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By David Ning
Being debt free by retirement used to be the dream of almost everybody, but data suggests that most seniors are increasingly becoming accustomed to retiring with a mortgage. According to the Federal Reserve Board and its Survey of Consumer Finances, almost a quarter of families (24.2 percent) with a head of household age 75 and up still had a mortgage in 2010, compared with just 5.8 percent in 1989.
Sure, interest rates are at historic lows and the math on the surface would suggest better returns by taking a huge mortgage and investing the rest in riskier assets. But that's just in theory. There are plenty of reasons to pay off your mortgage by the time you retire. Here are a few to consider:
Focusing on paying off the mortgage greatly encourages us to spend less. Most of us are saving too little for retirement, but the reality is that we aren't able to save because of choice. We mistake needs for wants, and we end up squandering the incredible income we earn in our lifetime. Those who make a point to pay off their mortgages early will usually find a way to make extra payments, which will also increase their potential for a comfortable retirement because they simply spent less during their working years.
If you opt for the shorter fixed-rate mortgage, you'll end up buying less home. Your residence can be a wonderful investment, but the home you live in is an ongoing expense. When you choose a shorter term mortgage, you will not only save on interest during the life of the loan, but you will spend less on many other items as well because the higher monthly mortgage payment will force you to buy a smaller place. With less property taxes, smaller maintenance bills and a smaller square footage to cool and heat, there will be more room in your budget to allocate to retirement savings.
Not having a fixed expense can help you increase your retirement withdrawal rate. One of the most effective ways to increase the safe withdrawal rate from your nest egg is to be flexible with the withdrawals. By cutting back whenever the market is down, you'll be able to increase the chances that your stash will last throughout retirement. Once the big monthly mortgage bill is out of the way, you will have more flexibility to control your spending and your investment account withdrawals in retirement.
There's one less thing to worry about. The math definitely points to potentially better returns if you invest the money you get from a mortgage in risky assets, but there are no guarantees that everybody will automatically make more money this way. It's well known that most people's actual returns are well below what the market provides. Will you be able to actually capture a solid enough return after taxes and expenses? And as you start to lose your cognitive ability due to age, how will you fare? Are you still confident everything will work out just because it does in theory?
You will sleep better at night without a mortgage. Most advocates of keeping a mortgage are heavily discounting the benefits of being debt free. Ask anyone who doesn't have to make monthly mortgage payments and they will tell you how great freedom truly feels. People who don't have a mortgage also have fewer employment worries because of their reduced cash flow needs. With more confidence to speak their minds and pursue what they believe is right, some people are even better able to grasp career opportunities.
A few people will be better off financially if they keep a mortgage and delay paying it off for as long as possible, but it's not a given that everybody can capitalize on the theoretical benefits. Being debt free is a wonderful feeling, and if a comfortable retirement is your goal, think about this carefully before deciding to leverage up.