The conventional wisdom is to pay off your mortgage before you retire. People who are near their retirement are usually reluctant to hold mortgages. With age, the propensity to clear off mortgage responsibilities, increases. In other words, on an average, retired persons prefer to lead a debt-free life. But, does it really make sense to get rid off mortgages before you retire? It may be or may not be. In fact, when the prevailing market rate of interest is very low, the argument of paying off the mortgages prior to retirement does not seem too strong.
If you are on the verge of retirement, before making the decision whether or not to keep mortgages post retirement, you need to take into consideration a lot of factors. Your tax situation, different alternative options available before you to use the money, your investment outlook and the time period you want to stay in the house etc have to be taken into consideration before making the decision. You need to take these things into consideration before making the decision -
- If you want to make the decision whether to pay off your mortgage or to keep money in the form of savings, you need to take into account the rate of return coming through these ways. In case you pay off the mortgage, your rate of return will be the rate of interest on the mortgage. In case you want to keep money in the form of saving, the rate of return varies considerably. If you are a risk averse and want to keep money in savings account, then your rate of return will be considerably low. On the other hand, if you invest your money in stocks, then the rate of return will be quite high but the risks of loss will also be very high.
- If you are making mortgage payments, you receive tax benefits from mortgage interest deduction. However, if you have already retired, the benefits of mortgage interest deduction are much less than you actually think. Since, you are retired with low income, tax rate applicable for you may be comparatively lower.
- Your investment outlook is the key which decides whether you will hold mortgages or pay off mortgages prior to retirement. If you are a safe player and keeps a large sum of money in low-yielding savings account, then you would be better off by paying off the mortgage.
- You need to ensure that your efforts to pay off your mortgages before you retire do not leave you with no money at all. You should not be a position so that you have to use credit card to meet important, emergency expenses. In other words, you should have that monetary cushion ready with you so as to tide over unintended contingencies. You need to maintain the right balance between paying off your mortgages and keeping a monetary cushion ready for you.
Whether you have mortgages post retirement or not, you should make sure that your retired life is happy, wealthy and blissful.