Should You Carry a Mortgage into Retirement or Pay It Off?

Sean Sevey |

As you approach retirement, one of the critical financial decisions you'll face is whether to carry your mortgage into retirement or to pay it off. This decision is far from straightforward, as it involves balancing several factors, including liquidity, the net cost of borrowing, and the potential returns from investments. At Sevey Wealth Advisors, we understand the complexity of this choice and are here to help you make an informed decision.

Maintaining Liquidity

Liquidity is a crucial consideration as you enter retirement. Having accessible cash reserves can provide a safety net for unexpected expenses and allow you to take advantage of opportunities without having to liquidate long-term investments at an inopportune time. If paying off your mortgage would significantly deplete your liquid assets, you might be better off carrying the mortgage into retirement.

Pros of Maintaining Liquidity:
- Emergency Funds: Liquid assets are easily accessible in case of emergencies.
- Investment Opportunities: Available cash can be used to capitalize on investment opportunities.
- Flexibility: You maintain financial flexibility to adjust to changing circumstances.

Net Cost of Borrowing vs. Investing

To make an informed decision, it's essential to compare the net cost of borrowing (mortgage interest minus tax deductions) with the potential returns from investing the equivalent funds.

Net Cost of Borrowing:
- Mortgage Interest: The interest rate on your mortgage is the starting point. If your mortgage rate is low, the cost of borrowing is relatively inexpensive.
- Tax Deductions: Mortgage interest may be tax-deductible, which effectively reduces the cost of borrowing. For example, if you're in a 24% tax bracket and paying 4% interest on your mortgage, the after-tax cost of borrowing is approximately 3.04%.

Investment Returns:
- Market Performance: Historically, diversified investment portfolios have provided returns that often exceed the cost of borrowing. For instance, a balanced portfolio might yield an average annual return of 6-8%.
- Risk Tolerance: Your risk tolerance plays a significant role. Higher potential returns come with higher risks, which may not be suitable for everyone, especially in retirement.

Time Horizon and Mortgage Duration

The time horizon for your investment and the remaining duration of your mortgage loan are critical factors in this decision. The longer the remaining mortgage term, the more advantageous it might be to invest rather than pay off the mortgage, assuming your investments outperform the net cost of borrowing.

Short-Term Horizon (0-5 years):
- Paying Off: If your mortgage will be paid off within a few years, paying it off might make sense, especially if the mortgage payment represents a significant portion of your monthly expenses.
- Investing: The benefits of investing may be limited in a short time frame due to market volatility.

Medium-Term Horizon (5-15 years):
- Paying Off: Consider the peace of mind that comes with being debt-free. However, if paying off the mortgage depletes your liquidity, this might not be the best option.
- Investing: If you have a moderate risk tolerance, investing might yield better returns over this period, making it a viable option.

Long-Term Horizon (15+ years):
- Paying Off: Less common in retirement, but if you find yourself in this situation, consider your overall financial plan and retirement goals.
- Investing: A longer horizon typically favors investing, as you have more time to ride out market fluctuations and benefit from compound growth.

Making the Decision

Ultimately, the decision to carry a mortgage into retirement or pay it off depends on your individual financial situation, goals, and risk tolerance. Here are some guiding questions to help you decide:

1. How will paying off the mortgage impact your liquidity?
2. What is the net cost of borrowing after accounting for tax deductions?
3. Can your investments realistically outperform the net cost of borrowing?
4. What is the remaining duration of your mortgage?
5. How does carrying a mortgage or paying it off align with your retirement goals and lifestyle?

At Sevey Wealth Advisors, we specialize in empowering clients to navigate these complex decisions. Our personalized approach ensures that your financial plan is tailored to your unique circumstances and goals. Whether you choose to carry your mortgage into retirement or pay it off, we’re here to guide you every step of the way.

Contact us today to discuss your retirement strategy and ensure you’re making the best decision for your financial future.