The Case for Carrying a Mortgage Into Retirement
Smart retirees can leverage low-interest home loans to protect liquidity and out-earn their debt.
It’s common advice to try to enter retirement debt-free. The fewer fixed costs you have once your job-related paycheck disappears, the less financial stress you might have.
But should your mortgage be the exception? For people who locked in pandemic-era mortgage rates in the 3% range or lower, perhaps it should be. Here’s why having a mortgage in retirement could actually work to your benefit.
The liquidity may be invaluable
If you have a decent amount of retirement savings, you may be able to use some of it to pay off your mortgage balance before your career wraps up. But Steven Rogé, CFP, chief investment officer and CEO of R.W. Rogé & Company, says carrying a mortgage in retirement could make sense for liquidity reasons.
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“It preserves liquidity that can't be pulled away from you,” he explains. “Compare that to a line of credit against your portfolio, where you could face a margin call that forces you to sell assets, often appreciated ones, with tax consequences.”
Rogé also cautions clients set on being mortgage-free in retirement that once that loan is paid off, there’s no "undo" button. So before throwing a pile of money at that mortgage, consider the rate you’re paying and how those monthly payments fit into your budget. If your rate is low and your payments are manageable, keeping cash on hand for unplanned expenses could be a smarter bet.
Rogé also says that if you pay off your mortgage ahead of retirement and change your mind, it can be tricky to get a new loan.
"Banks want to see income, and few of them care much about the assets you hold," Rogé explains. (Though some asset-depletion mortgages may help high-net-worth retirees secure new financing.) Plus, given today’s borrowing conditions, you’re likely to end up with a significantly higher interest rate.
Another thing to keep in mind is that maintaining liquidity doesn’t just give you more options for dealing with unplanned expenses. It could also be your ticket to fulfilling some of your retirement goals and maximizing years of good health, says Greg Corneille, CFP, wealth adviser, and founder at Choice Wealth Management.
"When planning for retirement, we don't always think about the importance of maximizing those early retirement years in which we're likely to be most healthy and active,” Corneille says. "If money that could be used to pay off a mortgage can instead produce income in excess of the mortgage payments, then that extra income can be used to get the most out of those peak retirement years — travel, being active, and pursuing things you enjoy."
There may be tax benefits to reap
In addition to liquidity, carrying a mortgage in retirement could mean scoring an extra tax write-off, Rogé says.
"Not every retiree itemizes now that the standard deduction has increased," he says. "But those who do can still claim the home mortgage interest deduction, which effectively lowers your mortgage rate on an after-tax basis."
Plus, Rogé says, "The cash to pay off a mortgage has to come from somewhere. Usually that means selling appreciated assets and paying tax on the gain, or taking an IRA distribution and paying tax on the distribution." That extra income may, in turn, trigger Medicare premium surcharges, known as IRMAA.
In other words, paying off your mortgage could create a secondary tax burden, whereas carrying it could help from a tax perspective.
You might out-earn your mortgage rate
The amount of interest you’re paying on your mortgage should help inform your decision. But Rogé says that if you’re sitting on a 3% mortgage rate or lower, you can pretty easily earn a higher return in a relatively low-risk portfolio, which makes the case for keeping the loan.
"You can generally earn a higher return on your investments than your 3% mortgage costs you. It isn't guaranteed, but even a 3-month T-Bill yields more than that mortgage rate today," Rogé says.
He also reminds borrowers that 3% interest rates aren’t available anywhere today and may not be for a long time. So before giving up that rate, see what your options are for making money off it.
Moreover, a fixed-rate 3% mortgage is a fantastic hedge against inflation. You get to pay back the bank over 30 years using "cheaper," depreciated dollars, while your home's equity theoretically rises with inflation.
You may have a better use for the money
If you have a nice amount of savings, paying off your mortgage may be doable. But Rogé says that if you have a low mortgage rate, you may be better off doing something else with your money.
Many of his clients, for example, have large traditional IRA or 401(k) balances that will be subject to required minimum distributions (RMDs) and the taxes that come with them. Roth conversions can fix the problem, Rogé says, but the cash to pay taxes on a conversion needs to come from somewhere.
In that case, "the cash you would have used to pay off the mortgage can do that job instead," Rogé says.
It’s a matter of your personal comfort
While keeping a mortgage in retirement certainly has benefits, your decision should ultimately boil down to your specific financial situation and how you feel about carrying debt versus being debt-free.
Georgia Bruggeman, CFP, founder and CEO of Meridian Financial Advisors, LLC, says, "Whether to keep a mortgage or not in retirement is not just a math question but a comfort question."
"Some people," Bruggeman explains, "are just really uncomfortable carrying a mortgage. In these cases, it makes sense to develop a plan to just pay more toward the principal to pay off the mortgage sooner."
But if you’re not particularly bothered by the idea of retaining some debt, keeping your mortgage in retirement could give you the best of many worlds — more financial flexibility, tax breaks, and the option to keep other funds invested for added growth.
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