Dear Penny: Should Retirees Pay off Their Mortgage in a Volatile Market?

An elderly couple sit on their couch inside their home.
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Dear Penny,

My husband and I are in our mid-70s and retired. We had about $500,000 in retirement savings before the pandemic. With all the volatility, we're not sure what it is precisely today, but as of a couple of weeks ago, we hadn't lost much value. 

Our expenses before the pandemic were just covered by Social Security, pensions and our RMDs. Sheltering in place, we're saving money.

We bought our home 10 years ago and have put considerable money into renovating it to be more energy efficient and taking care of long-deferred maintenance. 

We do not plan to leave this home, except possibly for a nursing home one day (shiver at that thought!). We are in reasonably good health and quite active in community and religious groups. 

Unfortunately, we have a mortgage on our home with $175,000 still outstanding. The mortgage is an ARM, with interest at 4.125% and a monthly mortgage payment of $1,457. This was a refinance in October 2019.

Would it be wise for us to pay off our mortgage now? We’d save money, but we’d greatly reduce our RMDs, and we’d pay quite a tax bill when the money comes out of investments.


Dear S.,

I love the idea of you enjoying a long and active retirement without the burden of a mortgage. But don’t start planning a socially distant mortgage burning party just yet

There are a few things that make me jittery here.

For starters, you’d be withdrawing more than 35% of your retirement balance in a single year. Usually, it’s recommended that you limit withdrawals to no more than 4% or 5% annually. The idea is that you withdraw about the same amount that your investments are earning so you don’t run out of money during your sunset years.

And those taxes you mention could mean you have to withdraw even more. Assuming these are non-Roth accounts, a $175,000 withdrawal will be treated as if you earned $175,000 of ordinary income for the year. (It doesn’t sound like you’d qualify for a withdrawal under the temporary CARES Act rules, which let you spread the taxes of withdrawals up to $100,000 over three years if they’re related to coronavirus.)

Still, I understand why paying off your mortgage is appealing. It buys you certainty at a volatile time. Often, the question of paying off debt comes down to whether you’ll save more in interest than you could earn by keeping the money invested. But who knows what we can expect from the market while the threat of coronavirus looms over us?

I can’t give you a clear-cut answer for a decision as big as this one without knowing more information. I think it’s worth the cost to work with a financial planner so that you’re aware of all the consequences of whatever decision you make.

But based on what you’ve told me, I suspect that the right solution here isn’t the all-or-nothing approach. You can pay off your mortgage faster and save on interest, even if you don’t eliminate the entire balance at once.

Interest rates have dropped to record lows. So even though you refinanced recently, talk to a loan officer about whether refinancing again could lower your payment. You could also put the money you’re saving while staying at home to knock out extra principal. If you can carry over any of your new frugal habits into your post-pandemic lives, continue paying more toward your mortgage.

But another possibility may be to take larger distributions from your retirement accounts over the next few years — just not to the tune of $175,000 all at once. For example, you could aim to pay off your mortgage in the next three or four years and take money out of your retirement accordingly.

This decision could permanently reduce your income, in addition to leaving you with a humongous tax bill. The moderate approach won’t be as satisfying as wiping your debt slate clean in one fell swoop, but given the lasting consequences, I’d advise you to proceed with caution.

Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. Send your tricky money questions to [email protected].