Retirement should be a time for freedom, traveling when and where you choose, relaxing in a way that fulfills you, and generally enjoying life on your terms. But if you’re still dealing with a mortgage payment, your freedom may feel constrained due to your financial future not being untangled.
More retirees are now getting into their golden years with mortgage debt on their books than ever before. A 2025 update from the Consumer Financial Protection Bureau (CFPB) reveals that mortgage debt among older Americans continues to rise, with nearly one-third of homeowners aged 65+ still carrying mortgage balances, a sharp increase from just 22% in 2001
Accordingly, a big question arises here: should you pay off debt before retirement, or should you invest the money?
In this blog, we are going to explore smart strategies for mortgage and retirement planning, including evaluating housing costs and savings, considering early payoff, and common pitfalls when mortgage planning. Whether you’re 5 years away from retirement or only just beginning your retirement planning process, you can use these strategies to guide you in the right direction and make solid decisions about your future.
To Pay Off or Not to Pay Off: That’s the Question
Let’s review the discussion about whether or not to pay off a mortgage before retirement from both sides:
Reasons to Pay Off Before Retirement
· Eliminates a large monthly bill for your “fixed income” years
· Creates improved cash flow and peace of mind
· Brings peace of mind (knowing you own the home)
· Can free up cash for other retirement priorities, such as healthcare or traveling
Reasons to Keep the Mortgage
· Mortgage interest might remain less than income from investments, particularly in tax-advantaged accounts
· You may lose liquidity by using cash to pay off the house
· Pre-paying might negatively impact your emergency cash reserve or tax deductions
In the end, the answer to whether to pay off the mortgage when you retire depends on:
· Mortgage interest
· Retirement savings balances
· Future expected market performance
· Your age and years until retirement
Mortgage vs Retirement Savings: Which Comes First?
If you’re employed, ready to get that done, and want to do both, here’s a general rule of thumb:
· When thinking about mortgage payments, pay off your higher-cost debt (credit cards).
· If your mortgage rate is low (below 4%), it may make sense to build your retirement savings instead.
· Get your employer match on your 401(k), it’s free money.
· Take any extra cash to your savings, and can also apply it to your mortgage payments.
In other words, it’s not always about picking one over the other. Instead, balance your financial goals based on your risk tolerance and income needs.
The Impact of Housing Costs in Retirement Planning
For many retirees, housing represents 30%–40% of monthly expenses. Keeping your mortgage in retirement can strain your budget, especially if healthcare or inflation hits hard.
Here’s how to factor housing into your retirement planning:
| Factor | How It Affects Retirement |
| Monthly mortgage payment | Reduces cash flow |
| Property taxes & insurance | Ongoing expenses continue |
| Home maintenance | Increases with home age |
| Home equity | Could be tapped via HELOC or reverse mortgage if needed |
If you’re unsure whether to keep your home, consider alternatives like:
- Downsizing to a smaller, more affordable home
- Moving to a lower-cost-of-living area
- Exploring senior co-housing or rent-based communities
Refinance Before You Retire?
For those who intend to take a mortgage into retirement, refinancing before you retire may help alleviate future obligations.
Benefits:
· Possibly lower monthly payments with a lower interest rate
· Switch from adjustable to a fixed-rate
· Consolidate other debts
Note: Lenders will typically require the ability to verify income, which may be more difficult to do when you retire.
Should You Use Retirement Funds to Pay Off Your Mortgage?
This is a tough one.
You may consider using your 401(k) or IRA to help pay off the mortgage, but each withdrawal of funds gets taxed (except in the case of a Roth) and may incur a penalty if made early.
And remember, once you take the funds out, they stop growing. So, unless your mortgage is seriously causing financial stress, or you have a large amount of extra savings, you’re generally better off leaving your retirement assets invested and taking a more gradual income stream.
Key Takeaways for Retirement Planning and Your Mortgage
· Examine your total housing costs, not just the mortgage.
· Don’t forfeit retirement savings for the sake of homeownership.
· Think about how long you plan to live in your current home.
· Try to pay off debts and have a cash flow before retirement.
For many people, mortgage and retirement planning blend beautifully together when you use good budgeting and flexible thinking, not concerned with being debt-free.
FAQ’s
It depends on your mortgage interest rate and investment goals. If your mortgage interest rate is low and you can earn more in the market, it might be better for you to invest.
You will eliminate a major monthly payment, lessen your financial strain, and have more flexibility in budgeting for expenses.
Yes. This could create taxable income or penalties unless you are over the age of 59½. Also, you lose any growth opportunity from the funds you withdraw.
Yes, especially if you can secure a better interest rate. It is easier to get approved for a refinance while you have employment income.
No problem! Just ensure that your retirement income can cover the payment comfortably, or consider downsizing.
It can be beneficial if you have a lot of home equity and need income; however, there are fees, and you’ll incur interest on the amount.
Housing is often one of the largest costs in retirement. Reducing those costs gives you more financial flexibility.
