For most people, a mortgage is the largest, and longest lasting bill of their entire lifetime. For many, it can take upwards of 30 years to finally pay off of a mortgage on a house. To those entering retirement who still have one, it can seem very enticing to withdraw a large amount of funds early and completely take care of any remaining payments.
But is that really the best decision for you? Here are a couple of reasons why you may actually be better served paying your mortgage off slowly during your retirement:
1. Remember: Retirement Plans Are Taxable
While this may sound obvious, many people forget that by withdrawing more money, there is a higher chance that you’re bumped into a higher tax bracket than you expect, meaning you’ll owe more in taxes at the end of the year. Once you’re on a fixed income, this can be much more of an issue than previously. Before withdrawing any large sums from your retirement accounts, you should do the math to know how it may affect your taxes in the end.
2. Medicare can change depending on your taxable income
If your taxable income goes too high, is possible to trigger higher premiums with your medicare. This is yet another reason why you should pay special attention anytime you withdraw a larger than average sum from your accounts, and especially if it’s going to something like a mortgage. The last thing you need is to eliminate your mortgage but then have the cost of your healthcare go up right afterwards.
3. The Math Tends to Be Against You
If the average investment portfolio averages a 9% return, it’s most likely you’ll have more money by chipping away at your mortgage over time than than paying it upfront. By pulling out a large lump sum early, your annual accruals will be significantly less than if you had kept as much money as possible in your investments. Depending on your financial needs, this may not be a priority for you, but since many seniors worry about outlasting their money, this is definitely something to consider before you pay off your mortgage in one fell swoop.
Of course, there are other factors to consider as well. If you’re thinking about using some of your retirement money to immediately finish paying the mortgage, don’t hesitate to give us a call and have us walk you through the pros and cons of this decision.