Should You Pay Off Your Mortgage Before Retirement? 5 Key Factors Retirees Need to Consider

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should you pay off your mortgage going into retirement in other words should you be debt free should you have nothing you owe on the house that you live in in retirement that’s what we’re going to talk about today let me bring in my co-host Tony sure now Tony yes welcome to the show we had this exact conversation or a similar one over four years ago I was looking at it and really let’s redo it for two reasons one the first time we did the show we didn’t have video so you know we gotta

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add that little bit to the audience for the audience yeah I think it’s important that they see us Dan when we’re talking about mortgages and the other reason is mortgage the mortgage situation has changed drastically from four years ago yeah so I want to um I want to revisit this yeah I have a sound effect for the mortgage situation currently no that’s the general consensus but right historical perspective mortgage rates well pretty low yeah that’s true that’s true I mean compared to what 1984

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right you’re 83. the last time we were struggling with Social Security collapsing we had some pretty high mortgages as well but yes traditional advice and this has been since the beginning of financial advice that I’ve been since I’ve been in the industry will say sure it’s been you want to be debt free in retirement that’s a you know there’s a lot of people out there Talking Heads that say no debt in retirement be debt free it’s just which isn’t a bad thing no having no debt sounds great

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it’s less uh monthly expenses in retirement uh that sounds logical right it does but right now 2023 I think that it may not be the best advice really and people are realizing that as they as they are retiring they’re starting to see and there’s a situation happening now where having a mortgage in retirement actually makes Financial sense more so not wow and it and hearing you say that is funny because earlier this week just this week I heard uh on television a financial one of the Talking Heads a financial advisor like

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yourself but he said because and I disagreed with him just even on this initial statement he said mortgages are your biggest expense in retirement is your mortgage your housing so if you can eliminate that going into retirement you want to do that and number one I would say probably you and I both I would think I assume that Health Care is going to be your biggest expense in retirement or even possibly taxes over yeah then Healthcare up there yeah well I mean I I think the idea of no debt in retirement

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is good and sure there’s different types of debt though so right credit cards medical student loans we’re not going to talk about those we are talking about mortgage and the fact that I mean when someone says the biggest expense in retirement is your mortgage they could be right like the fixed expense on a monthly basis but sure when you throw in taxes and you throw in health care that could be higher at certain points right in terms of just a monthly payment out the door yeah mortgages can really be up there but is

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that a reason to get rid of them um not necessarily and it’s a high stakes decision too because as we’ve talked about in previous shows I think we did an entire show on housing in retirement I’ll put it up here for those that are watching yeah because that’s a big issue in retirement for people as you plan for retirement whether you’re 40 50 or 60 or in retirement where you’re going to live and how much it’s going to cost that has to be a big part of your planning process when you plan for how

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much you’re going to need and what you where your money’s at in retirement right and it’s the biggest asset financial asset for most people sure and that’s just because they bought it for the typical retiree let’s say they bought it years ago let’s say you bought your house in the 70s and um you just been chipping away at it and you probably own it outright by now unless you take in second mortgages to send the kids to college or something but for most people they uh they have

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their house paid off and then they go to retire sure and um oh I got my 401k I got my savings I got my pension but the house itself the value of it is substantial yeah people especially are you saying everybody doesn’t have a sixth mortgage on their house well I thought I was in the you should only have three you have three kids that’s true um you know there people have to make that decision at retirement is well I’m going to move I’m going to move from in our case in um Tampa area it’s a lot

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of Midwesterners and or New Englanders you know people from and you know you don’t get many people from the West moving they kind of go to Arizona but I think like you know Ohio is the cutoff point but anyway do I sell my house and buy a new one in in Florida well that’s moving the people understand that but then they say well no I got to get a new house and I want to pay cash should they get a mortgage or should they pay for cash outright or if you’re downsizing you’re going to

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sell your big house because the kids are gone you’re an empty nester do you pay for the house outright or do you just get a new mortgage um I call it right sizing you know the size of the house you need it’s no birding so people with snow do a lot of snow ranch or a rambler one level home is what we’re looking for in retirement right and it’s going to be there theoretically it’s going to be lower cost value than your existing home hopefully yes right but then you get snowbirds that own two properties oh and

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then like well we’re done snow burning we don’t want to travel anymore we’re going to just move to Florida but the question is should they sell that house um or keep it and rent it or you know and then you got refinancing which was huge in 2020 22 21. um we’ve talked about reverse mortgages or HELOCs you know borrowing against the house it’s got this negative stigma and I think what I want to say is having a mortgage in retirement is not the end of the world it could be quite

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actually beneficial to do so so let’s talk about five factors to make this decision we got cash flow liquidity interest rates return rates and stress levels I want to take these one at a time and talk through why people may want to keep their mortgage or not and the first is cash flow do you have enough to sustain the mortgage so this is you were just describing the advisor said you have a your basic expense is aim is your mortgage so let’s um let’s move away from that get rid of

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it and then you’ll be better off in retirement right that makes sense but what if you have enough income to cover the mortgage so so what are you effectively doing you’re effectively using other cash to pay off that debt and if you don’t have enough cash to pay off the debt then yeah it makes sense to not have the mortgage but then how are you going to not have the mortgage you have to pay off right good point yeah I think that’s where uh they might be missing the boat there but

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but you’re right and I think what you’re saying here is if you have money in other accounts that’s interest bearing you know you’ve got your compounding interest happening you’re going to take money out of that so you might end up selling when it’s low uh or taking it out at a bad time to pay off a mortgage or get out of debt but you’re missing out on so much compounding interest you’re missing out on you could have a loss A compounding loss because of when you pulled the

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money out too right exactly so it’s a tough decision to make but the cash flow is King we’ve said it over and over again right it’s not a matter of how much money you have for retirement it’s about how much income you have sure what does income matter income matters because you got to pay your bills so there’s two things you can pull you can pull you can increase your income or reduce your expenses by paying off a mortgage or not having a mortgage you’re reducing your expenses but if

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that’s at the cost of reducing your income because you have to use money to that you’re generating income from to pay it off if you have money sitting under your pillow and you have a mortgage pay off the mortgage right if you’ve got a mattress full of money you know stacks of hundred dollar bills neatly wrapped and in your mattress take them out pay off your debts right instant gain of whatever the mortgage rate is yes right it’s money less money going out is just as good as money

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coming in so what you’re saying is whether or not you should be debt free depends on where you would get the money to pay off the debt that’s right and your cash flow situation if you got enough cash to pay off the debt what’s the issue now if that cash flow could stop because of a disability or you’re not gonna stop working this is what people say well I’m going to stop working so I’m not gonna have the income anymore to pay the mortgage so I want to get rid of the mortgage but you can

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generate income in other ways so that’s the first of five issues to think about the second issue and these are all tied together because you alluded to a couple of things sure um but the second one is liquidity and you’ve heard the term house poor right yeah you have all of your money your Equity your net worth is tied up in your house and this happens to a lot of retirees they do everything they can to pay off their mortgage so that when they retire they are debt free right which I cannot argue

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is not a bad it’s a good thing but if you take all of your savings I’ve seen people drain their 401ks to pay off their mortgage so they can be debt free because that’s their goal what I’m saying is maybe that’s not the greatest goal right because now what do you have you have a liquidity issue meaning you have the inability to get access to your cash if you because it’s tied up in a house right if you put all your money in the house and you’re against debt you say I don’t want a mortgage I want to

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pay it off and you take 200 000 out of your savings and you throw it at the house and now you’re debt free and now your mortgage went from 1500 a month to zero you’re like see this is how you do it this is how you retire successfully and then I say okay now uh your car breaks down and you need 15 grand to get a new car fix it um where are you gonna get the money from um well I don’t know it’s in the house so now you have to look at getting a mortgage a home equity line of credit

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you have to borrow right uh use a credit card to pay it off or get a car loan get a car loan so now you’ve effectively got another form of debt and that bothers you so if when you were looking again at all the different types of debt Mortgage Debt it’s probably the best type of debt if you’re going to have any because typically it’s a lower interest rate than most debt and um also your other money can be earning that money so uh what I see liquidity is this issue that you’re talking about now

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uh is really about [Music] um having money uh just stay debt free uh if the problem is staying debt free or pay off your house you know you can take your money that you have for retirement or saved up and pay off your house uh but if you use all your if all your money’s tied up in your house you’re not going to be able to stay debt free because life happens exactly life happens but that’s an obvious like oh well then I’ll just keep an emergency fund but what I see a lot of retirees

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doing is living to a point where they want to pay off their mortgage and have no debt and then they’re in retirement and they don’t have enough income to live because all of their assets all their wealth that they’ve built over the years they threw into their house and it’s not generating income for them it’s not something generating expenses which is great but it’s not giving them income so unless they do a reverse mortgage or cash out refi or home equity line of credit they don’t have access to income

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and they’ll so and you know especially in some areas in Florida and um you know up where I’m from Minnesota if you pay off your house your house doesn’t stop costing you money you still have monthly payments or you know yearly payments quarterly uh what have you on property tax and maintenance I mean property tax alone on some houses can be pretty big right and you need income to pay for those so your Social Security is going to be there we talked about maximizing Social Security put videos on

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that but it’s more about um you don’t want to have all of your money stuck in your house which a lot of people do because it’s a forced savings account for many people the mortgages yeah um but eventually you need that access that cash unless you just plan on giving it away but obviously too many retirees in a situation where all their money’s in the house and we call that house poor and right and the big deciding factors the third point I want to make is interest rates what is your

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mortgage rate people tend to know the answer to that but this is really the Crux of it is how much are you paying an interest I’m paying 2.9 so okay let’s use you as an example 2.9 is an amazing right historically it’s probably as low as it’s been um I know people that have um rates closer to two than three and so when you when you look at your situation Tony let’s fast forward to your retirement I know you’re not going to retire but now you’re going to retire

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and you’re saying we’re going to move to Key West when you when you’re at that point you’re like I got to sell my house in Minnesota but when you look at getting a new house in in Key West you’re like if I if I want to pay in Key West it’s more expensive I’m gonna have to get a new mortgage and the mortgage rate is going to be over five percent maybe it’s even six percent maybe it’s double your current mortgage this is what’s happening in 2023 is people are having difficulty moving not

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because not only can they not find a property it’s because they don’t want to get rid of their mortgage their hands to this really low rate right so why get rid of it is what I’m saying in retirement now if you’re moving it’s a different story you might not have choices but this is where the snowbirds are coming in it’s like well I don’t need that house I’m not going up there anymore why don’t I sell it well if you sell it and you don’t owe anything on it

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or if you have a really low mortgage rate why not rent it out and generate cash flow that’s higher than the mortgage rate well I don’t want to be a landlord so fine but what I’m saying is a lot of people are in your shoes Tony yeah they have a really low rate and they’re not going to see that again in their lifetime potentially on any new mortgage they get yeah so if you have interest rates make a big difference it makes a huge difference and if you have a adjustable rate a lot of people have like a 10-year adjustable

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rate so they got locked in for 10 years they’re like I’m not doing anything I’m going to rent it out for 10 years but then 10 years comes and they shoot up to six percent interest then it’s like wait I need to do something about this I need to I need to get rid of this and that makes a lot of sense so if your mortgage right now is above six you’re like well I’ll just get a new one if it’s at two and a half this is where the problem lies which yeah then it becomes an opportunity cost

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which is the fourth point I want to make what are the returns that you can get outside of your mortgage because if you pay off the mortgage what are you getting you would get a 2.9 return a fix you get a guaranteed basically three percent return on your money Tony because that’s three percent that’s going out that’s less going out for you if you paid off your mortgage you would be getting three percent return if you think about on that money you put a hundred thousand towards your mortgage

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it’s paid off 2.9 is what you saved a year if you take that same 100 000 and you throw it into a CD at a bank right now which you can get five percent on now it’s like well wait a sec why would I pay off the mortgage at 2.9 when I can put that same money get five and then keep the difference and pay the mortgage the 2.9 so you got a two percent Arbitrage there granted you have to pay tax on that gain from the CD so that lowers it but still you see how you’re coming out ahead and you have a liquidity you still have

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that CD you can access you don’t have to get a loan on the house to use that money so what you can do with your money outside of the mortgage and how that return rate compares to the mortgage is really important and we’re at the point now where guaranteed rates from fixed annuities and CDs and money markets are even higher than mortgage rates right now for some people and this is what’s causing my change of tune here’s the interesting part a lot of financial advisors in the past and still

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will say I can get you nine percent return 10 return so give me the money and keep your mortgage and I don’t care if your mortgage is six percent I can get a nine but that’s a can I may there’s no guarantees there yeah so it was always a wishing and I should never tell you I can get you this that’s not good because there’s no guarantees no guarantee that but if you say historically the stock market’s average nine percent over the past 100 years why you know you can make the case to it but I guarantee I

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guarantee you in 2022 no financial advisor made their clients ten percent or nine percent unless they were shorting the market and then it’s like active management it’s like most people lost even bonds had their worst year in 2022. so that idea of investing instead of paying off mortgage doesn’t make sense but now that the fixed guaranteed rates are a lot higher five six percent you’re saying hmm so this changes the math yeah and a lot of those advisors that are saying I could do better now they can actually back it

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up by saying yeah we can get a fixed rate that’s better so now people are starting to say yeah now I get it because yeah if it’s if it’s a wishy-washy all stock returns nine percent Maybe that’s one thing and I’m not saying it’s bad to do that instead of paying the mortgage but a lot of people say I’ll take the sure thing and pay off the mortgage right because when guaranteed rates in other words like a CD where it has a set rate of return or a mica or certain annuities or

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other vehicles have uh guaranteed rates your principles protected and the issuing bank or insurance company is backing up that rate uh and saying we’re going to give you this rate for this amount of time and it’s going to be right now way more than a lot of people’s mortgages if they’re around three percent or less right exactly but the issue is you can’t get a 30-year CD that’s going to match or repeat your mortgage no 30-year fixed or annuity um but you know if you have 10 years

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left on your mortgage you might be able to get a 10-year fixed rate or a five year and then reassess and five and then pay it off later um it’s not that simple it’s like oh if you get a little bit more from an investment then then you shouldn’t pay out the mortgage because there’s another factor in here there’s taxes there’s that you can factor in but there’s one other last point that I want to make and I’m quoting myself again we did this on the last show and you made fun of me

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for it but successful retirement’s about increasing income and decreasing stress and I think that’s something that paying off the mortgage addresses and that is debt causes stress so one of the things to improve your retirement or be successful is to have low stress in retirement and I know from experience one of the things that reduces stress is when you don’t owe other people money right and so you pay off the mortgage you feel the sense of relief and it’s like I don’t owe anyone

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anymore I’m debt free see you later I’m you know I can dance I can I can run through the streets right and that can’t be discounted that can’t be discounted true good point now go back can you go back to your quote go back to your quote let me read that a successful retirement is increasing income and decreasing stress I think that’s a great quote um here’s where you’re being a little disingenuous I think I’m pretty sure that St Thomas Aquinas said that um yeah no I think what you’re thinking of

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is the treasury’s treasury Department at St Thomas University in Minnesota Paul said that you’re just stealing that quote to conclude the math on having a mortgage in retirement does make sense and this idea that having a mortgage in retirement is bad and should be eliminated is wrong in my opinion you can’t make blanket statements like that if you do the math it can obviously make sense for a lot of people especially in today’s environment yeah so this idea of being debt free sounds great but may not

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make sense mathematically at the same time however math only goes so far emotional well-being can often override the math people make irrational decisions and I’m not saying that paying off a debt when it doesn’t make Financial sense is irrational what I’m saying is that that person probably um is emotionally motivated more so by how they feel about their stress level and debt levels than they are about the actual math and the financial gain which is not the end of the world so there’s no right answer I just think

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that people need to get off the no debt ever in retirement bandwagon and start thinking about maybe it does make Financial sense maybe it’s not the end of the world for me to keep my mortgage into retirement because it’s really not especially now in today’s environment [Music] yep that’s a good conclusion and I think that’s a great Point uh and this is something people need to think about that they’re just a blanket statement no you need to be debt free or yes you should pay off your mortgage

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or no you shouldn’t um it depends on people’s situations doesn’t it does and depends on who’s telling you so a mortgage broker will say yeah you need the mortgage a uh investment um a financial you know broker stock broker will say no don’t pay it off give me the money so I can invest it I can beat the mortgage rate and so you got to watch where you’re getting the money from yeah getting the advice from follow the money who’s getting paid to give you advice versus who’s getting paid to tell you

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something whether it’s a stock or a mortgage so when you’re thinking about these things you want to talk to a fiduciary preferably a certified financial planner that understands the concepts here the taxes and all the implications and it’s going to give you an advice give you advice on what to do with your mortgage and retirement based on what’s best for you and not what’s best for them so that’s my final little soapbox there Tony thanks for listening uh it was a good show I will catch you

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next week yeah all matters discussed in today’s show are for informational purposes only this show is not an investment advice Dan middle nor dolphin Financial group are affiliated or endorsed by any government agency investment advisory services are offered through Dolphin Wealth Management Inc they registered investment advisor in the State of Florida Insurance products and services are offered through Dolphin Insurance Inc Dolphin Wealth Management Inc and Dolphin insurance and our Affiliated

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companies doing businesses as Dolphin Financial Group you should talk to someone at Dolphin Financial Group before implementing any of these strategies or ideas