There are many different ideas and philosophies on how best to save for retirement. You’ll hear lots of retirement advice about how much of your retirement savings should be invested in stocks, how much in fixed income products like bonds or CDs, and how this balance between equity investments and non-equity investments should change as you get closer to your target retirement age.
But another form of retirement savings – one that doesn’t get the same degree of attention as those traditional investments – is paying off the mortgage on your home before you retire. Paying off your mortgage before you retire can provide you with some unique advantages over traditional retirement investment strategies.
Significantly Reduced Living Expenses. When you own your home outright, your monthly living expenses during your retirement years will be greatly reduced. Chances are your housing expenses are one of the most significant components (if not the single largest component) of your monthly budget. When you no longer have to make a mortgage payment, your budget obligations are significantly reduced. (Just remember that you’ll still be responsible for your local property taxes and your homeowners’ insurance even after you pay off your mortgage.)
Less Savings Required For Retirement. When your overall living expenses are lower, you don’t need the same level of income to maintain the same general lifestyle. For example, if you save $1,000 per month by no longer having to pay a mortgage, you can otherwise maintain the same lifestyle with a monthly income that’s lower by $1,000. Keep in mind that it takes $240,000 of retirement savings, earning income at a rate of 5%, to give you $1,000 of monthly income.
Here are some steps you can take to pay off your mortgage before you retire.
Consider Refinancing to a Shorter Term Mortgage. With interest rates at record lows, now might be a good time for you to refinance to a shorter term mortgage. Depending on your current interest rate, and how much time you have left on your current mortgage, you might be able to save money (and be able to pay off your mortgage more quickly with the extra cash flow) by refinancing your mortgage.
Pay Additional Principal Each Month. Another way to pay off your mortgage before you retire is to pay more than your required payment each month, and request that your bank apply that extra amount to the principal balance of your loan.
Shift Your Investment Focus. The closer you are to paying off your mortgage, more of each payment you make goes to reduce your principal and less goes towards interest charges. Depending on your tax situation, and your other retirement assets, you might wish to consider shifting some of your investments towards paying off the remaining principal balance.
Like any other investment decision you make in relation to your retirement, you’ll need to balance the likely pros and cons of each investment choice against what you are giving up by not making other investing choices. Make sure to include paying off your mortgage before you retire as a potential choice in your retirement planning.
Tags: payoff mortgage, refinance mortgage, retirement advice, retirement planning
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There are many different ideas and philosophies on how best to save for retirement. You’ll hear lots of retirement advice about how much of your retirement savings should be invested in stocks, how much in fixed income products like bonds or CDs, and how this balance between equity investments and non-equity investments should change as you get closer to your target retirement age.
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[…] Advice on Paying Off A Mortgage Before Retirement […]
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