Retirement should be about enjoying what you love, whether you’re spending your days on the golf course or relaxing on the beach. It should not involve worrying over debt, such as your mortgage. Proactively paying down your mortgage before you retire can help you feel financially free.
“Economically, [retirees] eliminate a monthly payment as well as the rate of interest they are paying, and can reallocate that cash flow towards savings,” said John Piershale, a wealth advisor at Piershale Financial Group in Crystal Lake, Ill.
Here are six ways to retire without a mortgage so you can focus your savings wherever you please.
1. Determine your retirement income.
Hopefully, somewhere in your decision to purchase a home, you devised a realistic plan to pay for it. Granted, it’s easy to lose sight, particularly in those early days of homeownership.
Fortunately, even if you’re approaching retirement age, you still have time to develop a strategy to help you retire your mortgage when you do, said Piershale. Your first step should be identifying your retirement target date and aligning your mortgage payoff date with it.
Piershale recommended establishing a retirement income projection to get an idea of when you can or would like to retire. “It gives you a good roadmap for what you need to do today, to achieve your age goal for retirement,” he said. “Paying off your mortgage is a goal that can be built into this projection.”
This projection should take into account all of your financial resources, cash flows and assets to see if you have enough money to fund your retirement.
“If you are not on pace to properly fund your retirement, it will help you see what actions you need to take now in order to meet your retirement goals,” said Piershale.
2. Devote a larger percentage of income to your mortgage.
Now that you can visualize your future retirement, you should be able to tell whether you can afford to pay more on your mortgage. You can make additional payments at any time.
“The additional amount depends on … how much in additional payments is affordable,” said Len Hayduchok, president of Dedicated Senior Advisors in Hamilton, N.J. “If someone can afford an extra $200 a month and has enough of a financial cushion, that is how much can be paid.”
Generally, you should have a financial cushion to cover you for six months, plus some unpredictable expenses, such as a car repair, said Hayduchok. He cautioned that it’s better to have this safety net than accelerate your mortgage payoff.
3. Refinance your mortgage.
Whether you have a 30-year mortgage or a higher-than-average interest rate, financial experts say you might want to consider a mortgage refinance if it makes sense for you.
“The surest way to pay off your mortgage fast is to reduce your interest rate to as low as possible because the lower your interest rate the less money you pay over time,” said Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage.”
Fleming said if you qualify for your current loan, you should qualify for a lower mortgage rate. The question is whether your payments will be lower than what they are currently and if it helps you pay down your mortgage loan over the same period or sooner. If so, then it might make sense to refinance.
You can also shorten the loan term to 15 years or fewer. You’ll need to look at your retirement plan to see if these payments will work with your overall budget.
Although refinancing isn’t for everyone, it could be an option worth exploring if you want to be mortgage-free sooner and take advantage of today’s lower interest rates. Angie O’Leary, senior vice president for U.S. Bank Wealth Management, said you’ll want to factor in closing costs for a new mortgage in order to decide if it makes sense to refinance.
Otherwise, “you may accomplish a similar result by simply prepaying on your current mortgage,” she said.
4. Use windfalls to assist in paying off your mortgage.
Whether you’ve won cash off a scratch off or come upon an inheritance, put windfalls toward your mortgage, rather than squandering it away.
“Look for opportunities to accelerate the payments by using any cash windfalls, such as bonuses, to help you reach your goals,” said Paul Tarins, president and founder of Sovereign Retirement Solutions in Winter Park, Fla.
Common windfalls include a tax refund, cash gifts and money you made off a yard sale. Pretend like that money never existed, rather than expanding your food and entertainment budget for a month or two.
Of course, this takes commitment to your mortgage payoff plan. Designate a special account, folder or an old-fashioned money jar to help you retire your mortgage.
5. Consider what expenses you can cut.
Looking at what expenses you can cut and doing away with them should coincide with your plan to allocate spare cash toward your mortgage, said Tarins.
“If you find that certain items in your pre-retirement budget need to be reduced, then you may need to do without certain items,” he said. “Look for ways to cut out what might be more of a luxury than a basic need when evaluating your expenses.”
This could mean skimping on takeout and cooking at home instead, or planning budget-friendly outings with friends rather than hitting up your typical spot with pricey drinks. Activities that spark excess spending should be flagged when you put together your retirement plan.
You can make a simple spreadsheet yourself or use an online tool, such as Mint, which can provide you with a wealth of information on your spending and expenses.
6. Downsize your living arrangement.
Empty-nesters tend to be good candidates for a move to a smaller home. Downsizing can also be a practical choice if you’re struggling to meet your retirement savings goal and your mortgage is more than 25 to 30 percent of your income, said Piershale.
“You could consider selling your existing home and going to a smaller one with a smaller mortgage, then put the savings into an IRA,” he said. “This would increase the odds of reaching your targeted retirement age without a mortgage.”
Five to 10 years before retirement tends to be the best time to cash in on the value of your property, said Ash Toumayants, founder of Strong Tower Associates in Pennsylvania.
“Living in a place that’s cheaper than what you can afford as opposed to one that is exactly at the level you can afford makes a big difference in retirement,” he said.
Toumayants said it’s important to note that even after you pay off your house, you’ll still need to worry about things like insurance, maintenance and property taxes. Those costs need to be factored into your plan.
Although it’s good to pay down your mortgage with the aim of retiring without one, Piershale said other debts should be paid down first.
“Credit card and auto loan interest cannot be deducted like you can with mortgage interest. So, it’s best not to lose track of what types of loans should be prioritized and paid off first,” he cautioned.