Retirement & Financial Planning Report

Many retirees just like the security of owning their home outright. Image: Okaycm'Stocker/Shutterstock.com

If you are still paying a mortgage as you head into retirement, should you pay down your mortgage, reducing your debt burden? Or should you hold onto your mortgage, retaining your tax deductions and freeing up cash for other purposes?

In part, that’s a function of your mortgage rate and your expected return on investment, over a long retirement. For example, if you have a 5 percent mortgage, you expect to keep itemizing deductions, and your tax rate is around 30 percent, keeping your mortgage costs you only 3.5 percent a year (70 percent of 5 percent). If you expect to invest the money you would have used for prepayments, and earn more than 3.5 percent, after-tax, prepaying is not the best choice.

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What’s more, you shouldn’t pay down your mortgage if that means using money from a tax-deferred account such as an IRA. You’ll accelerate tax payments that could have been deferred.

On the other hand, if you no longer will itemize to benefit from the mortgage-interest deduction — especially since the standard deduction was been increased substantially under the 2017 tax law — prepaying might be a good choice. Moreover, many retirees just like the security of owning their home outright.

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FERS Retirement Guide 2022