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A Mortgage Free Retirement May Not Be The Best Financial Decision

A decision many homeowners face is whether to pay-off their home mortgage early by making additional principal payments, or, instead, to invest this surplus cash to maximize savings for their future retirement. It is common for homeowners to plan their retirement date around the time they expect their mortgage to be fully paid off, with a goal of living their “golden years” debt free. However, this outcome is less common than most people realize. A recent survey by a national mortgage banker, found that roughly 44% of Americans between the ages of 60 and 70 continue to hold a mortgage, and 32% of those surveyed expect they will continue paying a mortgage for at least 8 years into their retirement. Nearly 17% say they may never pay off their mortgage [1].

While paying off a mortgage early can have a positive psychological effect, and reduce your required cash flow needs in retirement, it isn’t always the smartest financial decision. There are tradeoffs investors should consider, since choosing to pay down a mortgage faster can dramatically impact the size of their investment portfolio at retirement. While there are many variables to consider, including your specific mortgage rate, income tax bracket and expected rate of return for investments, in most scenarios, choosing to save and invest more now, as opposed to paying a mortgage off early, is the smarter financial choice.


“44% of Americans between the ages of 60 and 70 continue to hold a mortgage.”


For example, if the capital markets produce positive performance over time, and your average annual return from a well diversified portfolio exceeds that of your mortgage interest rate, it typically makes more sense for you to divert additional savings into your investments, not into accelerated payments on your mortgage. Choosing to pay-down the mortgage incurs a so-called “opportunity cost,” whereby the investor is missing out on the future growth of those additional savings and the nearly magical impact of compound interest. When you combine today’s relatively low interest rates with the tax deductibility of interest payments, one has a very good chance to earn more on a dollar invested for retirement, as compared to a dollar diverted to additional mortgage payments. Of course, results will vary, and future performance can never be guaranteed.


“While paying off a mortgage early can have a positive psychological effect ... it isn’t always the smartest financial decision.”​


Not all debts are created equally, and there are some that should be eradicated as soon as possible, like high interest credit cards. But in the case of low interest, tax-deductible loans, like mortgages, one is more likely to come out ahead by paying the required payment each month, and then allocating any surplus savings to retirement investments for long term growth. Every person’s situation is different, of course, so you should always consult a professional advisor to review your specific circumstances before implementing any financial strategy.



[1] American Finance & AARP. “Many Retired People Don't Expect to Pay Off Mortgages,” 2018.

[2] Economic Research Federal Reserves Bank.

See Disclosures.

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