Which comes first retirement or paying off the mortgage

A mortgage-free retirement is a pipe dream. On the surface, your most significant monthly payment has been removed, freeing you to lead a more leisurely life after retirement.

But that doesn’t necessarily mean paying off your mortgage before retiring is in your best interests. It takes more work to plan your finances after retirement, and in certain circumstances, it makes more sense to concentrate on liquid retirement assets. The ideal choice for you depends on your unique situation. Since it will ultimately affect how you save money, this choice should be made well before retirement.

When to consider pre-retirement mortgage payoff

How long you want to stay in your current home is the most crucial consideration to make when deciding whether or not to pay off your mortgage. Focusing more of your money on paying off your mortgage may make the most sense if you want to stay in that area to be close to family and friends and eventually transmit the house to your children. This is particularly valid if

You have enough savings to pay the mortgage and live comfortably after retirement.

If you plan to stay there and one of your children has enough money to support you after retirement, you will give them the property so they can live there permanently.

Being relatively young, you believe you will have plenty of time to save savings for retirement.

It’s also important to remember that owner-occupied homes could qualify for a capital gains tax deduction. You can keep the proceeds if you decide to sell your home later in life for various reasons, including downsizing, relocating to an assisted living facility, moving in with relatives, or any other reason.

Before paying off your mortgage early before retirement, keep the following things in mind:

Will you stay home long enough to benefit from years of mortgage-free living?

There might be little point in paying down your mortgage if you can. Making additional mortgage payments will only affect your monthly fee if you have a variable-rate loan.

The graphic above shows that rates have recently increased significantly, yet, there is little reason to believe that mortgage rates will remain this low in the long run. Therefore, for borrowers with higher rates, potential refinancing options may raise questions about whether free cash flow should be allocated to making current mortgage payments.

Homeowners nearing the end of their mortgage term could be motivated to pay down the principal before retirement because it is small and dropping. Be sure to keep in mind how loan amortization works before completing that last transfer. When a new loan is issued, the amount going toward the loan principal is significantly outweighed by the interest component of the fixed payment. But by the time the loan is paid off, the relationship is reversed, and the cost of debt service is much smaller than the total amount due.

Why it’s not advisable to finish paying off your mortgage before you retire?

According to U.S. News & World Report®, the Federal Reserve Board estimates that one-third of homeowners between the ages of 65 and 74 have an average amount of $118,000 on their mortgage. There are several reasons homeowners could decide to carry their mortgage into retirement, whether or not that is on purpose.

Other debt sources should be taken into account first. According to USA Today┬«, the typical interest rate for a new credit card is just about 17%. This is slightly triple what a mortgage’s usual interest rate is. It may not always be wise for somebody with high-interest debt to make additional mortgage payments.

Another important factor is current retirement funds. Numerous individuals approaching retirement will have funds set aside in an IRA, 401(k), 403(b), or another retirement-saving vehicle. This money can be utilized to pay bills, such as your monthly mortgage payment. Retirement-age workers only sometimes want to have more assets than money. They should ideally have access to capital when required for monthly budgeting, long-term care expenses, unexpected expenses, and pleasure.

Since each retiree will have a unique set of risks, there is no right or wrong response to this query.

Why Would I Put Mortgage Payments Before Retirement Savings?

The truth is that you shouldn’t. If you must, try to do it early on in the life of your mortgage. You may pay less interest over the loan by making more payments up front and lowering the principal subject to appeal.

Why Should I Make Retirement Savings a Priority?

When planning your retirement savings, remember that money invested today will continue to grow and increase in value by the time you’re ready to retire, thanks to the wonders of compound interest. This is because it will generate interest for a more extended period, and the goodwill also be earning interest. Therefore, you will suffer disproportionately every year that you put off retirement savings.

What Tax Aspects Should You Be Aware Of When Paying Off Your Mortgage?

The mortgage can be worthwhile if you need something to lower the amount you owe Uncle Sam. It is tax deductible if you itemize deductions on your income tax return.

Since each retiree will have a unique set of risks, there is no right or wrong response to this query.

For instance, it might be in your best interest to divert part of the money from your retirement savings to your mortgage in the ten years before retiring if most of your post-retirement payments will go towards your mortgage nonetheless. Refinancing your mortgage can be possible if you want to raise your monthly payments in this situation.

Whatever path you take, having a plan is essential. Calculate your monthly post-retirement budget, the years of financial reserves you’ll need to support your expected lifestyle, and your required savings.