Here's Why Retirees on Reddit Are Gladly Paying Off Their Mortgages Early
As workers prepare for retirement, they have a choice: Should they pay off their mortgages early or put the extra money toward investments?
Regardless of the math, many retirees opt for the peace of mind of owning their home free and clear. Here’s why retirees on Reddit say it helps them sleep better at night.
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Smaller Target Nest Egg
By lowering your living expenses, you lower the investment nest egg needed to retire.
Start running the numbers on how much you’d save each year by paying off your mortgage, versus how much extra income your portfolio would generate if you invested the money instead. If you follow the 4% rule, every extra $100,000 invested would add another $4,000 in annual income.
“It might be easier to reduce your expenses versus increasing your income,” posted Queenfan1959 on Reddit.
Remember, paying off your mortgage doesn’t eliminate your housing costs. You’ll cut out the principal and interest payment, but you’ll still need to budget for property taxes, homeowners insurance, repairs and maintenance.
Peace of Mind Over Maximizing Returns
Paying off your mortgage offers a guaranteed return equivalent to your interest rate. Your investment returns will fluctuate with the market.
One redditor, under the handle Negative-Salary, raised a valid point. “Why would I take my IRA money and pay off my house? I'm making 10% and my house is 3.5%,” presumably referencing their mortgage rate. The S&P 500 has in fact generated an average annual return around 10% since its inception per Fidelity.
The arbitrage argument makes sense, at least from a mathematical standpoint. But even then it may be deceptive. Does this redditor have their entire investment portfolio in stocks paying an average 10% return?
Probably not, as most retirees keep their portfolios more conservative. Their total average return on their nest egg is probably closer to 5%-7%.
And that's to say nothing of the fear caused by stock market crashes.
Lower Stress and Risk During Downturns
Stock market crashes still feel scary when you’re working and investing each month, but they’re not all bad news. You get to buy stocks “on sale” at their lower prices.
That’s not the case after you retire. Downturns are all downside, because you’re only selling, not buying.
Lower living expenses reduce the amount of equities that you need to sell each month to pay your bills. You may even be able to live off cash reserves, bond income and Social Security benefits for the duration of the downturn, preventing you from having to sell low.
That gets harder when you have higher living expenses that still include your mortgage.
Part of a Larger Spending Analysis
Even if you ultimately decide not to pay off your mortgage, the exercise itself is useful as you approach retirement.
Many redditors mentioned that getting a better grip on their annual spending helped them both trim their budgets and prepare for retirement. Some wish they’d done the analysis earlier.
“When we calculated our monthly expenses, we were surprised at how much it was,” posted a user called Gilword. “We are spending at least the same amount retired as we did working.”
Without spending their time at work, retirees tend to spend more on entertainment and travel.
And some retirees do decide to keep their mortgage in place, for reasons beyond arbitrage. It offers some inflation protection: their principal and interest payment stays fixed in yesterday’s dollars, even as your investment returns adapt to today’s dollar value. It also keeps your money more liquid, as it’s difficult and expensive to tap home equity, but you can sell investments instantly.
When in doubt, talk to a financial advisor. They’ll talk you through both the math and the emotions to help you make the right decision for your unique circumstances.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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