Carrying a Mortgage into Retirement

By Ryan Rink CFP®, ChFC®, CLTC®  

Pros & Cons of Carrying a Mortgage into Retirement

Pros Cons Rocks Dreamstime 11.30.21

Twenty years ago, the thought of carrying a mortgage into retirement was scary, especially if you had enough assets to completely pay it off.  However, the notion behind this has changed over time with interest rates decreasing over the years.  As with most financial decisions, there are pros and cons to help determine if carrying a mortgage in retirement makes sense for you.

Pros:

Overall mortgage interest rates have really come down over time.  Twenty years ago, the average 30-year fixed-rate mortgage was around 7%.  Fast forward to today, where 30-year fixed mortgage rates have hovered around the 3% mark for the majority of 2021.  Historically, a well-diversified portfolio has been able to return higher than 3% over the long-term.  Taking that into consideration, we often find that a person’s financial plan projects BETTER if they continue to carry the mortgage throughout retirement, rather than to take a lump sum from their investment portfolio to pay it off.

Another item to consider is the tax-deductibility of mortgage interest.  In 2021, taxpayers are permitted to deduct interest on up to $750,000 of a qualified residence mortgage.  This is available to taxpayers who itemize deductions.  Consider this real-life example:

Joe recently retired and is currently in the 22% marginal tax bracket.  He has a 30-year fixed-rate mortgage at 3% with a balance of $400,000.  He anticipates being in this tax bracket for the majority of his retirement.  He has enough tax deductions to be able to itemize, so he can deduct the mortgage interest on his tax returns going forward.

Cons:

We’ve covered many of the positives, so now let’s discuss some of the reasons someone may not want to carry a mortgage into retirement.  Having outstanding debt is not a comforting feeling, especially for someone in or nearing the end of their working career.  Some clients have said they actually lose sleep over having debt in retirement.  If you have similar feelings, it may not be worth the stress of carrying a mortgage in retirement, even if it makes sense from a financial standpoint.  Let’s revisit the example with Joe from above:

We’ll assume Joe also has $500,000 in a taxable brokerage account.  If the $400,000 mortgage is causing Joe anxiety, one option is pay a portion of the debt down.  For example, he could take $200,000 from his brokerage account to pay the mortgage down to $200,000, which is a much more comfortable level of debt for Joe.

If you are nearing retirement and have an existing mortgage balance, contact your Shakespeare advisor to determine the best decision for you.