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Should You Be Mortgage Free When You Retire?


When you sign the dotted line on that 30-year mortgage, you’re probably thinking how great it will be to have that house paid off right around the time you retire.  But most people don’t live in the same house for 30 years like they used to.  Plus some choose to take on second mortgages through the years. 

So a lot of near retirees are finding themselves with 10-20 years left on their mortgages when they want to retire.  Combine that with the recent housing bubble and baby boomers are entering retirement with very high loads of mortgage debt.

A recent study by Anna Maria Lusardi of George Washington University and Olivia Mitchell of the University of Pennsylvania confirmed just that.  They took a closer look at the debt load of the current baby boomer generation and found that most boomers are approaching retirement with more debt than any generation before them (even after taking into account inflation).  There’s no single reason behind the increase, but there are definitely a couple major factors that played an important role.

Housing Bubble Enabled Buyers

Lusardi and Mitchell’s study suggested that baby boomer’s mortgage balances were so high due to the housing bubble.  They noted that many of the boomers were able to buy more expensive properties with lower downpayments during this time and older boomers who bought pre-housing bubble were much less likely to be underwater than newer boomers.

Whether you’re approaching retirement or not, it’s never a prudent choice to buy more house than you can afford.  Anyone who’s seen a housing bubble can attest to that.  Property prices will always fluctuate but it’s up to you to decide how much house you can afford.  Just because a bank will loan you X amount, doesn’t mean you should take it.  A lot of the problems boomers with high mortgage balances are facing could have been avoided with some simple planning.  But for those who find themselves in trouble, all is not lost.

Is a Mortgage All That Bad During Retirement?

It might seem like a mortgage is taboo during retirement but if you’re stuck in this situation, it’s not all that bad.  Most people make a lot less when they retire and if your sole income source is 401(k) or social security, all of that money is still taxable at regular income rates.  If you pay off your mortgage before retirement, you’ll lose a lot of the deductions associated with owning a house.

If you have a low interest mortgage rate, it might make sense to carry a mortgage into retirement so that you have cash on hand for investments and to continue capitalizing on the mortgage interest deduction.

Live Within Your Means By Downsizing

As you approach retirement, it’s up to the individual to decide whether or not they can handle a mortgage payment in addition to their regular expenses.  Even though by paying off a mortgage you’ll lose the interest deduction, the peace of mind may be more than worth it. You may prioritize being mortgage free simply so you have one less thing to worry about.

If you’re finding that your mortgage is causing you to live beyond your means, there’s always the option of downsizing your home.  Most people want large homes while they’re kids are younger. But once your children are off living on their own, it may be time to look for a smaller house.

Most people don’t need to live in a giant house when they’re retired considering there are only two people.  By downsizing, you can effectively reduce your mortgage payment to something more manageable and still be comfortable.

The Bottom Line

Ultimately, your personal situation will dictate whether it makes sense to carry a mortgage into retirement or not.  The best advice is probably to start planning early and try to live within your means.  You don’t want to find yourself constantly worrying about money during retirement because you haven’t saved enough or your investments aren’t returning quite what you expected.

If you want more personalized advice, consider talking to a financial advisor. A financial advisor will evaluate your complete financial situation and make tailored recommendations. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three registered investment advisors who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

Photo Credit:  EK Captures