Should you pay off your mortgage before you retire?
This is a question we actually get quite often in our practice, and I think it’s a good one. I think it’s really something more people should be thinking about, because as we’ve talked about in some of the other video blogs your mortgage is most likely one of your largest expenses. At least it is for many people, as they’re in the accumulation phase of their retirement planning.
So, what do you do with your mortgage pay outs?
Well, there’s a couple of things.
First of all, I think it’s important to look at how your mortgage payment may be affecting your overall cash flow. And I think that’s really, probably the most important thing. For example, let’s say you have a $2,000 a month mortgage payment.
You’re paying $24,000 a year to make those mortgage payments. Using the 4% rule that we’ve talked about in some of the other videos. If we divide 0.4% into 24,000, it actually tells us that you need to have about $600,000 in assets to be able to generate $24,000 a year of income and have a pretty good chance of that is going to last you for the rest of your lifetime.
So, that’s pretty significant. I think for most of us, we should probably be looking at some ways that we can improve our cash flow and housing, because, again, it’s probably one of our largest expenses.
So, a couple of things, if you’re still working, one of the things that I highly recommend is aggressively paying off that mortgage as best as you can between now and the time that you retire because that’s just gonna have a big impact potentially for you in retirement.
If you do end up having a mortgage in retirement I would really take a look at a couple of things.
Number one, if you have a relatively small mortgage balance maybe consider taking some assets and paying off that mortgage balance, especially if that’s something that’s going to improve your overall cash flow.
For example, in that example that we just used, If you have a $2,000 a month mortgage payment, and maybe you only owe $75,000 or $100,000, maybe it makes sense to take that $75,000 or $100,000 out of your portfolio to pay that mortgage off. It will have, like I said, a $24,000 improvement on your cash flow.
The other thing, is if you maybe have a little bit longer time to pay yet on the mortgage, you could consider maybe re-financing that instead of being on a 10 or 15 year mortgage payment. Maybe stretch that out to maybe even a 30 year mortgage. That would drop your payments and take some pressure off of some of that cash flow, and reduce the amount of money that you have to take out from some of the investment accounts.
So, those are a couple of strategies that you can use, but again, you want to look at how that is affecting your cash flow.
The final strategy that I want to talk about here, is the down size strategy, and I think this is a big one.
I think a lot of people probably have it in the back of their mind that maybe downsizing their house is something that might make sense. It could potentially help them get to where they want to be for retirement. So, let’s take that same example.
Let’s say you have a $600,000 house. Maybe you still owe a couple of hundred thousand dollars on it, so you have $400,000 in equity in that house. Instead of keeping that mortgage and that big house, maybe you down size your house a little bit. Sell the $600,000 house, buy a $400,000 house basically wipe out that debt entirely, and that could have, again, a huge impact on your overall cash flow.
So, think about how the mortgage is affecting your cash flow and if you haven’t already, check out our blog on moneyevolution.com. We’ve got some great resources there that you can access. We also have our three-part mini-workshop live right now as well. I’ll put a link here in the post to check that out.
There’s some great worksheets that you can do some planning on, kind of map out some of this cash flow and see where you’re at towards some of your retirement goals.
What I Do
I help individuals make the transition from working to retirement.
As you approach retirement you will be making some of the most important financial decisions of your life. Most of these decisions don’t get a do-over, once you’ve made them your stuck.
My goal is to help you get the most out of your retirement resources. I do this by coordinating and optimizing what I call the 7 Core Elements of Retirement Planning.
It all starts with a plan!
We use advanced financial planning software to help you understand your retirement cash flow so you know where the gaps are.
Understanding your retirement gap is the foundation to getting the most out out of your retirement resources and avoiding costly mistakes.