Should I Take a Small Mortgage Into Retirement?

Our topic on this episode of the Ready for Retirement podcast is whether you should retire with a mortgage. Many people believe that carrying a “small” mortgage into retirement with them will be advantageous in terms of tax deductions, but the reality is that unless your mortgage is rather large or you contribute to charity significantly, you will likely be better off using the standard deduction. 

In association with episode 7 of the podcast, where we discussed how much money you should have in order to retire, it is very important to consider your monthly expenses, the largest of which is likely your mortgage payment. Keeping in mind that your financial goal is to outlive your money, evaluate your portfolio returns when determining if your income can support a mortgage. 

It is also worth mentioning that there is a psychological component to this discussion as well. There is an element of stability and peace that comes with knowing you own your home outright before you retire, but if this is not a big factor for your wellbeing, then you may be fine continuing to pay a mortgage into retirement.

The two key risks of carrying a mortgage into retirement are having higher expenses and the sequence of return risk. There isn’t a whole lot you can do about the volatility of the market at the time you retire or afterward, but it is important to get advice from a professional regarding how best to account for this fluctuation.

Key Points:

1. Tax deductions
   1. Itemized deductions
      1. State and local taxes ($10,000 cap)
      2. Charitable donations
      3. Mortgage Interest
   2. Standardized deduction
      1. If the above itemized deduction amounts are less than $24,800 (married) or $12,400 (single), you are better off taking the standardized deduction.
   3. Unless your mortgage interest and charitable donations together are more than $14,000, having a mortgage in retirement will not help you at all.
2. Income
   1. Will you outlive your money?
      1. Higher expenses increase the likelihood that you will run out of money
      2. Mortgage is likely one of your highest expenses
      3. Evaluate your portfolio capacity
         1. If you keep your portfolio withdrawals to less than 4%, you will be in a better position
3. Key risks of having a mortgage into retirement
   1. Higher expenses
   2. Sequence of return risk
      1. Susceptible to the volatility of the market
      2. What sequence you achieve certain rates of return

Timestamps:

0:49 – Is having a small mortgage advantageous in terms of tax deductions?

6:24 – Is having a small mortgage advantageous in terms of income?

10:03 – The psychological component of taking a mortgage into retirement

10:52 – The two key risks of taking a mortgage into retirement

14:53 – Summary of today’s topic