I'm 65 And Have A $150K Mortgage With $250,000 In My Retirement Account. Should I Use Retirement Funds To Pay Off The Mortgage?

In a common financial scenario, many people 65 and older grapple with whether to use their retirement savings to pay off their mortgage. Consider a hypothetical case where a 65-year-old person has a $150,000 mortgage and $250,000 in a retirement account. This scenario presents a financial crossroads, posing the question of whether it’s wise to use retirement funds to pay off the mortgage.

You must weigh the benefits and drawbacks of such a decision. Paying off the mortgage could mean a debt-free life — a significant relief for many. It reduces monthly expenses and provides a sense of financial security. However, this decision has its downsides. Draining retirement savings can leave you vulnerable to unexpected expenses or changes in the cost of living.

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Financial experts suggest evaluating several key factors before making a decision. These include the interest rate of the mortgage, the return on investment from the retirement account, tax implications and your overall financial health. 

Analyzing Mortgage And IRA Growth

First, consider the mortgage. Assuming the interest rate on the $150,000 mortgage is 4.5%, over 10 years, the interest paid would be substantial. Using standard mortgage calculations, the total interest paid on this mortgage can be approximated.

Next, look at the retirement account. If the $250,000 individual retirement account (IRA) grows at the same rate of 4.5%, its value at the end of 10 years can be calculated. This growth, thanks to compound interest, should be higher than the interest paid on the mortgage. However, although interest rates on money market accounts can be as high as 4.5% in early 2024, historic interest rates paid by risk-free accounts such as money market funds, T-bills, certificates of deposit are far below a rate of 4.5%. In other words, it's unlikely that you could earn a risk-free 4.5% return on that money over a 10-year period.

Financial Projections Over 10 Years

Mortgage interest: The total interest paid on a $150,000 mortgage at a 4.5% interest rate over 10 years is approximately $35,767. This is a simplified estimate, as actual mortgage interest could vary because of the nature of loan amortization.

IRA growth: The $250,000 IRA, if it earns the same 4.5% interest rate compounded annually, could grow by $138,242 to reach reach a value of approximately $388,242 over the same 10-year period.

Comparing these figures, the growth of the IRA, assuming the ability to earn a consistent 4.5% interest rate, exceeds the interest paid on the mortgage. This indicates a financial advantage in allowing the IRA to continue growing, rather than using it to pay off the mortgage, although it doesn't take taxes into account.

Paying Off The Mortgage And Retaining A Reduced IRA Balance

What if you pay off the mortgage with $150,000 from the IRA and leave the remaining $100,000 in the account? Paying off the mortgage would eliminate the interest expense of the loan and free up money you could save each month. If the remaining $100,000 in the IRA grows at the same 4.5% interest rate, its value at the end of 10 years would be approximately $155,297.

By paying off the mortgage, you avoid the interest expense. However, the growth potential of the IRA diminishes significantly. 

This scenario highlights a trade-off: the immediate benefit of being mortgage-free versus the long-term financial growth of the IRA.

Tax Implications 

It's also important to consider the tax consequences. Withdrawals from retirement accounts, like 401(k)s or IRAs, can be taxable, requiring you to pay more tax and potentially pushing you into a higher tax bracket. This tax impact could negate some of the financial benefits of paying off the mortgage.

Overall Financial Health

The decision to pay off a mortgage with IRA funds isn’t solely about numbers; it’s also rooted in your overall financial health. This aspect encompasses more than just current savings and debt — it includes factors like income stability, emergency funds, future financial needs and lifestyle considerations.

Income stability and cash flow: For a retiree, stable income sources such as Social Security, pensions or other steady revenue streams play a crucial role. These income sources impact the ability to cover living expenses and remaining mortgage payments without compromising lifestyle.

Emergency funds: It’s essential to have accessible funds for unexpected expenses, such as medical emergencies or home repairs. Using a significant portion of IRA funds to pay off a mortgage could deplete these vital reserves.

Future financial needs: Anticipating future expenses is crucial. This may include healthcare costs, long-term care or financial assistance to family members. A substantial investment like an IRA can be a critical resource in addressing these future needs.

Lifestyle considerations: The decision should align with your lifestyle goals and retirement plans. For some, a debt-free life offers peace of mind, enhancing their retirement experience. For others, maintaining investment growth to support future aspirations or leaving a legacy might be more important.

While the idea of using retirement savings to pay off a mortgage might seem appealing for immediate debt relief, it requires a careful assessment of various financial factors. Consulting with a financial adviser is recommended to make a decision that aligns with your long-term financial security and goals. This balanced approach helps in navigating the complexities of managing debt and retirement savings effectively.

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*Jeannine Mancini has written about personal finance and investment for the past 13 years in a variety of publications, including Zacks, The Nest and eHow. She is not a licensed financial adviser, and the content herein is for information purposes only and is not, and does not constitute or intend to constitute, investment advice or any investment service. While Mancini believes that the information contained herein is reliable and derived from reliable sources, there is no representation, warranty or undertaking, stated or implied, as to the accuracy or completeness of the information.