Retiring with a mortgage: Why it’s bad, how to avoid it
That monthly payment can drain your 401(k), trigger tax obligations and increase your Medicare Part B premiums
A generation ago, just 10% of households with someone at least 70 years old still had a mortgage. Today, it’s close to 40%, and that spells certain trouble for millions of retired Americans. This column can help you avoid that fate.
Data from the Federal Reserve Bank of New York reported that in the second quarter of 2019, households 70-plus had $1.16 trillion in total debt – $820 billion in mortgages – roughly double the $570 billion 10 years earlier. The 60- to 69-year-old crowd owes a total of $2.16 trillion, roughly three-quarters of it mortgage debt.
A big monthly payment can eat up retirement income faster than you intended. And that can make it hard to outlive your nest egg.
To date, the late-in-life debt hasn’t set off a wide-scale panic. Rates have been so low, and many people refinanced in recent years to take advantage of that.
But a life-long mortgage payment, for all but the affluent, is a big strain on retirement finances. Do you plan to stay in your current home after you retire? If so, paying off the mortgage sooner would be wise.
Working past 65 can help boost retirement savings and delays tapping into those accounts. It can also make it possible to wait until age 70 to start claiming your Social Security benefit, which is the single best way to boost the guaranteed income you will have in retirement.
But working in your 60s isn’t a sure thing. Maybe you want to downshift to something less demanding, or perhaps you get pushed out the door before you’re ready. Either likely means earning less. (When people 50+ are laid off, it is rare for their income to ever fully recover.) A mortgage payment will only make work life more stressful.
Taxes are a consideration, too. If your plan is to rely on withdrawals from traditional 401(k) and IRA accounts to pay the mortgage at age 70-plus, keep in mind that all withdrawals will be as income. Let’s say your monthly mortgage is $1,500. That could require withdrawing $1,800 or more to cover the tax bill and leave you enough for the payment. As your taxable income rises with larger withdrawals, you could find yourself in a higher tax bracket in retirement. It may also increase the portion of your Social Security that is taxable, and the premiums for your Medicare Part B coverage. The cost of both are dependent on your taxable income.
How to pay off your mortgage faster
Set a deadline of age 60 or 65 to have the mortgage paid off. Contact the company currently servicing your mortgage and ask for a fresh amortization schedule that will get the loan polished off by your new end date. There are also online calculators that will run the numbers for you.
Spend less today. Resist the knee-jerk reaction that there is no way you can afford that higher monthly payment. It is the rare household that can’t find ways to cut. Start in the garage: Drive a car longer before trading it in, to free yourself of car payments.
Earn some side income. Got an adult kid living at home? Charge some rent. That’s good parenting – and can help you accelerate your mortgage payment. Or, might you be able to take on some part-time work, maybe consulting or tutoring?
Scale back your retirement saving. If you’ve been diligently saving for retirement for decades, it might be worth considering reducing your current contributions to use the money to pay off your mortgage, but only if you are on track with your savings. And if you have a workplace plan that offers a match, you should most definitely continue to contribute enough to snag the maximum matching contribution. But beyond that, temporarily reducing what you’re socking away each month in retirement accounts can make financial sense. While you will have less set aside in savings, the valuable tradeoff is in eliminating the mortgage expense in retirement.
If you decide to accelerate your mortgage payments, be sure to arrange with your loan servicer that 100% of your extra payments will be applied to the loan principal. You don’t want one penny of your extra payments going toward interest. Indeed, an added benefit of prepaying your mortgage is that you will likely shave off thousands of dollars in interest payments.