Retirement Planning: Should Your Mortgage Be a Big Part of It?
Written by
Crystal Mayer
Edited by
Ashleigh Ray
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As you look toward retirement, you will want to take all of your expenses into account. Unfortunately, many people fail to take into consideration their mortgage, which is usually their largest expenditure. Failing to factor in your mortgage can create a challenging situation once your income is reduced after retiring.
We asked experts nationwide to weigh in on why your mortgage should be considered during retirement planning and what it should look like when you do. Keep reading to learn more about planning your retirement with your house payment in mind.
Get Rid of Your Mortgage If You Can
The best retirement move is to pay off your mortgage before you retire.
According to Christopher Stroup, founder and president of Silicon Beach Financial, “Ideally, your mortgage is long gone by the time you enter retirement, which can help free up a critical slice of monthly cash flow when navigating an era of life where your income is likely fixed.”
However, Stroup also said, “Carrying a mortgage during your golden years could be a good idea in certain situations, but it’s hardly a one-size-fits-all approach.”
Reinvest Funds
If your mortgage is not paid off before you retire, Stroup said you may be able to use the equity in your home to help sustain you once you quit the workforce.
“There could be an opportunity to reinvest funds from your home equity to establish an entirely new source of income,” explained Stroup. “… [And] investing the funds in a diversified portfolio should provide greater returns over the long-term.”
Keep in mind that investing in the stock market doesn’t come without its own set of risks, “namely that investment returns can vary greatly in the short term,” Stroup added.
Tax Considerations
Maintaining your mortgage after you retire could also help offset some of your tax burdens.
“… Interest on mortgages is tax-deductible,” noted Stroup. “This helps reduce the costs associated with this kind of debt while increasing the returns on your portfolio investments.”
It’s important to understand that the Tax Cuts and Jobs Act of 2017 did blunt this benefit to a degree, as taxpayers can only deduct interest on $750,000 of a qualified residence mortgage.
“Furthermore,” Stroup continued, “unless the funds are used to purchase, construct or substantially improve the home that secures the financing, the act has waived the deduction for interest paid on home equity loans or lines of credit.”
Why It Matters
Remember, your mortgage is and likely will continue to be one of your largest expenses. Failing to account for it can leave you with an unwelcome surprise once you retire.
Erika Kullberg, an attorney, personal finance expert and the founder of Erika.com, said, “If you think you will retire before paying off your mortgage in full, then your monthly mortgage payments absolutely need to be included in your retirement planning.”
Worse yet, retirees are often hit with unexpected financial obligations in the first year or two after they leave their steady paycheck. These emergencies can range from health issues to car problems, and you’ll want to make sure that your finances can handle any unexpected expenses as well as your home payment. It may even be a good idea to establish an emergency fund to help you avoid using any money that’s intended for your mortgage.
As Kullberg explained, “When planning for retirement, you need to get an idea of how much money you will need to live comfortably each month. Creating an estimated retirement budget that keeps essential expenses in mind, like housing, groceries, transportation and healthcare, can give workers a much better idea of what their annual savings goals should be.”
She continued, “A mortgage payment, and any other related housing expenses like homeowners’ insurance and utilities, are expenses retirees need to deal with month after month.”
By creating a retirement plan with these expenses in mind, Kullberg said retirees will be able to better prepare so they don’t find themselves short on cash when they’re no longer receiving a consistent income.
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