Hardly a week goes by that I’m not asked the question: “Should I pay off my mortgage before I retire?” The answer, of course, depends. On math. On your situation. On your personal preferences. Let’s look through some of the key variables to consider and then I’ll tell you what I’m doing with my house (spoiler alert: I’m a big proponent of retiring debt free) and give you some tips on how to retire your mortgage early, should you choose to do so.
Variables to consider
Interest rate. What is the interest rate on your mortgage? If you buy a $250,000 home and have a 30-year mortgage at a rate of 4%, you’ll pay $179,674 in interest over the life of that loan. That same loan at 6% would cost $289,595 in interest, about $110,000 more. The higher your interest rate, all else being equal, the more incentive there is to pay it off sooner.
Other debt. Mortgage rates are typically lower than rates on other forms of debt like credit cards or car loans. If you look strictly at the math, it makes sense to pay off your higher interest rate loans first. If you carry a credit card balance or car debt, focus on those first. Once those are gone, you can target your mortgage.
Investment alternatives. Your house is an investment. Whether you use available cash to pay it off will partly depend on the other investment opportunities you have for that available cash. If your mortgage is 4%, but you have another investment opportunity that yields 8%, it might make sense to hold off on the house and invest the cash at the higher rate. Just keep in mind that paying off your house offers a guaranteed return (the interest disappears), while alternative investments likely do not.
Income sources in retirement. Think about your income sources in retirement. Social Security. Pension. Income from your investments. Add that up and then compare it to your retirement budget. Is there enough there to easily service your mortgage without limiting your other plans for retirement? If so, carrying a mortgage in retirement might not be a burden. If not, it might make sense to pay it off early.
Nest egg. Are you on track with your retirement savings? Are you maxing out your 401k and IRA contributions each year? If not, focus on those things first and then, if you still have some extra cash, consider paying down your house second.
Peace of mind. The decision to pay off your house isn’t entirely numbers based. I’ve had plenty of clients who could justify carrying a mortgage, but they paid it off anyway because they wanted the peace of mind of being debt free. I’ve never had a single client tell me that they regret the decision to pay off their house.
How long will you live there? Do you plan on downsizing to a different house or moving somewhere else in retirement? If you only plan on being in your current house for a few more years, it might not make sense to pay it off. If you plan on being there for a while, however, owning it outright would probably be best.
Tax considerations: Many people argue against paying off your house because of the “tax benefit.” Recent changes to the standard deduction make this argument less compelling, but even before then, I think this argument didn’t hold water. Consider a person in the 20% tax bracket who paid $10,000 in interest and got a $2,000 deduction. They paid $10,000 to get $2,000. Better to pay it off, spend a little more on taxes and save the $10,000 in interest.
What I’m doing and why.
As you’ve probably guessed (both from this article and others I’ve written on debt), I’m paying my house off early. I thought through the math, but to be honest, that was secondary. The three primary drivers of my decision are:
- Peace of mind: I sleep better when I’m debt free.
- Security: Debt adds risk and reduces cash flow. Both are bad for retirees.
- Priorities: According to the Employee Benefits Research Institute, the average retiree spends 40-45% of their budget on housing. I have other plans for that money! (For more, read The benefits of an extravagantly modest lifestyle)
A few tips to pay it off early.
Below are a few strategies I use:
- Set a goal and re-run the amortization schedule: If you have 7 years until retirement and want to have the house paid off by then, re-run your loan amortization for 7 years and figure out how much extra you need to pay each month to reach your goal.
- Make it automatic: Once you know how much you need to pay each month, make it automatic. Saving in your 401k is easy because it automatically comes out of your paycheck. Set up your extra principal payments to do the same thing.
- Refinance: Rates are still historically low. If you haven’t refinanced in a while, call your bank to see if it would make sense. Just don’t refinance into another 30-year loan. Keep the payback period as short as possible so more of your payments go to principal.
- Stop escrowing: This is more of a mental trick. When I started paying off my house early, I got discouraged each month at how much of my payments went to taxes, insurance and interest. So I called the bank and asked them to stop escrowing. Yes, I still need to pay my taxes and insurance, but now those bills come separately. Most of my payments go to principal and I’m forced to save extra to cover the taxes and insurance.
- For more ideas, read How (and why) to retire debt free and Your biggest retirement expense (and how to get rid of it).
Quick Note: I’m having a limited time, 50% off sale on our flagship product, The Ideal Retirement Design Guide. Read more at the bottom of this post.
At Intentional Retirement, we look at retirement a bit differently. So do our readers (You’re awesome!). Those differences are woven through our DNA and they show up in the things I say and do at the site, but once in a while it’s a good idea to have a refresher. Below are a few of the fundamental ingredients of an Intentional Retirement. It’s not a comprehensive list, but it contains a few big ideas that can radically reshape your retirement.
You need to be intentional. One thing is more important than any other when it comes to having a meaningful retirement (and life). That one thing is more important than money, health, Social Security or any other retirement related building block. What is it? You need to be intentional. Wanting a great retirement isn’t good enough. Everybody wants that. You need to actually do something about it. You need to decide what you really want out life and then be very intentional about making it happen.
Retirement is more than a math problem. Yes, money is important, but it’s not enough. You also need meaning (e.g. relationships, activities, challenges, pursuits). Money will help you sleep at night. Meaning will give you a reason to get out of bed in the morning. You need both. That’s why everything at Intentional Retirement—from the weekly articles to the products in our store—focus on both money and meaning. We want to help you achieve financial security, but we also want to show, teach and model how to use that money to live a meaningful life.
Retirement is a pie chart, not a timeline. Too many people buy into the false assumption that retirement can only happen once you reach “retirement age.” Why should living the life you truly want to live depend on how many birthdays you’ve had or whether or not you punch a time clock? How in the world has it become acceptable to defer your dreams and push the best things in life to the very end? At Intentional Retirement, we don’t think of life as a timeline where youth equals zero to twenty, working years equal twenty to sixty-five and retirement equals sixty-five plus. Instead, we think of life as a pie chart that is divided into time you control and time controlled by others. The more time you control, the more retired you are.
Intentional Retirement is iterative. So if retirement starts as soon as you begin to control chunks of your time, what does that look like practically? Think of it like software. When Bill Gates founded Microsoft, did Windows come out fully formed, with all the functionality that it has today? Of course not. He started with Version 1.0 and then continued to build on in it and add more features. That led to versions 2.0, 3.0 and so on.
What does this idea of iteration look like when applied to retirement? What if, instead of waiting until 65 to have the retirement of your dreams, you started with a Version 1.0 at 45 (or your current age)? That version wouldn’t have all the “freedom and control” functionality of future versions, but it would allow some rich experiences nonetheless. Then you could take what you learned and apply it to creating Version 2.0 in our 50s. With a little more money saved by that point and the knowledge and experience gained from testing and implementing Version 1.0, you could likely design a fairly robust “product” that included things like mini-retirements, travels and learning new things. Even though work would likely still be a part of the equation, it would be done in service to an existing lifestyle rather than as a prepayment of dues for a club you hope to someday join. Then when you actually reach that stage in life where your savings and circumstances allow you significant control over your time you would be infinitely better prepared to implement a feature packed, real-world tested Version 3.0. Rather than struggling with inertia and trying to figure out what you really want out of life (and wasting some of your best remaining years in the process), you would be ready to hit the ground running.
Delayed gratification is overrated: No, I’m not telling you to stop saving. Delayed gratification is great if it’s allowing you to work toward something. Where delayed gratification becomes a problem is when it is used as an excuse for life avoidance. Rather than allowing you to work toward something, it is keeping you from something. For example, it’s hard to decide what you really want out of life. It’s risky to pursue big goals. Rather than rising to the challenge, we often tell ourselves we need a little more time or a little more money. Not yet, but soon. Someday. Here’s the thing. The longer you wait, the less you believe yourself when you say “Someday.” Your dreams begin to atrophy. Your opportunities begin to vanish. You aim lower. You talk yourself out of things. Before you know it, it’s too late. So don’t delay. Decide what you really want out of life and get after it. Start small if necessary, but start.
Retirement is changing. Gone are the days when retirement was an age based, non-working relatively brief and sedentary period of life that doesn’t look a whole lot different from your working years, save for having a little bit of extra time. Intentional Retirement should begin much earlier (i.e. during the working years), last longer, and be totally unique to your plans, dreams and priorities. It will be intricately woven into your life now, rather than being some far-off time you hope to eventually reach. It should be active, fulfilling, challenging and exciting. If that resonates with you, stick around. There’s plenty more to come.
Half off Sale on the Ideal Retirement Design Guide: For those of you looking to start planning your own Intentional Retirement, I created a guide called The Ideal Retirement Design Guide. I’m launching an updated version of the guide soon, which means I’d like to clear out the existing inventory. Translation: Time for a sale! The guide is normally $159, but if you order now I’ve dropped the price to $79. To sweeten the offer a bit, I’ll also include a free copy of my book The Bell Lap: The 8 Biggest Mistakes to Avoid as You Approach Retirement. As always, no pressure to buy, but there is a limited supply so grab a copy if you’d like one. Click here for more info and to order.
The biggest fear BEFORE retirement is money. Pre-retirees worry about whether they’ve saved enough and if it will last. The biggest fear AFTER retirement, however, is health. Once retired, people worry most about getting or staying healthy so they can do the things they want and have a good quality of life. So, depending on where you fall on the retirement spectrum, health is either already a major concern of yours or it soon will be. With that in mind, a few studies caught my eye recently that I want to share with you because they can help boost your memory and extend your life.
How blood pressure affects your memory. A recent study by the National Institute of Health (NIH) examined whether more aggressive treatment of blood pressure could improve heart health. The results were so impressive that they stopped the study early and lowered the systolic blood pressure recommendations from 140 to 120 (and overall blood pressure recommendations to no more than 120/80). That more aggressive treatment reduced the risk of heart attack and stroke by nearly a third and death by almost 25 percent. They did further research to see if there were any other benefits and last week they announced that bringing the systolic below 120 also reduced the risk of cognitive impairment by about 19%. Cognitive impairment can lead to dementia which can lead to Alzheimer’s. The takeaway? Go get your blood pressure checked and if it’s above 120/80 you should talk to your doctor about bringing it down.
How relationships affect your health. While I was reading about the blood pressure study, another NIH study caught my eye. It summarized the growing body of evidence that shows how strong relationships and social connections can have a positive impact on your mental and physical health. Here are a few of the findings:
- Relationships have a cumulative impact on your health over time.
- People with weaker relationships and social connections are much more likely to die prematurely.
- Weak social ties are directly linked to a higher probability of developing conditions like heart disease, high blood pressure and cancer.
- Once you develop those conditions, you’re more likely to die from them if you have weak social ties. For example, heart patients with weak social connections are twice as likely to die of cardiac arrest than patients with strong social connections.
- Weak relationships also affect your immune function and your ability to recover from illness.
Why do relationships have such an impact? One reason is that behavior explains roughly 40% of premature mortality and relationships have a positive impact on our behaviors. You tend to take better care of yourself when you have people you care about. Another reason relationships help? Good relationships reduce stress and help foster a sense of meaning and purpose, both of which can help improve your mental and physical health. The takeaway? Work hard to foster meaningful relationships with friends and family. It can greatly impact your overall health, longevity and quality of life.
Money is an important ingredient to a successful retirement, but it’s meaningless if you’re not healthy enough to live life and do the things you want to do. So work hard to get your finances in order, but take these words from Emerson to heart: “The first wealth is health.”
“We try more to profit from always remembering the obvious than from grasping the esoteric. It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” -Charlie Munger, investing partner of Warren Buffett
Sometimes we make things too hard. Retirement (and life) works pretty well if you get the big things right. Things like a roof over your head. A good relationship with your spouse. Meaningful friendships. Your health. Satisfying pursuits. A healthy spiritual life. Freedom and independence. We should all spend our time, money, brain power and willpower getting those things right.
If your life were a house, the big things we’re talking about would be the foundation and load bearing walls. They are what gives the house structure, support and a secure footing. Once those are in place you can worry about paint colors, furniture and decorations. Those things are important too, but the color of your living room won’t matter much if the house is on the verge of collapse.
Get the big things right and then you can worry about improving things at the margins. Too often we do the opposite. We focus on the trivial many instead of the vital few. Most of those details don’t matter much. Yes, they can take something good and make it a little better, but they can’t take something bad and make it good. Get one of the big things wrong, however, and no matter how good everything else is, life will be tough.
So today, as you live your life and plan your future, look for big wins. There’s no prize for making life complicated. In fact, it can be pretty simple. As Charlie so eloquently stated above, often times you don’t need to be brilliant, you can have enormous success by just trying to be “consistently not stupid.”
In life, we often have the option to do things the easy way or the hard way. We can choose between the wide and narrow roads. Paradoxically, choosing the easy way out often leads to a hard life while choosing the hard way often leads to an easy life.
Narrow, difficult decisions that require discipline and sacrifice usually pay off by leading us into a place where the road is wide and our options are plentiful. On the other hand, taking the wide, easy path often ends up funneling you down a narrower and narrower chute until all good options are gone and all that is left are painful consequences. In short:
Easy choices, hard life. Hard choices, easy life.
Nowhere is this more true than with our finances. We all stand at a fork in the road when making decisions on things like debt, saving, investing and giving. Path A is wide and well worn. Reach for that credit card. Try to keep up with the Joneses. Feed those desires. The other path, as Robert Frost might say, seems a bit grassy and in wont of wear. Live within your means. Give generously. Save for the future. Steward those resources wisely.
Perhaps not surprisingly, my advice on finances (and pretty much everything else) encourages you to take the road less traveled. Sure, doing so will be difficult and take discipline, but it will ultimately lead you to a place of peace, security and comfort.