There’s no universal right answer, but after 20 years of helping clients work through this question, I’ve seen a clear pattern: the clients who are most at peace in retirement, the least anxious, and the most generous with their money, are the ones who don’t have a mortgage payment.
The Psychological Case for Paying It Off
My old boss Dave Ramsey used to say that when you walk on your grass, it just feels different when you don’t have a bank note tied to it. I’ve spent two decades watching clients in retirement, and I think he’s right.
There’s a real psychological freedom that comes from not owing anyone. It’s hard to put a number on that. But I can tell you that the review meetings I’ve had with debt-free clients over the years are just easier. We’re not working through debt elimination together. When I get to that line on our financial review checklist and I get to write a zero and a slash through it, I’ve watched clients see me do that, and it’s powerful. Something shifts.
The Analytical Case: Your Mortgage Affects Your “Number”
I get asked all the time: “Scott, do I have enough saved? What’s my nest egg number?” My answer is usually a question back: how much do you need in retirement?
If your mortgage is paid off, you might need $1,000 to $2,000 less per month to live on. That directly reduces the size of the nest egg you need to accumulate. It’s not just a feel-good decision; it changes the math.
Now, I’ll acknowledge the counterargument. Some clients may have locked in mortgage rates at 2.5% during the low-rate period, and they’ve been earning 6, 8, or 10% on their investments. The math seems to say: keep the debt, invest the difference. That’s a legitimate analytical argument. But I come back to this, who are my most peaceful clients? The ones who don’t have payments. They’re also, not coincidentally, the most generous. Financial freedom tends to open people’s hands.
What If You Retire and Still Have a Mortgage?
Short answer: yes, it does create more stress. We get calls from clients who either never paid it off or who paid it off and then picked up a new mortgage when they upgraded to a different home. Those conversations usually start with: “Can I take money out of my retirement account to get this paid off?”
We don’t just say yes to that. If the payoff would require a large withdrawal, $100,000, $200,000 or more, that can possibly bump someone into a significantly higher federal tax bracket. What we like to do instead is work through a debt elimination plan over two or three years, taking out enough each year to stay in a lower marginal tax bracket while still making progress toward that goal.
We’re not going to tell a client they can’t retire until their mortgage is paid off. But we are absolutely going to work with them on how to get there as efficiently as possible.
What About the Equity in Your Home?
I typically think of home equity as what I call a “use asset”; something that has value, but that we don’t normally factor into your retirement nest egg calculation. Your house is where you live, not a line item in your portfolio.
That said, equity can absolutely be converted into retirement income if you need it to be. Here are two ways we’ve helped clients do that:
Downsizing is the most common. If you’re in a home with four or five bedrooms that aren’t being used, or you have land you don’t need, moving to a smaller home can generate significant tax-free cash. Most people don’t realize there’s a capital gains exemption on your primary residence, if you’ve lived there for at least two years. A married couple can potentially receive up to $500,000 of home sale profit tax-free; a single person can potentially receive up to $250,000. That’s money that can go straight into your retirement nest egg.
The other option is a reverse mortgage, which our industry has historically been skeptical of but is worth understanding. Dr. Wade Pfau, a researcher who speaks at Financial Planning Association conferences and approaches this from a purely analytical standpoint, has made a compelling case that a reverse mortgage can be a tax-efficient source of retirement income in the right situation.
Here’s the scenario where it makes sense: a retiree who has lived comfortably for 15 or 20 years suddenly finds themselves $500 a month short. They have significant home equity, maybe $300,000, $400,000, or more. They don’t have family support available. And they want to stay in their home, which, in my experience, is what almost every retiree wants.
A home equity line of credit in that situation means taking on a new interest payment, which adds to your monthly expenses. A reverse mortgage instead converts that equity into a monthly income stream without creating a payment obligation. It’s a different way to think about it. We’re not specialists in reverse mortgages, but as fiduciaries we have a responsibility to look at every potential source of retirement income, and your home is one of them.
Frequently Asked Questions
Does it ever make sense to keep a mortgage into retirement?
Mathematically, it can — especially if you have a low interest rate and your investments are earning more. But beyond the math, I’ve consistently seen that clients without mortgage payments are more financially at peace. That peace has real value, even if it doesn’t show up in a spreadsheet.
What if I can’t pay off my mortgage before I retire?
It doesn’t disqualify you from retiring, but it does affect your monthly income needs. We’ll work with you on a plan to accelerate payoff — often over two to three years — in a way that minimizes the tax impact of drawing from retirement accounts.
Can I use my home equity as part of my retirement plan?
Yes — through downsizing or, in some situations, a reverse mortgage. Downsizing can generate up to $500,000 in tax-free cash for a married couple. A reverse mortgage can convert equity into monthly income without creating a new payment. Neither is right for everyone, but both are worth knowing about.
How does paying off my mortgage affect how much I need to save for retirement?
Significantly. If your mortgage payment is gone, your monthly expenses are lower, which means your nest egg doesn’t have to be as large to sustain you. It’s one of the most direct ways to reduce your “number.”
When should I start thinking about this?
Ideally in your 50s, while there’s still time to accelerate payoff or adjust your savings strategy. The earlier you plan for it, the more options you have.
About the Author
Scott T. Marshall, CPA, CFP is a founding partner at Rivertree Financial Planning in Jackson, Mississippi, with over 20 years of experience helping clients navigate retirement planning, debt elimination, and long-term financial strategy.
This material is for informational purposes only and does not constitute investment, tax, or legal advice. Investment and loan repayment strategies vary based on individual circumstances. Please consult with a qualified financial advisor before making decisions about your investment or debt repayment strategy. All investing involves risk, including the possible loss of principal, and past performance does not guarantee future results. Securities offered through Valmark Securities, Inc., Member FINRA/SIPC.Advisory services offered through Valmark Advisers, Inc. an SEC registered Investment Advisor. Rivertree Financial Planning is a separate entity from Valmark Advisers, Inc. and Valmark Securities, Inc.