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Ask an Advisor: I’m a Retired Teacher With a State Pension, Social Security and $550k in Savings. Should I Pay Off My $120k Mortgage?


I am trying to decide if I should pay off my house worth about $750,000. I owe around $120,000 on an adjustable-rate mortgage (ARM). On the other hand, my 4.5% interest rate just ended and I know the interest will continue to rise in this economy. My mortgage is $1,450 per month, having risen $400 in the last year. Interest is around $500 per month. I am 69, a retired teacher, have a state employee pension and Social Security benefits. I have about $550,000 in a certificate of deposit (CD), a high-yield savings account and regular savings. I get anxious thinking about the security of my future if I pay off the house and consequently reduce my nest egg. However, I would reinvest the mortgage amount. Your thoughts would be very welcome.

– Melissa

This is one of the most common retirement dilemmas and I understand your concern. You can likely make a case for either route, so I wouldn’t worry as much about being “right” as I would about finding the path that’s right for you. I’ll try to guide you by explaining how I would approach this decision.

Do you have questions about building a plan for retirement? Speak with a financial advisor today.

How Does Your Income Compare to Your Regular Expenses?

Before jumping right into your specific question, it’s important to establish some context by comparing your regular expenses against your retirement income. I think if you can comfortably cover your recurring expenses, there’s less strain on your savings which suggests you may be able to justify a somewhat smaller nest egg.

The fact that you’re a retired teacher with a pension and still collect Social Security is good. Without knowing specifics, I think there’s a decent chance your state pension, plus Social Security benefits cover most, if not all, of your spending needs such that you take only small regular withdrawals from your savings, or none at all.

If so, that’s huge. At that point, your nest egg is essentially a large emergency fund. Suppose you take $120,000 out to pay off the mortgage. You’d be left with $430,000. If you can cover all of your expenses with guaranteed income sources and still have over $400,000 in the bank, then you are in a really secure position. (A financial advisor can help you take stock of your financial assets and goals, and make decisions surrounding them. Speak with an advisor today.)

A few additional items to bear in mind:

  • Consider that your $1,450 per month mortgage payment would go away (don’t forget to add back insurance and taxes if that’s included)
  • There are a number of ways to tap into the equity in your home if you need to later
  • You can dig deeper into the idea of saving that extra $1,450 per month, which may not even be necessary

Weigh Your Mortgage Rate vs. Expected Rate of Return

A woman adds up her monthly expenses and compares them to her retirement income.

The most common way that people usually approach this problem is pretty straightforward. Compare the interest rate on your loan with the rate of return you’d expect to earn on your savings. Then, place the money where it earns the highest return.

Of course, the issue is that you can’t know for sure what you’ll earn on investments. That makes it difficult to make a good comparison. However, knowing the interest rate on your mortgage helps you estimate the likelihood of “beating” it. If your mortgage rate was staying at 4.5%, it would, in most cases, be very easy to beat that, meaning it would make less sense to pay it off for purely financial reasons.

Unfortunately, your mortgage rate is resetting in this current interest rate environment, which means it will likely go up more. Although there are caps on how much and how often your ARM can adjust (spelled out in your contract), your rate could potentially be over 6% after the next adjustment and go even higher moving forward. In that range, it starts to make more sense to pay off your mortgage. (If you need more help managing your finances in retirement, consider matching with a financial advisor.)

Assessing Your Feelings

Math rarely tells the whole story in retirement planning decisions. Your attitude towards paying off the mortgage versus keeping that money in savings matters, and you should certainly consider it. That’s a personal decision that only you know how to make. I’m pointing it out here so that you don’t inadvertently ignore it or think it isn’t important in the big picture.

Fortunately, the math in this situation probably leaves plenty of room for you to consider your emotions and feelings surrounding the decision. I doubt this is a make-or-break decision for you one way or the other, though.

Bottom Line

A woman ponders a significant financial decision over a cup of coffee.

If the assumptions I’ve made about your situation above are accurate, I’d personally lean towards paying off the mortgage in this case. Unless you get a lot of comfort by seeing that relatively higher savings balance, it’s probably the better route from a purely financial perspective. However, if my assumptions aren’t correct, leaving the money in savings may become a more desirable option.

Tips for Finding a Financial Advisor

  • Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • When you meet with a prospective financial advisor, it’s important to find out how they are paid. Fee-only advisors are compensated solely by the fees that advisory clients pay. Fee-based advisors, on the other hand, may earn sales commissions for selling you financial products, in addition to the advisory fees that you pay.

Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email and your question may be answered in a future column.

Please note that Brandon is not a participant in the SmartAdvisor Match platform, and he has been compensated for this article. Questions may be edited for clarity or length.

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