Is it smarter to invest or pay off mortgage as you near retirement?

I am 60 yrs old and will probably retire in 5 to 6 years. I owe approx $80,000 on a $300,000 mortgage and I have the funds to pay it off. My financial guys are telling me I would be better off investing this money instead of paying off the mortgage. Is it a mistake to pay off my mortgage and lose out on the deduction on my taxes? I'm interested to know your opinion of my situation.

Thanks.

Brian

When you’re heading into retirement, which of the following is more important for you to succeed?

• Having a lot of money

• Not needing a lot of money

I admit that this is a bit of a trick question. Both of these options are usually pretty high on the list of wants prior to your last day of work. If you can manage to pull them both off before you step into retirement you’ve pretty much won the game. But, what if you can only accomplish one of the above? Hmmm...

You’ve posed two questions to me and I’ll answer them both, but I’m going to answer them in reverse order. Is it a mistake to pay off your mortgage and lose a deduction on your taxes? In most cases, no. No, it’s not typically a mistake for you to pay off the mortgage early. Why? Because math says so. For example:

If you’ve only got $80,000 left on a $300,000 mortgage, you’ve probably only got about 5 years left until it’s paid off (assuming you had a 30-year mortgage at 4.125% to begin with). At this point in this particular mortgage example, you’ll only pay around $3,000 in interest in the next 12 months, whereas the total of your mortgage payments will be closer to $17,500 during that same time period. Since mortgage interest is a deduction on your tax return (versus a credit), that $3,000 will only provide a fraction of that amount as an income tax reduction. The real question is, would you rather have an extra $17,500 of cash flow at your disposal, or pay all of that to the mortgage company and get a cookie from the government in the form of a tax deduction?

Here’s something else to think about: With the update to the tax laws for 2018, specifically the increased standard deduction, there is a chance that you may not need to itemize your taxes this year. If you don’t itemize so you can “take advantage” of your mortgage interest, then holding that mortgage seems kind of pointless if you have the means to pay it off.

Before anyone starts to send me a very detailed reply as to why I’m totally wrong… Are there instances when you could really use a few extra bucks in deductions to drop an income tax bracket level? Sure. Are there ways to get deductions outside of mortgage interest deductions? You bet. In fact, I’d rather get my deductions by giving money to a charity of my choice than to a mortgage company, but to each their own.

In your case, should you heed your advisor's suggestion and invest the $80,000 prior to your quickly approaching retirement? Easy...

Based on the information provided, I don’t know. Great answer, isn’t it?

If I could answer your question, here’s what I’d want to know: Are you depending on that $80,000 to provide income in retirement? Or, perhaps you have a nest egg that will cover your income needs for the rest of your life? Maybe you have a pension that you’re expecting to provide income alongside a Social Security benefit? Finally, I don’t know how much money you need in retirement. The answer to these questions can and will guide you to your answer. This is a conversation I hope that you’ve already had with your advisor. You see, if you don’t need a lot of money in retirement, your options open up considerably.

PS - Even if you are depending on that money for retirement, you could feasibly replenish that amount with your new found cash flow each month before retirement. You’d also have the advantage of dollar-cost averaging into the market over the time period instead of dumping one lump sum into an account.

PPS - If the $80,000 is just sitting in a savings account somewhere, and isn’t your entire emergency fund, I’d say the scale tilts to paying off the mortgage.

PPPS - If you’d be selling some securities and withdrawing money to pay the mortgage off, then I’m not as confident in your strategy for a couple of reasons. 1) I want to believe that your advisor is looking out for your best interests since they (should) know way more about your situation than I do. I also choose to believe that they’re not just trying to gather (your) assets to manage in order to get paid more. 2) On the other hand, we’ve been in an incredibly long bull market. It’s going to turn at some point and selling high is the preferred time to exit out of a position, so… But, if I knew how to time the market I’d be writing this from my private island in the Caribbean. Scratch that. I wouldn’t be writing this.

PPPPS - If you choose to pay off the mortgage, give the new found cash flow a job. I love it when people time their expenses to be satisfied right before they retire. Your case is a bit different, though, since you’re 5-6 years away from retirement. If you simply assume the old mortgage payment into your lifestyle and make it more expensive for you to live on a month to month basis, retirement gets trickier. All of a sudden, you’ll need more money saved to live the lifestyle you want during retirement. If you’ve got a lot of money, then maybe it’s not an issue. However, if you don’t have a pile of cash waiting to fund your life, then not needing said pile of cash is a huge benefit. Quite frankly, not needing a bunch of money to live on is how most Americans will succeed in retirement.

If you’re still reading this, I commend you. You deserve an answer, so here it is. If your retirement is set up without this $80,000 included, and this money isn’t your emergency fund, you’re probably in the clear to wipe out the mortgage. Start using the new cash flow to rebuild your savings, stash it for retirement, or get charitable. And most importantly, enjoy your bought-and-paid-for home!