Paying Off Mortgage Quickly Is Not Always the Optimal Retirement Strategy

Q: I will soon make our final mortgage payment. My wife will retire in two years and I will work to age 67. We are both 60 today. Because I don’t get a pension I really have been looking forward to this final payment. We bought the house 25 years ago, but I shortened the term of the loan by refinancing to a 15-year loan in 2003. Are we doing well to have the mortgage paid off by age 60?

A: Paying off a mortgage before retirement is sort of the baseball-and-apple-pie of retirement. It’s a feel-good way to create a sense of security in your later years. Of course, without knowing the details it’s tough to determine if you’re doing well in the larger sense. Assuming your previous mortgage was a 30-year loan, you knocked off five years of interest payments and presumably the 15-year loan was at a much lower interest rate because rates in general declined substantially in that decade. Plus, rates for 15-year loans are lower than those for longer terms. But did you take a bunch of cash out in the refinance or pay a lot in closing costs? Was the cost of the house itself more than you should have spent given your income?

More broadly, how does the rest of your retirement picture look? Plowing that mortgage payment into extra retirement savings now will certainly help over the next several years. But did the higher house payment for the 15-year loan result in you not saving much in retirement accounts? That money could have been compounding all these years. Second-guessing your decisions probably isn’t in your best interest, so perhaps the best strategy is to enjoy the freedom of being done with those payments, but make the most of that new cash flow now.