Dear Dr. Don,
I owe $20,000 on my home that’s worth $200,000. I have just retired with a good pension. Should I pay off the home mortgage? Is having a mortgage a better fit than having no mortgage, taxwise?
— Mitch Mortgage
Congratulations on your retirement, especially with a good pension. I think it’s a solid goal to have your mortgage paid off by the time you retire. You’re pretty close to that goal. Now you have to decide whether it’s worth it to raid savings to pay off the note.
First of all, don’t raid your liquid savings if it will deplete your emergency fund. You want to keep three to six months’ worth of living expenses in your emergency fund.
The mortgage really isn’t doing much for you taxwise. Paying off the mortgage means there’s no more mortgage interest deduction on your income tax return, but the tax deduction associated with the interest expense on $20,000 isn’t likely to help you out much. A loan balance of $20,000 at, let’s say, 5 percent, is an annual interest expense of less than $1,000. If you are in the 28 percent marginal federal income tax bracket, you have potential savings of up to $280 on your federal income tax return. Those savings will decline over time as you pay down your loan or if you are in a lower marginal tax bracket in retirement.
To fully utilize the mortgage interest deduction on your taxes, you have to itemize enough expenses to exceed the standard deduction by the amount of the mortgage interest. If the mortgage interest expense is just replacing the standard deduction on your income tax return, it’s really not doing anything for you.
My rule of thumb is the same for retirees as it is for people still working. If you expect to earn more after tax on your investments than you pay after tax on your mortgage, then stay invested. The more conservative you are in investing, the more likely it is to make sense to pay down or pay off your mortgage.
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