Should I pay off my house and not have a mortgage?

I get this question often. There are many experts who say that paying off the mortgage should be your top priority, and that retiring with a mortgage is a bad financial decision.

This is something that many families worry about, and recently I was asked:

Thiago, I’m afraid our mortgage payments will affect our retirement lifestyle. We want to be able to spend more during early retirement on things like traveling and helping fund our grandchildren’s college funds, but we worry that we might be spreading our money too thin if we also have a mortgage payment… It gives us the feeling like we have to push back on our goals and work longer hours to support our family and our goals. Is it really true that a mortgage is a pension killer?

There are a lot of There are several things that can cause a retirement plan to fail, and debt can certainly be one of them, but as with most things in financial planning, the answer will depend on several factors.

For some of our clients, paying off their mortgage gave them more financial flexibility in retirement, but we also have clients for whom paying off their mortgage meant they couldn’t do everything they wanted in retirement.

To help create context, I’m going to look at an example of a real financial plan that shows maintaining versus paying off a mortgage so you can see the long-term impact and how it can impact one’s goals.

Let me start by saying that our approach to retirement planning is research-based. We want to make sure we are not influenced by general blanket advice. As with most things in retirement planning, what is good for one family may not be good for another.

Benefits of paying off your mortgage

Why pay off a mortgage at all? The obvious benefit is that it reduces costs in retirement. The idea is that when you retire, your salary disappears and only a portion of it is replaced by your FERS pension.

Some may be old enough to claim Social Security, but most people wait until full retirement age, which is typically several years after many federal employees retire. However, there are some important considerations that are left out if we leave it at that.

First, not all of your monthly mortgage payment is your loan. Your monthly mortgage payment consists of four parts: principal, interest, taxes, and insurance (“PITI”). For most people, taxes and insurance can amount to as much as a third of their total payment.

If you have HOA fees, this may also be on top of your mortgage payment. Some also have local city or municipal rates. When you pay off a mortgage, the principal and interest are gone, but taxes, insurance, and other costs remain.

But is this reduction useful in the long run? Does reducing costs by paying off a mortgage really mean you have more financial security?

In our example, we have a married couple with a net worth (“NW”) of about $2.5 million, including their home, and in liquid assets they have about $1.8 million between their TSP, brokerage, 401ks, etc. Their monthly mortgage payment is just under $3,000 per month, and their all-in expenses are about $10,000 per month, which is in line with most families here in the DC area.

By paying off their mortgage in one lump sum earlier in life, they are expected to have lost almost a quarter of a million dollars over the course of their retirement. That’s money they may need later in life for long-term care, or assets they can pass on to their heirs when they’re gone.

Line graph showing the amount and value of estimates lost in one year as this couple paid off their mortgage, and the long-term impact on their retirement
Credit: Thiago Glieger

Another problem is the significantly reduced chance of success of their retirement plan. Although early retirement looks strong, this move has a drastic impact on their safety during mid-to-late retirement, with an estimated failure in the mid-70s.

Bar chart showing the probability that the couple's assets will survive during retirement as a result of paying off their mortgage
Credit: Thiago Glieger

I would be very concerned if this family were to pay off their mortgage early. The large amount of capital required to deploy – plus the taxes – is too great and negatively impacts the longevity of their plan. If they use it to pay off their mortgage, it could mean they don’t have enough money left over to support them for the rest of their lives.

The importance of assessing the long-term trajectory of your retirement plan cannot be overstated. Variables such as expenses, financial decisions, market volatility, healthcare challenges and more must be carefully addressed and adjusted.

Considerations that go beyond financial

There is one more important part to consider. So far we have only discussed the financial considerations of this decision.

What if having this mortgage in retirement blocks them mentally from enjoying their retirement? What if it makes them feel guilty about spending more on things that excite them for fear that it will be credited to their credit?

The fear of overspending in retirement is a real fear that many people have when they retire. We find that the closer people get to retirement, the greater the stress surrounding it becomes, and sometimes they are more stressed in retirement than when they were working.

There are two sides to retirement planning. The first side is what is best for you financially. The other side is what makes you happy in retirement. The reality is that retirement planning is somewhere in the middle: the intersection of a Venn diagram.

Successful retirees recognize that the reason their retirement is so satisfying is because they’ve combined smart financial planning with what makes them happy. I encourage you to seek the same, after all it’s not just your money, it’s your future.

© 2024 Thiago Glieger. All rights reserved. This article may not be reproduced without the express written permission of Thiago Glieger.

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