“We have a lot of cash in our savings account.  Should we pay off our mortgage or invest the money for retirement?”

When you give financial advice “by the hour” you get asked questions like these.  And the answer is… it depends.

It depends on;

* your attitude about owing money

* how much of a nest egg you have accumulated for your retirement because you will need cash to pay bills after you stop working and therefore stop getting paychecks

* what other financial goals you have and if you are on track to achieve them

* what interest rate you will pay on the mortgage and the assumed rate on the investments, and other assorted mathematical inputs

“Should we pay off our mortgage?” is a question that is more than a math calculation.  After the math is figured, take it a step further and think about how you will feel during retirement with and without a mortgage payment.

No mortgage in retirement

I have never heard anyone say they regret paying off their mortgage.  And there are ways to tap into a portion of the home equity if needed.  However, many retired folks have shared with me that they wished they had been wiser in their approach to mortgage debt so they didn’t have a mortgage while retired.  I have sometimes noticed during an initial meeting when I meet with a couple who have a mortgage, they seem more concerned about market fluctuation than other couples who do not have a mortgage.

Mortgage in retirement

There are a few couples that I can remember meeting with that have a mortgage in retirement and they were comfortable with it.  They outlined the math in a logical way and how it made sense for them.   They liked that it left them with more available cash in retirement.  I agreed with them, that it seemed to work for them.

When to pay it off? 

If your last mortgage payment is due after the day you would like to retire, jump on one of the many financial calculator websites and figure out the extra payment you would need to send each month in order to time your last mortgage payment with your retirement date.  You might be surprised to find how little additional money needs to be sent in order to pay the loan off by your retirement date.  How great would that feel?  Be sure to call your mortgage servicer to be certain that you do not have a pre-payment penalty, pretty unlikely, but just in case.  Make sure that you can still afford to make enough of a contribution to retirement accounts so that you can retire on time!  And that you are able to save for any other financial goals that are important to you.

What not to do

What I think is unfortunate, is to see a young couple that has heard that it is good to pay off your mortgage sending every available dollar to the mortgage company – with no emergency fund!  And they have not been saving in the company retirement plan, no savings for vacations or other goals.  A balance is needed.  Get the emergency fund created first!  Then create a prioritized list of goals and send money to each based on your priority.

The mortgage problem

The mortgage problem of having a large mortgage when retirement time rolls around isn’t usually created with the starter home, it usually happens when people move up into a series of bigger and bigger homes or take out cash to remodel.   That is when it is especially important to check to see if you can afford to pay the mortgage off by your target retirement date.

What To-Do?

Write down the approximate date that you would like to retire.

Write down the date that your mortgage payment will be done.

If the mortgage will be done after you retire, satisfy your curiosity and find out how much extra you would need to send in to pay your mortgage off in time for retirement.

You could call your mortgage company and ask them.  Or you could use an online mortgage payment calculator and the amount of principal left on your loan, how many months or years until retirement, the interest rate on your loan and find out for yourself.  Just remember that the monthly payment it quotes you is just the principal and interest, if you have your taxes and insurance escrowed you would add that on top of the principal and interest.

Invest just a few minutes, and you could be on track to having your mortgage paid off in retirement.