Monday, December 2, 2013

Should you pay off your home mortgage before retirement?

As Shakespeare put it, "Borrowing dulls the edge of husbandry." In other words, subsidizing a lifestyle with credit tends to make us financially lazy. When headed into retirement with the prospect of a fixed income, liquidating all your debts — including your mortgage — seems to make a lot of sense. Nevertheless, paying off a mortgage, unlike reducing credit card or installment debt to zero, may not be the wisest choice for everyone. Here are four factors to consider.
  • How's your emergency fund doing? If you don't have enough money set aside to cover the unexpected hazards of life, you may end up charging credit cards or raiding retirement accounts to cover those costs. How much should you set aside? Most experts recommend enough to cover three to six months of living expenses. Funding an emergency fund first will keep you from being house-rich and cash-poor.
  • How much can you earn elsewhere? If you've refinanced your mortgage and locked in a historically low interest rate, you may want to invest extra money in funds that earn higher returns. Of course, the stock market is notoriously volatile. So if you can't handle the volatility of the market or can't sleep at night when your investments take a downturn, paying off the mortgage may be the more prudent choice for you. In other words, know yourself and plan accordingly.
  • Is consumer debt draining your cash flow? If you're only making the minimum payments on your car loan or credit card balance, attack those debts first. Consumer interest isn't deductible on your taxes, and the interest rates are probably higher than you're paying on a mortgage. If you're heading into retirement with only a few years left on a fixed-rate mortgage, most of your payment is already being applied toward the principal balance.
  • Are you fully funding retirement accounts? As full-time employment winds to a close, be sure to contribute as much as possible to IRAs and 401(k) accounts. Most folks will use those funds to supplement social security payments, pensions, or other savings. Again, having a house that's paid off may provide little consolation if you run out of cash partway through retirement. True, you might be able to sell the house and use the cash to cover a shortfall. But selling your primary residence should fit into a carefully considered plan. A fire sale doesn't qualify.
For help in analyzing whether paying off your home mortgage makes sense in your circumstances, give us a call.

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