Should I Pay Off My Mortgage Before Retirement?

Dear Pete,

I have seven years until retirement, and I still owe about $63,000 on my mortgage. My home is slated to be paid off in just under 10 years. I have an extra $750 per month right now, and I’m trying to decide whether to pay more on my mortgage or invest more for retirement. I can afford to have a mortgage for the first few years of retirement, but I’d rather not have that payment. What do you think I should do?

Gloria, Pittsburgh

Answer: I was driving back from Florida to Indiana recently, and I was faced with every roadmasters’ toughest decision: Do I circumvent Atlanta? If you’re a Midwesterner who's ever driven down to see Florida, you’ve undoubtedly encountered this vital choice. Choosing to drive through Atlanta is hand-picking 180 minutes of your life, and deciding they aren’t particularly important minutes, and you’d rather stare at the car 15 feet in front of you, at 6 mph for the length of the entire run time of "Gone With the Wind." Choosing to avoid Atlanta is a bit riskier, because you never know what stretch of country road will be dealing with an overturned peach truck, which could add equal strife to the end of your vacation.

The known or the unknown. It’s been the fork in the road since the beginning of time.

If you hammer away at your mortgage with $750 more each month, you’ll likely be out of debt before your co-workers are slicing through your "Goodbye Gloria" sheet cake. It’s a safe decision. There are no surprises. You won’t have a mortgage payment in retirement, even though you feel like you can handle that expenditure during retirement.

The unknown choice, especially if you choose to invite risk to the party, is to try and grow the $750 per month over the next seven years, and then see what happens. I mean, $750 per month for seven years will leave you with over $75,000, as long as you average a reasonable 5% of return. That’s not chump change.

I’m sure there’s a technically perfect answer to this question, but I’m not interested in it. You tipped your hand, Gloria. You said it yourself, you don’t need to pay off your mortgage in order to retire successfully. Therefore, don’t be in a hurry to do so. Let the loan run its course.

If you invest your $750 per month for seven years, you will be greeted with $75,000, an affordable mortgage payment for just over two years, and you will receive a gigantic raise when the mortgage is finally paid off. The sudden disappearance of a payment is the same as a raise. And what I know about retirees is they never turn down a nice little raise two to three years into retirement.

The investment path is absolutely uncertain. You don’t know whether you’ll end with $75,000, $63,000 (the amount you will have invested) or less based on market risk. Even if you don’t earn much of a return, I still like the unknown path for you.

Of course, you’ll want to make sure you invest according to your risk tolerance. Talk to your financial adviser about that.

It’s worth noting if you had indicated your mortgage payment would be a chore during your retirement years, I would have suggested you forwent the $75,000 retirement reward and permanently secured your lower monthly obligation total.

The relationship between a mortgage and retirement income is an intense one, and complicated at that. I’d rather people not have a mortgage payment going into retirement, but I also don’t want people to make impractical money moves to rid themselves of the payment. For instance, don’t take money out of savings or your retirement account to pay off your mortgage.

My fear is once you pay off your mortgage, no matter when that is, you’ll reabsorb your monthly payment into your lifestyle, thus increasing your lifestyle. This happens to just about anyone who vanquishes a payment plan, be it a car, student loan, and yes, your mortgage. If this is going to happen to you, I’d rather it happen after you retire, not before.

Take the back roads, Gloria. They’re ripe with opportunity, and sometimes peaches, too.

This article is published courtesy of USA Today.