Should You Retire with a Mortgage?

Ideally, you want to retire with at least one home you own outright, absolutely no debt, a pension that delivers a generous annuity, and a diverse portfolio of investments that provides you with both capital growth and a worthwhile income. Congratulations, if that's a reasonable expectation for you. You're very smart, very self-disciplined or very lucky -- probably all three.

Golden Years Only for Some

Unfortunately, the reality for many current retirees is very different. When the Retirement Research Consortium held its annual conference in Washington D.C. in August, one academic paper revealed a very different life for many aged 65-74:

  1. Nearly half still had mortgages, reverse mortgages or other loans secured by their homes.
  2. More than one in three had credit card debt.
  3. About a quarter had installment loans.

In all, two-thirds of those in this age group had some form of debt. And there's no sign of things getting better for those whose retirement dates are still far off. Indeed, the future looks even bleaker for many of them.

Earlier this year, the University of Michigan's Institute for Social Research reported a double whammy that may tarnish many younger Americans' golden years. First, the proportion of those now working who have any sort of pension at all has steadily fallen since 2001. And, secondly, those who do have pension provision are increasingly likely to prematurely raid their funds to cover present-day emergencies. Others even use the cash for unnecessary expenditures. The Institute highlighted homeowners spending their retirement funds on things like kitchen re-modellings, complete with expensive granite worktops.

Should You Retire with Debt?

So a question that already troubles many approaching retirement may affect even more in the future: Should I pay off my debts before I retire? Of course, some have no choice in the matter, but what's the best strategy for those who do?

As a rule, the answer is easy when it comes to high-interest borrowing like credit card debt and many installment loans. The chances of leveraging your cash assets sufficiently to earn more than you're paying out on these are slim -- especially because as you approach retirement, you should not take risks with your capital. Average rates on credit cards were 17.10 percent in mid September, according to, and if someone's promising you a better return than that, you'd better make sure she didn't learn all she knows from the Bernie Madoff School of Investment.

Home Loans Are Different

But what about low-interest borrowing, such as a mortgage? Investment website Seeking Alpha posed precisely this question. Casey Smith used the example of someone approaching retirement with a $150,000 home loan at 3.25 percent, and making monthly payments of $1,100.

Using the sorts of calculations that leave most laypeople feeling dizzy 15 minutes into any meeting with a financial adviser, Smith reached some counter-intuitive conclusions. He reckoned that a person in that situation would need the $150K he retained by not paying off the loan to earn him a return of 8.8 percent p.a. over 15 years. That would leave the person in the same financial situation as if he had paid off his mortgage.

Now, 8.8 percent isn't an unachievable return, but you have two ask yourself two questions:

  1. Can anyone really guarantee such a rate in the long term?
  2. Do I, at this stage in my life, want to invest such a large proportion of my wealth in the sort of investments that could offer that return, given that they're almost by definition going to be high-risk ones?

On the Other Hand...

Of course, plenty of financial advisers agree with Casey Smith. For example, Edu4Retirement president Michael Callahan recently told The St. Louis Post-Dispatch: "With current low interest rates that are fixed for a number of years, a retiree can possibly have a better return on the money in a long-term objective portfolio than the 3 or 4 percent interest payment."

In that same article, a number of experts were consulted about the pay-or-don't-pay dilemma. The consensus was that the answer was far from straightforward, and might include a partial rather than full paying down. Certainly, any conclusion should only be reached after a full exploration of an individual's financial circumstances, requirements and goals.

You're the One Who Has to Sleep at Night

However, perhaps another factor needs to be taken into account: the emotional needs of the retiree. Sure, a trustworthy expert with a computer and all the facts can tell you what makes the best financial sense. And some advice (like getting rid of expensive debt, such as credit card balances) is almost always worth taking. But facing up to a new reality -- one where that pay check no longer arrives with reassuring regularity -- can be unsettling.

If you think you'd be uncomfortable living in such a world without a substantial cash reserve, then you're entitled to ignore the math, and act in the way that best helps you sleep at night. After a lifetime of work, that's the least you deserve.

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