Can you afford to retire with a mortgage?

Remember, retirement as a concept hasn’t been around all that long[i][ii]. When it comes to rules of thumb you might have heard for retirement, a lot has changed over the past few decades that should be considered.

Conventional wisdom used to be to go into retirement without debt[iii], which seems to make sense, but does it make cents?

Here’s the thing, it really depends on a few different factors that can vary wildly from person to person, some of them are financial and some of them are psychological/emotional. Even if we assume you have the money to pay off your mortgage just sitting in the bank, earning little interest, there are three important questions you need to answer.

1.??????How much peace of mind will this give you?

This is often the most important question and the hardest to answer, especially for someone else to answer for you. It’s deeply personal. However, if you know you’ll be anxious having a mortgage and feel constant stress from it; you have your answer, pay it off. It doesn’t matter what the math says unless you have peace of mind. A plan you can’t stick to wont help.

If you’re open to the idea of having the mortgage the next most important question is.

2.??????What is the interest rate and is it fixed[iv]?

The 401(k) only started in 1978 but boy oh boy have there been dramatic changes to mortgage interest rates since then[v]! To put it simply, all other things being equal[vi]; the higher your interest rate the more sense it makes to pay it off, the lower your interest rate the less sense it makes to pay it off. Depending on your age, the idea that it’s bad to have a mortgage in retirement might be deeply ingrained. When interest rates on mortgages were in the double digits it was nearly impossible to rationalize keeping a mortgage you could otherwise payoff. If your mental framework around money was shaped during that period that can be really hard to overcome.

3.??????What else could you do with that money?

Every time you spend or invest a dollar, you’re choosing one thing to do with that money and choosing not to do anything else with it, that’s opportunity cost[vii]. When we start to talk about what else you could do with that money, it’s very important to understand your risk tolerance.[viii] If you’re willing to invest that money for the medium to long term and your interest rate is low there might be some great opportunities. If you would just put the money in the bank instead, paying off the debt is probably the better option. If you’re tapping into retirement accounts or eliminating your emergency fund to pay off the mortgage, then you could be taking larger risks and paying more in tax than you would have to.

So, the real question, for any financial decision is what else could I do with this money? Is there an option that will help me towards goals, or make me feel better or give me less stress or more stress? We tend to think that we’re rational, but we aren’t always, especially when it comes to money.

There are always tradeoffs when it comes to money, if you can figure out what the most reasonable choice is for you, you’re more likely to be able to stick to it. Don’t fall into the trap of trying to be rational and failing, figure out how to succeed at being reasonable.

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[i] https://www.nber.org/system/files/chapters/c6108/c6108.pdf

[ii] https://www.cnbc.com/2017/01/04/a-brief-history-of-the-401k-which-changed-how-americans-retire.html

[iii] https://www.aarp.org/money/credit-loans-debt/info-2018/retired-paying-off-mortgage-fd.html

[iv] https://www.mortgagecalculator.org/helpful-advice/types-of-mortgages.php

[v] https://fred.stlouisfed.org/series/MORTGAGE30US

[vi] https://www.investopedia.com/terms/c/ceterisparibus.asp

[vii] https://www.stlouisfed.org/open-vault/2020/january/real-life-examples-opportunity-cost

[viii] https://www.investor.gov/introduction-investing/getting-started/assessing-your-risk-tolerance