Should we pay off the house before retirement?June 4, 2012: 5:05 AM ET
My wife and I are in our late 50s with a $265,000 mortgage and a house worth $365,000. We plan to retire at 65. Should we concentrate our resources on paying off the mortgage by retirement? We are not going to live here forever.
-- Name withheld
The simple answer is that the closer you get to retirement, the less debt you should have. "A client who comes into retirement with a mortgage payment has a much higher withdrawal rate from portfolio assets than a client with no mortgage," says Omaha financial planner Joe Elsasser. "That makes them less likely to be able to sustain a downturn."
So it would behoove you to pay off as much of your mortgage as you can — as long as you aren't making too many trade-offs to do so. "Paying more than your mortgage payment doesn't make sense if you must drop below the match amount on your 401(k), or you don't have an emergency fund established," Elsasser says.
You can also look at paying down your mortgage as a type of tax diversification. If a significant amount of your savings is in tax-deferred accounts — such as 401(k)s and IRAs — then throwing money toward your mortgage balance is like building outside savings that can give you added tax flexibility during retirement. For instance, if you downsize later, you can use the difference in your retirement income plans.
— Kate Ashford
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