension payment (like EVERYONE on Social Security?)
2. If you could borrow money at that low rate (either as a home equityloan OR from any oher source), would you do it?

[Duane]

Many people treat this as an either/or proposition, but for most people they would be wise to simply round up the amount they pay each month on the mortgage and if they move try to keep the mortgage amount from increasing more than 10%. The house will be paid off eventually and if you invest regularly along the way you will do yourself a world of good. Do a fair amount of both and all will be well.

[Dave Farquhar]

Kitty- I'm glad you got a huge windfall to pay off your mortgage. But that's not what happens to the majority of poeple. Call the snowball "psychological help" or whatever other derisive words you want. I call it exactly what it is: a plan.

And let's face it: If you owe more money than you make in a year and don't have enough in the bank to make a serious dent, then you need a plan if you're going to get out.

If my wife and I decided that we'd just wait for a big windfall to get out of debt, we'd still be waiting. Instead, we followed a plan, and now, I'm 34 years old and have no mortgage.

[Old Limey]

Here's a hindsight view from someone that came to the USA in 1956 with the grand sum of $400 and the promise of a job. Today my wife and I have a high 7 figure portfolio of municipal bonds and CDs, a primary home and a vacation home, both paid for, and two retirement pensions and two SS checks arriving like clockwork every month.

In every person's life there are a very small number of very significant turning points. Take one bad turn and you can impact your future Big Time. I must also add that there is one factor that none of us have any control over and that is the date on which we were born, i.e. Timing.

Factors that are important for success.
1) You need parents and an extended family that are great role models.
2) You need to buckle down, be very conscientious, and work very hard starting at grade school because without a good education behind you the road of life will be significantly tougher for you.
3) In the vast majority of cases you need a college education, preferably with a post graduate degree since the competition gets tougher and tougher all the time.
4) You need to get it right when you decide to marry. I have been married to a wonderful woman for 53 years. Divorces can be a finance killer, quite apart from all the unhapiness and stress.
5) You need to be the best employee you possibly can and keep improving your job skills so that when layoffs occur you aren't one of the unfortunate ones to be let go.
6) You need to start a savings program when you get your first paycheck and stick with it.
7) You need to make the maximum possible contribution to your company 401K plan.
8) You need to live frugally, at least until you are very secure financially, then you can ease up a bit.
9) The good education helps again when it comes to managing your own finances. If you have good math skills, understand the power of compounding, understand the devastation that one large percentage loss can make to your portfolio, then you have an excellent chance of acquiring the skills needed to manage your own investments.
10) Being born in a good year can prevent you from meeting an early death in a war, keep you out of periods when the economy and job market go through a serious downturn, and allow you the opportunity to benefit from periods when jobs were plentiful (i.e. during the Cold War), and grow your investments very significantly during bubbles and periods like the nineties when the financial markets were unusually strong. Thus I am the first to admit that LUCK plays a huge role in one's life.

[CDM]

Before passing away, my father was laid off, went 4 years without a job, (age discrimination is no help), and then had to take early Social Security and live off that while paying for outrageous health care costs before they were old enough for Medicare to kick in. This is why he had to refinance the house with an ARM about 5 years ago. Now my mom has a mortgage to deal with and she just refinanced for another 7 year ARM. These are real reasons why retired people have mortgages. Nobody plans on getting laid off, running a business that loses money, health issues, etc...

Anyway, now that my mom has enough cash and investments to live off of, why would she pay off the mortgage? It makes no sense that she would tie up money in a house that she could live in for the monthly payment of a mortgage, especially when nobody knows how old she'll live to be. When she passes away, whatever cash and investments she has left will be more useful to her heirs than her house. We could always pay off the house if we wanted to keep it anyway. With just her social security income, she gets a tax benefit by paying her mortgage interest. If the house value happens to keep going down, she won't lose more principal.

If a reverse mortgage is good for some older people after they've paid off their homes, then why isn't just having a mortgage with a low monthly payment almost as good and definitely better than having a house that's paid off?

[kitty]

Dave Farguhar -- you missed my point. I was talking that it may or may not make sense to pre-pay your mortgage depending on your interest rate or circumstances, repaying a mortgage is an investment decision like any other. BTW -- I didn't just got this windfall for nothing. I got it because I did a number of smart things with my money: 1) bought place that I could afford 2) had savings and no debt other than mortgage 3) upgraded at the time the real estate market just started to pick up after the 90s slump 4) made a decision to rent out rather than sell my old condo and COULD AFFORD this decision. A smarter decision, by the way, would've been not to sell the condo in 2004 but wait 2 or 3 more years. Obviously, I made some stupid decisions too - like not selling stocks in 2001. This is beside the point but if I had ever found myself in debt, I'd sure as hell would not use "snowball" because I don't need cheap psychological tricks to be motivated; to me debt and savings are part of the same pile of money, so I would choose a way that increases the total net worth quicker not something that wastes money.

At the time I paid off my mortgage, a) my mortgage rate was 7% b) banks were paying 2% and the interest rates were going down and inflation was not on the horizon c) I had lost money on internet bubble (on paper) - enough money that I could have paid off my mortgage back in 2001 had I sold stocks, so I was a bit weary of stocks and regretful of not having sold stocks and paid off mortgage in 2001. d) I had a whole lot more money in savings than 7 months emergency fund which frankly I think is pitifully small for any real emergency. So it was a combination of what was right at the time financially, not knowing what to do with the money, and emotional factors. Putting it in different words - a guaranteed 7% return was looking very good in 2004.

But if I were to buy now, I'd take a mortgage rather than pay cash because the interest rate is low and the probability of higher rate in future is high. But this decision, like any other investment decision can be wrong since it makes bets on future. Decision to pay off mortgage also makes bets on future like that the inflation will continue to be low.

If you have little money and lots of debts you tend to think of paying off mortgage in terms of getting out of debt - this is natural. You have a goal to be debt-free and it is a fine goal in your situation. Those of us who haven't had debt problem and who have higher net worth tend to think in terms of maximizing this net worth. Will repaying the mortgage maximize your net worth? Maybe, maybe not depending on circumstances.

Mortgage is different from your other debts because a) it's cheaper b) the rate is fixed c) it's long term.

Think about repaying a mortgage in terms of putting this large amount of money into a 5% (or whatever your rate of return is) 30-year CD. If you had the money would you put it in a 30-year CD at 5%, find other investments or buy short term bonds or CDs expecting higher rate in future? Depending on your rate, ability to deduct interest (taxable return vs tax-free return), and your personal risk tolerance, your decision may vary.

One reason it is normally a good idea not to keep mortgage in retirement is that when you retire, you normally tend to switch to low interest safer investments such as CDs or investment grade bonds. It's rare that you can find such an investment that would provide you a return comparable to mortgage. But when the mortgage rates are very low as they are now, spreads between treasuries and corporate/municipal bonds are relatively high, and the probability of higher rates or/and inflation in a few years is very high, keeping low fixed interest debt around may not be so bad.

[funny about Money]

I arrogantly paid off my mortgage some years ago (against the advice of two financial planners) and have never regretted it for a minute.

Now that I'm being canned at an age when I'd be too old to get a comparable job if the economy were flying high and absolutely will not get another job in the present downturn (couldn't even get an interview to drive the tourist train at the zoo!!), I'm mighty glad I'm not looking a mortgage that would absorb two-thirds of my retirement pittance. Having to pay mortgage or rent at this stage would simply render me destitute.

While you do have a full-time job and energy to do a side job, it's not that difficult to speed payoff. My son and I figured his 30-year, $210,000 mortgage could be paid off in 16 years by putting an extra $200 a month toward principal. Many people can generate an extra two hundred bucks with a moonlight job or freelance activities, and some folks even earn enough that they can pay that much out of their regular income.

It's sooo worth it! Any of us could find ourselves "retired" sooner than we planned.

[Penny Phoenix]

As I read through these posts one thing stands out: many who are mortgage free at or near retirement age have been in stable marriages and/or stable jobs. When I was 45 I was dumped after 27 years of marriage. I got $17,000 from the settlement (my share of home equity). I am proud that I have managed to create a good life for myself, including a professional career (albeit not a high paying profession: social work). Part of that career development included a move to West Coast. Now I am at the top of my salary range, and a supervisor, and feeling good about it as I approach 60. You would probably laugh if you knew it has taken me this long to reach the $60,000 mark in annual salary. I have a house in Oregon which is quite nice but modest. I have about 27 years left on a mortgage. Guess what? I have decided I will probably sell up in a few years and move back to the Midwest (if I can get a job there which I think I can) to live closer to my adult children, all three of whom have regular jobs and graduated from college. I have lived in many beautiful places, sometimes as a renter, sometimes as an mortagee, and I have enjoyed many changes (sometimes, not "enjoyed", but "had to deal with"). I have a wonderful second husband who has shown me what it's like to be alive when one has unconditional love. I don't plan to "retire" so I can golf or garden, although God knows there are days when I want to. I will work for many more years, god Grant me health. My work has social meaning and it keeps me connected to my fellow citizens. Yet I love the sanctuary of going home and being in my own world-a peaceful home surrounded by the things and creatures (husband + pets + plants I love.). Yes, I know I still have 27 years to go on my mortgage, but somehow, if that goal, of say being in one place with one person for 30 years was the definition of success, prudence, a good work ethics, the right values, or whatever, , than yes, I have failed, or I am stupid, or foolish. But you know what? I wouldn't trade my life, because it is all mine and I have made my way as I go along. P.S. I don't "blame " anyone for the fact that at the age of 58 I have a 27 year mortgage--I realize it is my responsibility and was my choice to buy a home three years ago. I don't expect anyone to rescue me. I don't know what will happen, yet I feel empowered, and somehow "free--with responsibilities." Maybe it's a different perspective being a woman ( including the roles of wife and mother) but there you have it. Sometimes life is not so simple. PGR