Should I Pay Off My Mortgage Before Retirement or Invest? – Technologist

Inflation hits people on a fixed income the hardest.

Say you’re retired. You’re living off a pension or Social Security (plus drawing down your retirement investments, which include plenty of bonds). It hurts when your dollar keeps losing purchasing power.

It can be scary to be in that situation with a large mortgage obligation. So traditional wisdom says you need to finish paying your mortgage before retiring.

We’re in a strange time as far as mortgage rates, though. The financial crisis in 2007-08 created an environment where the federal government artificially lowered mortgage rates for a decade-plus.

Now that interest rates have normalized, the housing market represents a stark contrast. Those locked into low-rate mortgages sometimes feel stuck in their current home. And those wanting to buy sometimes feel locked out due to relatively expensive home prices coupled with rates double (or more) what they were a few years ago.

But all the focus on the current housing market leaves out another consequence. Especially when it comes to the return you can earn from your investments vs. your mortgage rate.

Should I Pay Off My Low-Rate Mortgage Before I Retire?

I’m locked into a great mortgage rate and nearing retirement. Should I pay off my mortgage before I quit working? Or is it OK to invest instead?

That’s what a Clark Howard listener recently asked.

Asked Shawn in Connecticut: “I’m coming up on 60 years old and am hoping to retire at 64. My wife and I have been in our condo for nearly three years and owe less than $200,000 on our 30-year mortgage, which has a less than 3% interest rate.

“My question is, are we better off trying to pay off the mortgage before retirement or investing?”

Clark couldn’t believe the words that came out of his mouth next.

“The classic answer is you can retire when you have no mortgage,” Clark says. “What do you do in this case? You don’t pay off your mortgage. There, I said it. I can’t believe it.

“Anyway, you don’t. Because your interest rate is so low that you can even outearn it in a savings account.”

The best savings accounts pay 5% right now. That will change if and when the Fed cuts interest rates. But we don’t know when it will cut rates — or by how much. So far, rate-cut predictions haven’t come to fruition.

Paying Off Your Mortgage vs. Investing

Investing instead is a bit more nuanced. In your 60s, expecting to retire in four years, you probably shouldn’t be invested in anything close to 100% equities.

And your timeline matters. Clark advises that you should only invest when you won’t need the money for at least five years. But he’d prefer 10+ years for true investing. If Shawn will need to start withdrawing the money he’d invest now in four years when he retires, he’s at risk of a downward stock-market wobble just at the time he needs to sell.

But if he can rely on other investments and won’t have to touch that money for five, 10, 15 years? And if he can put the money into a conservative allocation that can still outearn his mortgage rate of less than 3% over the long haul? Absolutely, investing is OK in that case.

“Following the banking scandals, we went through 10 years of these crazy low mortgage rates that the Federal Reserve engineered. And normally the Federal Reserve has very little influence on mortgage rates,” Clark says. “But they did everything they could to get those rates down to reflate the housing market. Now those rates are gone.

“So if you just think of it that way, the priority of bills, the priority of debts, paying off a mortgage that cheap, you do not want to prepay it. And you want to pay as agreed – I can’t believe I’m saying it – even in retirement.”

Final Thoughts

For most of modern financial history, paying off your mortgage before retiring was the accepted strategy. But if like Shawn you have a mortgage rate that’s below 3%, it’s OK to take your cash on hand and earn a return on it.

Right now, you can safely get a return on your investment that tops 3% by a good margin.