Mortgage Debt and Retirement

With an estimated 80% of those aged 55-64 carrying some time of debt, the question of whether to pay off a mortgage or take it into retirement looms large these days. I will attempt to shed some light on it below.

Prior to the credit crisis and the bursting of the stock market bubble, financial planners recommended mortgage borrowers to plow all extra cash into stocks and other assets, rather than paying down mortgage debt. The argument was grounded in “simple” arithmetic; assuming a mortgage rate of 5.5% and the 15%+ annualized returns that the stock market was averaging, mortgage borrowers could earn a healthy spread.

This logic was turned on its head as a result of the market crash, as the S&P initially lost 50% of its value. In hindsight, borrowers reckoned that they would have been smart to sell off some of their more liquid investments and use the proceeds to pay down their mortgage debt. Now that the market has rebounded – though not (yet) to the highs of 2008 – some are wondering whether the initial advice was right after all. Maybe the key is merely patience.

Personally, I side with the camp that encourages a debt-free retirement. Using your mortgage loan to fund stock and bond market speculation is hardly sensible, regardless of the potential upside. Some analysts counter that a diversified portfolio will outperform residential real estate over the long-term, so you are better off maximizing the leverage on your home and plowing the proceeds into other investments. Research has showed, however, that this is simply not the case, especially after taking taxes into account.

To be fair, such a strategy could be defensible for younger generations, who are understandably more keen to take bigger risks in search of bigger returns. For those in or near retirement, however, now is not the time to roll the dice. If your retirement savings are sufficient or are on pace to become sufficient, then why would you jeopardize that by keeping money in risky assets? If, on the other hand, your savings are inadequate, you would be advised to use what you have to pay down your mortgage, so that your debt burden is lower.

If your mortgage is so large that repaying it is simply unrealistic or impossible, perhaps you may want to consider downsizing into a less expensive house, with the goal of lowering your mortgage debt. “Converting” your mortgage debt into a reverse mortgage is also a possibility, though one that you should only consider as a last resort, due to its high up-front costs and the steady erosion of your home equity that it will wreck.

I realize that my analysis risks being labeled by critics as simplistic. Many have argued, and will continue to argue that the decision to repay your mortgage debt is a complex one, and must be weighed against many factors, such as the interest rate that you are currently paying, the return that you expect to achieve on your retirement account, and the proportion of your net worth that your mortgage represents. As implicit in my advice, however, I don’t think any of this analysis is necessary. No one knows how the stock market will perform over the next next 30 years, nor does anyone know how much (if at all) your home would appreciate. The question is: are you willing to bet your retirement on it?