Retirement is something most people dream of — and part of that dream is debt-free living. But what if you’re headed into retirement with a mortgage? If you are, you’re certainly not alone.
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GOBankingRates spoke with financial experts to get the low-down on whether or not you can — or should — retire with a mortgage. Here’s what they said below. Also, check out some of the perks of paying off your mortgage early.
The Short Answer: It Depends
Dr. Barbara O’Neill, CFP, owner of Money Talk, author of “Flipping A Switch: Your Guide to Happiness and Financial Security in Later Life,” and expert at RetireGuide, explained that the answer to this question is not straightforward.
“The short answer is ‘it depends,'” she said. “The answer to this question depends on a whole host of personal or household variables including the number and amount of retirement income streams — e.g., Social Security, pension, employment — amount of accumulated savings, geographic location of the house, the total of household expenses, and more.”
In other words, it will be easier to retire in some locations (and with more money in the bank) than it will be to retire in other locations (with less money in the bank).
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It’s All About Cash Flow
O’Neill and another expert said the key factor in determining whether you can retire with a mortgage is cash flow.
Anthony Saccaro, president at Providence Financial & Insurance Services, put it succinctly: “Retirement isn’t about whether you have a mortgage or not — it’s all about cash flow. A successful retirement means having enough income to last until the end of your life, including adjusting for inflation and covering all your fixed and discretionary expenses.”
O’Neill echoed this sentiment, stating, “In other words, cash flow: how much income is coming in and how it is being spent.”
The Ideal Scenario
Ideally, according to O’Neill, “retirees should enter retirement mortgage-free. This provides ‘breathing room’ to pay remaining expenses, particularly if income is reduced from pre-retirement years.”
However, she acknowledged that this isn’t always the reality.
“Many older adults have mortgages in retirement, as well as car loans, student loans and revolving credit card balances,” she shared.
Crunching the Numbers
To determine if you can retire with a mortgage, both experts recommended doing some financial calculations. O’Neill suggested creating a projected budget:
“People contemplating retirement need to know if they have ‘enough.’ One way to do this, especially within five years or so from an anticipated retirement date when it is easier to do a reliable estimate of cash flow (vs. 25 to 30 years out), is to do a pro forma (projected) budget with a ‘best estimate’ of post-retirement income and expenses.”
She recommended considering two scenarios: one with a mortgage payment and one without.
“If expenses exceed projected income with a mortgage payment, consider ways to close the gap including working longer than planned, prepaying mortgage principal before retirement, working part-time after retiring, and/or trading down to a smaller house,” O’Neill said.
Joe F. Schmitz Jr., founder and CEO of Peak Retirement Planning, said that if you can make more investing than paying off your mortgage, you should consider that. For his clients, he looked at what the current interest rate is.
“For example, if their current rate is 3% on their mortgage, but they can get 5% in a bank account, then we would rather get the higher return on our money,” he shared.
The Benefits of a Mortgage-Free Retirement
While both experts agreed that retiring with a mortgage is possible, they also said there are advantages to entering retirement without one.
Saccaro said, “It’s always a great goal to enter retirement without a mortgage. Doing so reduces your income requirements and could even lower your taxes.”
Rental Properties and Retirement
If you’re considering rental properties as part of their retirement strategy, Saccaro shared some advice: “If your goal is to pass the property on to the next generation, there’s no harm in having a tenant pay off the mortgage for you. Just ensure you’re at least cash-flow positive. However, if you plan to use the rental income for your own retirement, having a mortgage on the rental property might limit the income you can actually spend, as mortgage payments will reduce your available cash flow.”
The Final Word
What it all comes down to is that while retiring with a mortgage is possible, it requires careful financial planning. The key is ensuring that your retirement income can comfortably cover your mortgage payments along with all other expenses – while, of course, keeping in mind things like inflation and a realistic long-term financial plan.
As Saccaro put it, “If your retirement income can comfortably cover your mortgage and still allow you to adjust for inflation without the risk of running out of money, then having a mortgage won’t be an issue. On the flip side, if you live long enough to pay off your mortgage in retirement, you could use that freed-up money to offset inflation or fund other retirement needs.”
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This article originally appeared on GOBankingRates.com: Can You Retire If You Still Have a Mortgage?
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