Early Retirement Blog

A whopping 41% of Americans, between the ages of 60 and 69 are paying a mortgage on their home, even though half of them have enough savings to pay off their mortgage.  A common question people, who are about to retire ask is, “Should I retire with a mortgage or pay it off before I retire?”

According to a new Boston College Center for Retirement Research report, the answer is no, you should not retire with a mortgage.

The report, written by Anthony Webb, “shows that it is unlikely that many retired households will be able to earn a return on risk-free investments such as bank certificates of deposit, Treasury bills, and Treasury bonds that will exceed the cost of their mortgage.”

In other words, retirees paying mortgage interest, will have to take on a greater risk by investing a larger percentage of their investments in the stock market, to make up for the loss from paying interest on their mortgage.

Paying a mortgage in retirement requires a more risky asset allocation.

Also, what if you are ready to retire, but your home mortgage is underwater?   Meaning you owe the bank more than the value of your house, and if you try to sell your house now, you will have to take a large loss.  In effect you are trapped in your home, and forced to delay your retirement, living on hope that one day housing will boom again and you will be able to retire?

Or, you retire now, then your house value drops 50% and you find yourself underwater.  Rents in your neighborhood start falling, and you could gain extra retirement income by moving, but you are stuck in a house that is worth less than you paid for it?

YOU SHOULD NOT RETIRE WITH A MORTGAGE!!! Is that clear enough?

What the report fails to mention, is a much larger question than, “Should you pay a mortgage in retirement?”   The more important question is  “Should I rent or own a home in retirement?”  In most cases, renting and not owning your home in retirement, makes more financial sense.

Paying off your mortgage when you retire, although better than retiring with a mortgage, leaves you owning an asset with a historical after-inflation return of 0%.   Having  your largest retirement asset, your house earning 0%, is a sure way of running out of money savings during retirement.

I know that part of the American Dream is owning a house.  I’m guilty of having once owned a 4 bedroom ranch style house on a quarter acre lot with swimming pool.  But financially, as many people are learning, the American dream of owning a house can quickly turn into a financial nightmare.  Is it worth it?

Find out how much can you safely spend in retirement and visit the Early Retirement Website to learn how to retire early.