Should You Pay Off Your Mortgage Before Retirement or Keep More Cash on Hand?

As you approach retirement, one major question often surfaces: is it better to enter this next chapter mortgage-free, or hold onto your cash and keep investing? The right move depends on your goals, comfort level, and overall financial picture.

Key Considerations

• Paying off your mortgage early can bring peace of mind and lower monthly expenses.
• Keeping your mortgage could free up funds for investing, liquidity, and flexibility.
• The best choice depends on your interest rate, tax situation, and how you want to live in retirement.

The Case for Paying Off the Mortgage

For many retirees, eliminating monthly mortgage payments creates a powerful sense of relief. Without that fixed expense, your retirement income can stretch further toward travel, hobbies, or simply enjoying life without financial stress.

This option can be particularly appealing if your mortgage carries a higher interest rate than you could reasonably earn on conservative investments. In that case, paying off the loan effectively gives you a “guaranteed return” equal to that interest rate.

There’s also the emotional benefit to consider. For those who prefer stability and dislike debt, owning your home outright can offer an unmatched sense of security during retirement.

However, once that money is used to pay off your mortgage, it becomes tied up in your home. You gain peace of mind, but you lose liquidity — which may be important for emergencies or unexpected expenses.

The Case for Holding on to the Cash

If your mortgage rate is relatively low, it may make sense to keep investing instead of paying it off. For example, if your loan rate is 3%, but your long-term investments have historically earned closer to 5% or more, you could potentially come out ahead by staying invested.  If your assets are mostly in 401(k)/IRA plans you also have to consider the tax consequences.  When it comes to funding a mortgage payoff from a traditional IRA, the withdrawal itself is treated as taxable income. This can push you into a higher tax bracket for the year, increase the taxes owed on your Social Security benefits, and potentially raise your Medicare premiums. In other words, a $200,000 IRA withdrawal doesn’t give you $200,000 to apply to the loan — after federal and possibly state taxes, the net amount could be significantly lower.

By contrast, keeping the mortgage and withdrawing smaller amounts over time, or using taxable investment accounts instead, can help you better manage your tax exposure. For some retirees, this flexibility means preserving more wealth overall, even if it means carrying some debt into retirement.

Also, if you take most of your assets and use them to pay off your house, you can be limited if other emergencies pop up such as medical expenses, home repairs, or other unexpected needs.  Maintaining accessible savings or investments means you have funds available for unexpected needs without taking out a home equity loan.

In short, keeping some debt may not be a bad thing, especially if it allows your portfolio to keep working for you.

How to Decide What’s Right for You

The choice ultimately comes down to your unique situation. Ask yourself:

1. What’s my mortgage rate compared to expected returns?
   If your loan costs more than what you’re likely to earn investing, paying it off might make sense.
2. Will I have significant taxes from paying off the mortgage?
   If you withdraw from an IRA to pay off the mortgage it could cause your Social Security to be taxable and increase your Medicare premiums.
3. Do I have enough cash reserves?
   Keeping accessible savings for emergencies is critical. You don’t want to be “house rich and cash poor.”
4. How much value do I place on peace of mind?
   Some retirees find true comfort in being debt-free, while others prefer flexibility and growth potential.

There’s no one-size-fits-all answer. The right path depends on balancing your emotional comfort with your financial realities.