To retire with a mortgage or not: 5 FAQs
In the old days, it was standard operating procedure to retire debt-free, especially without a mortgage. But these days, advisers are more likely to debate the merits of retiring with a mortgage or not. In an interview, Harold Evensky, chairman of Evensky & Katz/Foldes Financial Wealth Management and a professor of practice at Texas Tech University, answered our questions about retirees and mortgages.
Q: What are the advantages of paying down a mortgage prior to retirement?
Evensky: The psychological benefit of being debt-free. However, all too often paying down the mortgage is presented as a “free lunch.” What is often missing from this framing is that the investor no longer owns the assets used to pay down the mortgage. This issue is my biggest objection to many of the discussions I read about paying off the mortgage.
Paying down a mortgage also allows for the option of a reverse mortgage.
Q: What are the disadvantages of paying down a mortgage prior to retirement?
Evensky: For many investors it is a modest positive arbitrage. The after-tax return on a conservative long-term investment (the mortgage period) is often higher than the net after-tax mortgage cost.
Keeping investments rather than paying the mortgage maintains a significant marketable reserve. In the event of an emergency need for funds, obtaining a new mortgage at that time is not a guarantee.
It is a form of "forced" savings, as an increasing portion of the mortgage payment goes to principal.
Q: What's the profile of the person who would benefit most from paying down a mortgage prior to retirement?
Evenksy: Anyone who sleeps better with no mortgage and recognizes that there is often a modest opportunity cost.
Q: What's the profile of the person who would benefit least from paying down a mortgage prior to retirement?
Evensky: Anyone who recognizes the potential arbitrage return and is not bothered by having the mortgage as long as their cash flow (including return on the retained assets) can comfortably cover the mortgage payment.
Full retirement age is a magic number for Social Security benefits
Q: What else is there to consider when contemplating whether to pay down a mortgage or not?
Evensky: We generally discuss the potential arbitrage benefit with clients but point out that it is relatively modest and that if they sleep better with it paid off, that is the appropriate decision, unless the extra potential return is a significant element in their meeting personal goals.
Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch. Got questions about money? Email Bob at rpowell@allthingsretirement.com.