Paying off mortgage = saving for retirement?

03.06.20 10:26 PM Comment(s)

From the Clipboard-Retirement-Is paying off your mortgage a good strategy for retirement?

One question that has come up recently is whether or not paying off your mortgage is a good strategy (and the question here is on the primary residence, not on investment real estate). With the pandemic causing job losses, even people who kept their jobs are thinking about this as a way to reduce financial stress and expenses in case something else happens in the future.


Further, for as long as I can remember, having the house paid off by retirement has been common financial advice. It is a big financial and more importantly, psychological, milestone. And one that can really help in retirement not to have to worry about making that mortgage payment. In turn, that means less retirement income is needed.


Still, is paying off your mortgage a good way to save for retirement?


There are many schools of thought on this, and I can’t deny the psychological and emotional benefits of a mortgage free home. That, by itself, is invaluable.  Let’s consider an extreme example - once you retire, would you rather have:


A. $500k house with no mortgage but no retirement savings


B. $500k house with a $500k mortgage but have $500k in retirement savings?


The trouble with equity in real estate is that it’s illiquid. Meaning that you can’t just drive to the ATM to take out cash from your house. So if you need to get money - from the equity in your home - to pay for groceries or any other expense, you would have to go back into debt (getting a home equity line of credit) or sell the house. There’s no other way to get the cash.


However, paying off the mortgage can be a good way to save for retirement IF - IF the retiree is willing to use the equity in the home as a source of retirement cash. Typically, this would be done through a Home Equity Conversion Mortgage, or more popularly known as a reverse mortgage.


Before you flip out, this is simply a tool and can be a very effective tool and a tax free buffer asset that can make other retirement savings, such as 401ks, last a lot longer. In fact, research backs up the usefulness of reverse mortgages. Perhaps you’ve heard of this organization - Stanford University. The Center on Longevity studied this very issue and found that one of the most effective ways to manage retirement income was to combined IRA distributions with a reverse mortgage (11/29/17, Optimizing Retirement Income by Integrating Retirement Plans, IRAs and Home Equity).


The study considered using a reverse mortgage 3 ways:

1. As a resource to tap for unexpected expenses, such as long term care

2. To provide regular fixed income, similar to an annuity or pension

3. Provide income when investment returns are unfavorable


In each scenario they ran, incorporating a reverse mortgage helped reduce the chances of running out money in retirement and provided more overall income. The report did not even take into account taxes, which would have made the results even better as draws from a reverse mortgage are tax free.


Think about why you get hammers, pliers, wrenches and screwdrivers when buying a toolkit at the hardware store. It’s to provide you with the ability to handle a wide range of possibilities because you may not know what kind of situations you will run into. Same with retirement tools like reverse mortgages, 401k and IRA, annuities, life insurance and Social Security.


So, can paying off the mortgage be a good strategy to save for retirement? Yes, IF you are willing to use the equity later.


Otherwise, just make your regular payment and save for retirement elsewhere.

My content is for educational purposes only and should not be construed as advice or any kind of solicitation to buy or sell anything. As always, consult your own financial or tax professional for your own specific situation. Your mileage may vary. Batteries not included.


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