A lot of people think that they have to pay off their mortgage before they can retire. This can lead to some other questions:

  • Is paying off a mortgage early always a good idea?
  • Is it smart to pull money out of my 401k to pay off my mortgage?
  • What am I giving up by paying off my mortgage early?

Let us take a look at some of these questions, but before we do, if you are getting close to retirement you may also want to check out my FREE 10 Minute Retirement Video.  CLICK HERE

Is Paying Off A Mortgage Early Always A Good Idea?

Surprisingly the answer is NO. Paying off a mortgage early is NOT always a good idea.

But isn’t all of that interest just profit for my Bank that is coming out of my pocket?

True no one likes to pay any more interest than they have to but interest payments are relative.

Ask yourself, can I earn more interest or growth on my money than my mortgage is going to cost me? What if?

  • My Interest on my mortgage is only 4%.
  • I can easily earn 6% average growth on my money in my current investment.

Would it be smart to spend down 6% growth money in order to save 4% on interest? I wouldn’t think so.

Is it smart to pull money out of my 401k to pay off my mortgage?

If you are like me you might wonder if anyone would really do this, yet I get asked this question all the time.

Just today someone that is considering working with me told me about how her friend at work applied this exact strategy and she was thinking of doing this herself. I’m glad she came to see me first.

* Martha is currently in the 22% tax bracket and it would take 75,000 to pay off her mortgage. Here are a few problems with this idea.

  • If Martha pulls $75,000 out of her 401k she will owe an additional $16,500 in taxes this year.
  • In reality, Martha would have to pull out $112,000 just to have enough left over to pay off her $75,000 mortgage after taxes.
  • Pulling out this much money will put Martha into a 24% tax bracket forcing her to pay taxes at a higher rate that could have easily been avoided.
  • While Martha is saving 4% on mortgage interest she is giving up 6% growth on that money.

I think you might agree that this idea might not be working out in Martha’s best interest but unfortunately, it gets worse.

What am I giving up by paying my mortgage off early?

While many people who consider this idea are very focused on all the money they will save each month many give little thought to the money they are giving up.

Let us say by paying off your mortgage 10 years early you will save $800 per month. That’s a savings of $96,000 in your first 10 years of retirement. But what if you are retired for 20 years? What did you give up?

Let’s say you could only earn 5% on the $112,000 you needed to take out of your 401k before taxes in order to pay off the mortgage. How much interest did you lose?

The compound interest at 5% on $112,000 over 20 years (that you just gave up) would have earned you an additional $185,169 in compound interest growth.

Would you think it was wise to give up $185,169 in interest in order to save $96,000 in cash flow?

Couldn’t Martha have paid the mortgage out of that interest and then still had more interest left over to live on?

Even though many people use this strategy every day it can be a big mistake. If you would like to learn how to avoid another very common mistake many people make in retirement please watch my FREE Retirement Video HERE.

And interest is not the only thing you are giving up…

Why You Should Never Make Extra Payments To Your Mortgage

If you have not watched our FREE video about How To Avoid Going Broke In Retirement While Securing Your Nest Egg please take a few minutes to watch it now…. CLICK HERE

*Hypothetical Example

 

 

Disclosure: Investment Advisory Services offered through Retirement Wealth Advisors, LLC. (RWA) a Registered Investment Advisor.  Rockford Retirement Planning, Inc. (RRP,Inc.) and RWA are not affiliated. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.

This information is designed to provide general information on the subjects covered, it is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that RRP,Inc. and its affiliates do not give legal or tax advice. You are encouraged to consult your tax advisor or attorney.

Annuity guarantees rely on the financial strength and claims-paying ability of the issuing insurer. Any references to protection benefits or lifetime income generally refer to fixed insurance products. They do not refer, in any way to securities or investment advisory products or services. Fixed Insurance and Annuity product guarantees are subject to the claims‐paying ability of the issuing company and are not offered by Retirement Wealth Advisors, LLC.

Social Security/Government Program Disclosure: Antonio Filippone of Rockford Retirement Planning, Inc and Retirement Wealth Advisors, LLC are not affiliated with or endorsed by the Social Security Administration or any other government agency

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