Q&A: Should a soon-to-be retiree use savings to pay off the mortgage?

Dear Liz: I am 64, single and planning to retire in two years. I have saved enough to pay off my $100,000 mortgage. It will take the bulk of my savings but I have no other debts. I will have a pension and Social Security. I also have a credit score over 800. Should I do this?

Answer: Being debt free in retirement is wonderful, but being stuck short of cash is not. It’s a particularly bad idea to use pretax money from retirement accounts to pay off a mortgage. Not only can the withdrawal trigger a big tax bill, but it may push you into a higher tax bracket for that year and cause other unexpected tax consequences.

Even if your pension and Social Security cover your expenses now, that probably won’t be the case for the rest of your life. For example, Medicare covers about half of the typical retiree’s medical costs, and doesn’t pay at all for most long-term care expenses if you should need those.

You could pay off the mortgage and then arrange a home equity line of credit you could tap for such expenses or for emergencies. Just be aware that lenders can freeze or close lines of credit at their discretion, so it won’t be the same as having cash on hand.

Decisions made about retirement are complex and often irreversible. Consider consulting with a fee-only financial planner about your retirement plans so you better understand your options and the consequences of the choices you’re making.

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Comments

  1. Jug Bedi says:

    Liz:
    My wife (64yrs) and I (72 Yrs) both are retired and we both get pension and social security. We also own three houses (in NY, MD & VA) NY house is our primary home from last 5 yrs and before that we lived in MD house for approx. 25 yrs. All houses are in both of our names (exception being NY, where we added our daughter (only child)). My question, should we add our daughter’s name in other two properties? Our daughter will inherit all our properties and all other assets. We would like to have your opinion on this. By the we also have two grand children (grandson & a granddaughter).

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