Everyone says that I should pay off my mortgage before I retire. What if I can’t?

There are few maxims in personal finance more beloved than “You should have a paid-off house in retirement.” 

Whether they actually happen in real life or are just the stuff of legend, the dream of a middle-aged homeowner hosting a mortgage-burning party persists.

But let's get real. In the hottest real estate markets, a typical thirtysomething dual-income household today has little chance of homeownership. 

And if you're single? According to the US Bureau of Labor Statistics, the median annual income for a woman in her mid-30s is about $50,000; that buys you a $200,000 house. 

There are certainly places where that works, but only a few. (The current median home price in the US is $467,400.)

The bottom line is that it is increasingly common for Americans to delay buying a home. 

According to research published in 2021, the median first-time home-buying age is now 33, up from 29 in 1981. 

Whether it's student loan debt holding you back, outrageous home prices, or, more recently, high interest rates, there are myriad reasons why you may be entering the real estate market for the first time with more than a few gray hairs. 

Paying off that “forever” home before Social Security begins may simply be a fantasy. Are you doomed to a sad retirement of canned cat food?

What's the real goal?

Stepping back, a paid-off mortgage has become synonymous with a stable retirement because, for most people, housing is the biggest line item in their budget – followed by transportation and food costs.

If you can mostly zero that out (taxes, maintenance, and insurance costs will always remain), your fixed retirement income need not stretch as far. 

The actual goal, then, is affordable housing; a paid-off mortgage is simply one tactic to get there.

Instead of comparing “having a mortgage” to “no mortgage,” why not frame the choice more realistically for those who have decided to delay homeownership into middle age? 

Either because they could not afford it earlier in their adulthood or simply because they had no previous desire to be homeowners, for many, the more relevant comparison is renting in retirement vs. a mortgage. 

If that is the choice, then having a mortgage can be a better path to achieving the real goal, i.e., a sustainable, affordable, and predictable budget line item for housing.

Buying your first home even as “late” as your 50s allows you to lock in most of your monthly housing cost in retirement. 

It's not that your housing costs won't rise over the years; no one can escape that. 

But the increases in your housing costs, if you buy, should be more modest than never-ending year-on-year rent increases (assuming that you avoid purchasing a maintenance money pit or a home in the path of repeated natural disasters). 

While every real estate market differs, the average national year-over-year rent increase from 2017 to 2022 was 5.77%.

You could even see a decline in your monthly payment if you can take advantage of falling interest rates in future years. 

As long as you have the income to support a mortgage application (and the desire to own a home), it is never “too late” to buy your first home. 

An important cautionary note, though: Size your mortgage payment to your expected retirement income, not your current working-years salary. This may mean you will buy “less house” than your real estate agent and banker want to sell you.

I have already bought my “forever” house. Should I make extra payments to pay off my mortgage early, before retirement?

Ah, now that is a different — and prevalent — question. And like many personal finance questions, there are both math and emotional answers. 

When your mortgage rate is low, then the numbers are pretty straightforward.

If you were lucky enough to lock in a 2021-era 3.00% mortgage, it is hard to support the idea that you should power up extra payments when even a basic bank CD can be had today with a 5.00% return at an online FDIC-insured bank offering high-yield savings accounts.

But this is guidance that will fall on many deaf ears.

For many, the seeming security of a fully paid-for home is such an ideal that they are willing to incur the possible opportunity cost — the difference between what your extra payment could earn if invested and your mortgage interest rate — of the path not taken. 

The flexibility one would have by investing the “extra” payment each month is a critical fault for some.

Locking up that extra amount in their home equity where it cannot be used for any other purpose is the entire point for some homeowners.

Indeed, you should not prioritize making extra mortgage payments if doing so would leave you without sufficient cash reserves today and possibly put you on a path to high-interest debt.

For example, today's average credit card interest rate is about 20%. It simply doesn't make sense to meet an unexpected expense with a credit card, incurring monthly interest charges while simultaneously making extra payments to your low-interest mortgage.

And even if you plan to be mortgage-free in retirement, you still need to amass a cash nest egg for significant expenses such as uninsured medical costs, home maintenance, and possibly long-term care.

Remember, money in your house is, well, locked up in your house.

While it is not impossible to tap into your home equity in retirement to meet these costs, that could be a costly and complicated path.

When should you make an extra effort to pay off your mortgage before retirement?

• After you have a solid emergency fund in place. For many, that means at least six months of core expenses. If your income or employment is uncertain, you may prefer more, perhaps the equivalent of nine months of expenses.

• After you have eliminated all other debt.

• After you have saved for known upcoming large expenditures, in addition to your emergency fund, this may be, for example, an upcoming summer vacation or a new car.

• After sufficiently funding your retirement account(s), be it your workplace 401(K), an IRA, or both.

• After you have funded your Health Savings Account (HSA), at least to the level of your expected out-of-pocket expenses for the coming year if you have a high-deductible health plan. If “over-funding” your HSA is a component of your retirement plan, you must balance this goal with the desire to make extra mortgage payments.

Assuming you have checked all of the boxes above and can enter a mortgage-free retirement safely, you certainly will have cause for celebration: 

• The largest line item in your monthly budget (housing) may now be amongst the smallest. You will have more cash flow each month for your needs and wants.

• You may be able to downshift to a part-time career or fully retire earlier than the traditional age of 67.

• You will have a valuable asset you can pass on to your heirs with few strings attached.

Final Thoughts: Is there one right answer?

The decision to carry a mortgage in retirement, just like the home buying choice that accompanied it, is both a lifestyle and a financial decision.

If you are fortunate enough to have the financial wherewithal to seriously consider paying off your mortgage before retirement, doing so may be more a matter of personal preference.

On the other hand, a late-blooming first time home buyer who plans to carry a mortgage through all or most of her retirement need not have any reason for despair so long as she has indeed planned for this choice, borrowing only an amount that will remain easily affordable in her non-working years.

While the math needs to work whatever path you take,  just as importantly, your decision should give you a sense of financial peace.