It was not so many decades ago when seniors would never consider retiring until their home mortgages were paid off. Many a retiree feel a great sense of pride and/or relief from not carrying debt into retirement. No longer receiving paychecks from a job, one has to answer how well can they support the mortgage payments? Today, when pre-retirees consider the expected expenses during retirement, in addition to the trips they want to take, and new hobbies to take on, more are going into retirement expecting to have a mortgage payment for either their current home or even a new home purchase.
According to the Federal Reserve, as of 2019, 33.2% of individuals between ages 65 and 74 had a mortgage or home equity loan (compared to 20.7% in 1989), while 22.6% of those 75 or older did (compared to only 5.8% in 1989) and the percentages are higher today.
There could be several causes for this shift in cultural behavior. The desire and expectation to want more for ourselves during our early retirement years certainly has influenced retirees’ choices. Another could be the very low interest rate environment for the past decade, allowing mortgage holders to refinance their loans to a lower rate or take out a new loan at a historically low interest rate.
With this become a trend, it is important that pre-retirees include in their retirement analysis the many considerations surrounding the liability of the loan, such as: the affordability of holding a mortgage during retirement, or the wisdom to pay down the debt ahead of retirement (if they have the funds to do so and it does not place them in a precarious financial position). In all good retirement analyses, looking closely at how financially stable and prepared one is going into retirement is key to a successful retirement. If paying down a mortgage during retirement makes up the greater part of their monthly expenses, or consumes the majority of their monthly income sources, that is cause for pause. If buying a larger home and assuming a new mortgage at the onset of retirement can only be done by taking withdrawals from accounts now, but leads to financial instability 10 years down the road, that is a red light. If their retirement assets and income sources are more than ample to exceedingly meet all of their needs and more over the course of their lifetimes, the decision to maintain a mortgage can be easier.
There could be sound reasons to hold on to the remaining balance of a mortgage for a period of time as one enters retirement; there could be potential tax benefits. Since mortgage interest is deductible on most residential loans, that interest amount may be what allows one to qualify for itemized deductions and thereby benefit from a lower liability on state income tax. Of course, there should also be the comparison of the mortgage rate with the expected return that the retiree may possibly earn, if their discretionary dollars were invested rather than used to pay off the mortgage. Weak stock and bond performance are not a guarantee. Apart from 2020, bonds coupon rates have not been impressive over the past 10 years. When the economy is not growing, but instead contracting, using funds that may have been invested in the stock market, or funds that are falling in value may make the decision of paying off a mortgage more attractive. On the other hand, the recent rise in interest rates has also led to improved bond yields, and possibly the after-tax coupon return on the bonds could be sufficiently greater than the interest rate on the mortgage, making holding a very low interest rate mortgage appear a beneficial choice.
What is most important is that all spending should be carefully analyzed; especially large investments during one’s retirement years. No one intentionally wants to sabotage their future financial security.
