Paying Off Mortgage Before Retirement

Are there are benefits to paying off your mortgage before retirement? When retirement age is just around the corner, there’s a good chance investments and mortgages will be at the forefront of your mind, and your main concern may be whether it’s worth using any extra funds you have to clear your mortgage or to invest.

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What’s the right choice, which option is likely to earn you the most money into your retirement and secure more funds when you eventually call it quits on the rat race? What are the other ways you can bolster your retirement savings, how can you ensure your twilight years are spent on cruises and vacations in the sun, as opposed to sleepless nights at home worrying how you’re going to pay the bills?

Mortgage vs Investments

First, let’s discuss one of the most pertinent issues here. It’s something we have discussed previously, but it’s a topic that needs to be addressed quickly: Should you clear your mortgage or invest elsewhere?

For instance, let’s imagine that you have a cash windfall of $50,000 sitting in your bank and you’re expecting to have $2,000 more in expendable income every month. You have a $100,000 mortgage balance to clear, but you also have your eye on stocks, bonds, and a savings account. What should you do?

Many consumers will lean towards investments, because investments earn money while mortgages cost money. If we were to give you $50 out of the blue, you’d see that as $50 earned. But if we told you that we’d called in a favor to make it so you wouldn’t need to pay your $50 electric bill, it wouldn’t be processed in the same way. In both cases, you’ve got an extra $50, but one clearly feels more profitable than the other.

What’s more, many financial websites actually advise you to put your money in investments instead, insisting that this is the best option. They do this for several reasons. Firstly, they know that 99 out of 100 people searching for an answer to the question of, “Should I invest or clear my mortgage?” are desperate for someone to tell them to invest. They’re predisposed to that answer and if they don’t get the answer they want, they’ll just look somewhere else for it, and will keep looking until someone gives them the advice they seek.

Secondly, many of these sites use affiliate links to turn a profit. They’ll tell you that investing is the better option and then, conveniently, link you to an investment account or an investment course.

Thirdly, they’re not really experts and are misjudging and miscalculating the data.

They know, for instance, that the average mortgage charges between 3% and 5.5% in interest. They also know that stocks have earned an average return of more than 10% per year over the last 100 years or so. Based on those figures alone, it’s a no-brainer—stocks are the way to go.

But this is just the average and it doesn’t paint a complete picture. According to the average, you can expect a return of 8% to 12% per year when calculated using figures from 1926 to now (using the S&P 500). However, in all those years, there have only been 6 instances where the annual returns have fallen within that bracket. For 27 of those years, the market didn’t increase at all, and during several key points there were major economic downturns that came unexpectedly and destroyed profits.

War, banking issues, pandemics—all these things can distort those figures. Sure, the markets might recover and over the span of several decades they will level out, but there’s no guarantee. And if you’re investing in individual stocks, there’s also no guarantee that the company will still be here next year or even next month.

Stocks are a sound investment, we’re not going to deny that, but the real estate market is generally more stable. What’s more, if anything happens and the market crashes, you can still live in your house and pass it onto your heirs. Your stocks, on the other hand, will be worthless.

Other Investments

Stocks aren’t the only way to invest your money, of course, but other investment choices have many of the same issues. For instance, you could argue that comic books, first-edition novels and even whisky have consistently earned more money throughout that time, while experiencing fewer dips and rises.

That may be true, and it’s true for other investments as well, but unless you’re an expert on those things, you won’t make the same money. What’s more, there’s always a risk. This is true even for precious metals like silver and gold. On the one hand, they are much higher than they were many years ago and where silver is concerned, even if it were to reach the highs it has previously achieved, investing right now would be a great move.

But you can’t guarantee that will happen. The great thing about precious metals is that they tend to increase when everything else decreases, people turn to them when stocks fall and countries struggle, and they are literally worth their weight in gold during times of hyperinflation. They have tangible worth, but that tangible worth is still reliant on supply and demand. If people suddenly decide that silver is not that impressive or gold is highly rated, where does that worth go?

After all, while these metals do serve an important purpose in many industries, the bulk of the world’s supply is being hoarded for investment purposes, suggesting that the value has little to do with practical applications.

As for bonds, they earn a consistent profit, but one that isn’t high enough to cover your mortgage payments and they are not risk-free. Savings accounts and retirement accounts, on the other hand, are guaranteed and insured, and are therefore great to have in backup. But even the most generous savings account pays you just 2% per year, and most pay less than half this.

The Exceptions

There are a couple of major exceptions to the above, times when it might benefit you to focus more on investments or to switch your focus to other things.

You Have Lots of Debt

If you have credit card debt charging an extortionate interest rate and requiring a substantial monthly payment, this should be your focus. The same goes for consolidation loans and personal loans. Forget about your low interest rate home loan for a moment and focus on the debts that are actually preventing you from saving and living.

Credit card debt could cost you thousands of dollars in interest every year and until you’re debt free, your focus should be on clearing those debts. Not only will this save you a lot of cash in the long term, but it will also improve your cash flow in the short term and bolster your credit score and debt-to-income ratio.

You Can’t Afford to be Mortgage-Free

Paying off your mortgage can give you some peace of mind, secure your personal finance situation, and clear your mortgage balance, which means you’ll have more money, more options, and less stress. However, if you don’t have the money to clear your mortgage debt, are paying an affordable monthly mortgage payment, and likely won’t clear your balance while you’re alive, you don’t need to rush.

In this case, you may be better off focusing on the short-term. The stock market may help you a little if you know what you’re doing, and you can also look into bonds. You may also want to consider selling some home equity (look into reverse mortgages, refinancing, and a home equity line of credit) and getting life insurance so that your spouse and heirs aren’t burdened with your debts. 

Whatever you do, make sure you plan ahead. Proper retirement planning requires you to estimate how much money you will need for the remainder of your life. Always err on the high side and assume you’ll live longer, need to cover medical bills, and will have a few vacations. Simply focusing on survival and estimating that you won’t live very long will make you very miserable in your final years.

You Don’t Have an Emergency Fund

It often makes sense to clear your debts or pay off your mortgage before putting money aside for a rainy day. But what if you devote all your income to clearing the mortgage, making as many extra payments as you can and clearing your savings, only to be hit with medical expenses? You will either need to take out a high interest loan or use your home equity, the latter of which won’t make sense if you only need a few hundred or thousand bucks.

That’s why it helps to have an emergency fund, something that can cover those unexpected expenses and help you through difficult times when your living expenses increase, your income drops, and you find yourself with a large bill. 

If it turns out that you don’t need the money in that fund and are living comfortably, that’s great, mission accomplished, and you can keep it there to prepare for a rainy day. But by avoiding it completely, you’re taking an unnecessary risk that could cost you dearly in the future.