As a financial advisor, I am asked all the time by individuals near retirement age, “Should I keep my mortgage in retirement or pay it off in full?”

Finding the right answer greatly depends upon your financial circumstances and requires an honest evaluation of your options.

Here are a few questions to help you make a wise decision about keeping a mortgage in retirement.

“Can housing allowance apply to my mortgage?”

If you’re a minister, it is important to understand the value of ministerial housing allowance and how it can be used after you retire. Unlike most retirement providers, GuideStone® is a denominational pension board and has the unique privilege to designate housing allowance on the income of retired ministers.

Depending on the housing expenses a minister can claim, GuideStone can designate all or a portion of a retired minister’s income as non-taxable due to this exclusion in Section 107 of the Internal Revenue Code. And good news — eligible housing expenses include mortgage payments.

If you already have a mortgage as a retired minister, take another look at your finances to see if and how much you can claim as housing allowance. But keep in mind that after a mortgage payoff, retired ministers often find that the amount of housing allowance they are eligible to claim is greatly reduced.

“If I do decide to pay off my home loan during my retirement years, where should the money come from?”

When trying to pay off debt, most individuals look to their largest pools of assets. Those considering payoff should understand the difference between:

• Early payoff achieved by extra principal payments using earned income. This option adds to financial security, helps save money in the long term and may increase net worth. 
• Early payoff achieved by withdrawing invested retirement assets. This option means you pay less interest but at the cost of potential returns on investments, and this may not increase your net worth. 

How to pay off your mortgage sometimes can be an issue of investment preference. But in most circumstances, it is best for individuals who wish to pay off their mortgage before retirement to use earned income and extra principal payments first rather than using existing savings or retirement assets.

One of the most difficult adjustments for retirees is learning to live on less income. Without a disciplined budget, using retirement assets instead of earned income to pay off a mortgage may give you a false sense of your financial situation. In this scenario, the extra space you find in your budget is due to leveraging your retirement assets rather than your income — meaning you don’t necessarily have more money. But if you instead reduce available income through extra principal payments, this can help prepare you to live on a retirement budget before you actually retire.

“Do I have enough liquidity in my retirement savings to meet my needs?” 

It is not uncommon to find retirees with over 50 or more percent of their retirement resources tied up in their home. But selling liquid retirement savings or investments to pay off a home can only lead to a retiree becoming “house rich” but “cash poor” as they age in retirement — only adding to the liquidity issue. This is why many retirees turn to expensive reverse mortgages or feel compelled to sell their homes to unlock some of their equity.

Carrying a mortgage into retirement can be a tool to help maintain liquidity on your invested assets, because you are then able to take advantage of the added flexibility of seeking a rate of return on investments while also continuing to cover your normal mortgage payments.

“What portion of my current mortgage payment is going toward principal?”

Often, a primary goal of paying down or paying off a mortgage is to save on interest. However, a quick look at your payoff schedule will show that extra payments when the loan is new save you substantially more interest than the same extra payment made later on a much smaller balance. This is one of the primary reasons why financial counselors most frequently encourage new homeowners to make extra payments, as the interest savings are most impactful during the early stages of the loan.

Other questions to talk through with an advisor before making a decision:

• Have I considered how this payoff transaction will affect my taxes this year as well as in the future?
• Am I considering the loss of liquidity on my savings or the missed returns on any money used to pay off the loan?
• If I pay off the mortgage from savings, will I be willing to reduce my retirement income by the amount of the mortgage payment to help preserve the remaining dollars?
• Do I have enough saved to help cover retirement expenses now as well as later when inflation may increase them?
• Am I planning on selling this home in the near future? If so, will I need these funds to remain liquid and accessible?
• Can I commit extra income toward loan payoff before retirement rather than using money already in my retirement savings?
• Which will provide me with greater financial strength: prepayment of housing costs or liquid funds that can be used for the payment of housing costs?
• Do I foresee a time when I may need to sell my home or tap the home’s equity due to lack of investment income?
• Do I have a habit of spending funds that might be needed for the payoff of my home?
• Would paying off the mortgage keep me from unnecessarily spending the funds?
• Does maintaining the mortgage payment provide any useful advantages (e.g., tax savings, motivation to spend less, motivation to pursue working income opportunities)?
• Do I trust myself (and my current allocations) to remain invested over the long run, working toward achieving a rate of return to help offset or exceed my mortgage interest rate?

The decision to pay off a home from retirement savings is not as straightforward as many believe. Before making any large investment decisions, it is always a good idea to weigh the pros and cons and assess the options available to you. There are many trade-offs that need to be considered, and it may be beneficial to maintain a mortgage into retirement if properly planned.

For those still in their working years, additional savings, whether in the form of extra principal payments or more liquid investments, can never hurt — they will simply provide more flexibility to your payoff decision. And that’s a decision that will certainly pay off.

If you would like to speak with a GuideStone® representative to discuss achieving any of your retirement goals, please contact us at 1-888-98-GUIDE (1-888-984-8433). Customer solutions specialists are available to assist participants Monday through Friday, 7 a.m. to 6 p.m. CST.

Doug White is a CERTIFIED FINANCIAL PLANNER^TM professional with GuideStone. Doug has served at GuideStone since 2001, gaining extensive experience working with ministers, executive leaders and other professionals. And as a former youth pastor, he has a unique perspective and understanding of the needs of many GuideStone participants.

He graduated with a Bachelor of Business Administration in finance from the University of North Texas and a Master of Business Administration in marketing and entrepreneurship from Dallas Baptist University. He now enjoys living in Dallas, Texas, with his wife, Laura, and two sons, Luke and Benjamin.

Advisory services offered through GuideStone Advisors®, an SEC Registered Investment Adviser. GuideStone Advisors is a controlled-affiliate of GuideStone Financial Resources®.

This should not be considered tax advice. You should consult a tax professional to discuss your unique situation.