Early retirement and homeownership are two of the most popular American dreams, but they need not be mutually exclusive. If you’re in a position to pay off your mortgage as part of an early retirement plan, it may be a wise decision to clear that debt. Paying down your mortgage isn’t always the best use of your money, even if you’re attempting to retire early.
Interest Charges vs. Interest Deduction
A huge advantage of paying off your mortgage ahead of schedule is the potentially significant savings in the amount of interest you pay on the loan. The down side? Your home mortgage interest payments can be a potentially valuable tax deduction, especially if you’re in one of the upper tax brackets. The interest deduction essentially lowers the effective interest rate you pay on the mortgage. However, if your mortgage is small, you may not pay enough in interest to make it worth itemizing deductions.
Although it’s hard to put a value on the peace of mind owning your home outright in retirement will grant you, it’s easy to calculate the value of paying off debts with higher interest rates. If you bought your home when rates were low, it’s likely other financial obligations are costing you more to maintain than your mortgage. High-interest credit card debt or other loans, such as auto loans or home improvement loans, with higher interest rates eat away your nest egg more quickly than a mortgage payment, and usually should be retired before you begin chipping away at more affordable debt like a mortgage.
While the elimination of your house payment can provide you with a sense of security, so can sitting on a significant amount of savings. Even if rates are low on your liquid assets, they provide a cushion and offer flexibility during retirement. Maintaining enough cash to meet emergency needs is an important part of retirement planning, and after you retire, you may find it difficult or impossible to borrow money because you won't be able to show a source of income.
If you retire early, you won’t immediately have traditional sources of retirement income available to you. You won’t qualify for early retirement from Social Security until you turn 62, and then you’ll only receive around 70 percent of your full benefit. Similarly, you won’t be able to tap IRAs and 401(k)s until you turn 59 1/2 years old without incurring the 10-percent early distribution penalty. Because of this, eliminating a house payment from your monthly budget may be necessary to make ends meet.
Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.