One of my biggest financial goals is to become mortgage free as soon as my financial situation allows. This is the second post in a two part series. In the last post I discussed some of the pros associated with refinancing your mortgage just before retirement. In this post I would like to show some of the benefits of having a mortgage free retirement.
I firmly believe that having a mortgage free retirement is a major financial accomplishment. However, the trend in mortgages during the past few decades has shown that most people are not going to have a paid off mortgage.
My family fairly accurately represents this mortgage trend. My grandparents have lived in their house for just over 40 years. They purchased the house while my mother was in junior high and paid it off as quickly as possible, on one income.
My grandparents’ children did not follow the example of having a mortgage free retirement. Within five to ten years of their retirement, my parents and their siblings all purchased larger houses. Many of them traded up and moved into a larger house during the housing bubble. When they did this they not only received larger houses, but they now also have mortgage payments to match.
I still have hope that my generation kicks this trend and focuses on the benefits of a mortgage free retirement.
Sleep Well at Night
There is something comforting in knowing that you don’t owe anyone. There are many who would try to extend a low-interest mortgage as long as possible to leverage their money and take advantage of the tax breaks. They say that leveraging this money to make more money is basic financial math.
This line of thinking fails to take into account the feeling you get from owning your house outright. If you’ve ever been deep in debt how well did you sleep at night?
Now imagine that you’ve just retired and have just refinanced your mortgage. The stock market has just crashed and interest rates are super low like they are now. Where will the money to pay your mortgage come from? Bonds? CDs? Stocks? How well would you sleep then?
Less Risk
The general rule of thought is that your investments should become less risky as you age. This is especially true in retirement because a majority of your income will probably come from investments.
Foregoing a mortgage free retirement in favor of using the money as leverage can be very hazardous to your retirement. Using borrowed money to make more money work is very similar to using a lever. The multiplying force of a lever can allow you to move objects that would otherwise be impossible to move with very little effort. However, if you put too much force on a lever it is possible for it to break and cause devastating injuries or worse to the user.
Using the leveraging power of money can harm you financially in a similar manner. If you end up putting too much pressure on your lever, by borrowing too much money, it could snap and unleash financial havoc. Think of all of the people who have tried to make the most of leverage by making their fortunes in real estate. They may have been millionaires on paper, but often they cannot keep up with their creditors and have to file for bankruptcy. While you may be able to bounce back from a financial calamity like this in your twenties, thirties, or even forties, it may be impossible to recover in retirement.
Lower Expenses
Your income is often reduced when you retire. Therefore having lower expenses can help you live on a smaller budget. While couponing and bargain shopping can stretch your budget, there is a good chance that your mortgage is your biggest monthly expense. Not having a mortgage payment can help your budget more than most other cost cutting measures.
During retirement there are other expenses that you probably didn’t have to worry about when you were younger such as higher health care costs and long-term care insurance. These two costs can become a large portion of your budget. However, not having mortgage payments can offset these two expenses.
While I have a few decades before I plan on retiring, I do intend to live mortgage free long before I reach that milestone. The lessons I have learned from my grandparents and their children have helped me see the benefits of having a mortgage free retirement and I hope to follow in their path.
Would you prefer to have a mortgage free retirement? Or do you think that you’ll refinance before you retire?
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I like to leverage money at the moment but really enjoy having bought my house cash and not owing anyone on that side. Having no rent or mortgage is incredibly freeing. I also sent my mum to the bank to pay off her mortgage last year, she is about to retire and it made sense for her to retire debt free.
Pauline recently posted..99 money mistakes and a $999.99 giveaway!
I’ve always felt that you can leverage your mortgage once it’s paid off. Just take the money that would have went to mortgage payments and invest it. Then you’ll have a lot of money to invest and a paid for home.
I’m with you on this one, Justin. We “lost” over 100k when the housing market crashed, bringing our home equity from over 100k down to just barely above the market for the house. It was so stressful, but wouldn’t have been nearly so if we had simply paid off the house early and owed no one. All arguments aside, we choose peace of mind over more money via investment income and retaining a mortgage. Great post!
Laurie recently posted..Out on the Town: Good Reads for the Week Ending 2/1/13
Good point Laurie. We bought our house in 2007 when the market was soft. We lost 30k, which is still a lot. I couldn’t imagine losing 100k. Although I suppose it’s not really a lose unless we sell.
I enjoyed reading this post! I’m with you, a mortgage free retirement sounds much more appealing than trying to use leverage to increase your return. Your story about your parents and grandparents is true of my family as well. I think there was something to growing up in the depression era that made my grandfather extremely frugal. It sure has paid off for him! He’s been retired almost 30 years now!
Oliver
Oliver @ Christian Money Blog recently posted..How I’d Spend The Super Bowl Bonus Check
I agree about people who grew up during the depression being frugal. My grandparents grew a lot of their own vegetables and pears. Also, my grandfather would take lawnmowers from the side of the road and fix the motors and then flip them for a profit in his spare time.
I plan on living mortgage free within the next 10 years, but I definitely believe retirees should be mortgage free. As you pointed out its one less liability that they have.
Brick By Brick Investing | Marvin recently posted..January Income 2013
While we’re not retired, we’re fortunate to be mortgage-free and it does feel great. The main benefit in my mind is freedom. The lower your fixed expenses, the more freedom you have to experiment on the income side–perhaps pursue a blogging business, for example. The larger your fixed expenses, the more pressure you feel to maintain a steady, reliable paycheck, aka ‘working for The Man.’
Kurt @ Money Counselor recently posted..Ally Bank Savings Review
Congrats on being mortgage-free before retirement Kurt. I agree that the more debt you have makes you more susceptible to being stuck “working for the man”. That’s our main plan right now. Become debt free so that we can focus on creating our own wealth.
We’re in our mid thirties now and have the cash to pay our mortgage in full now which we are working on doing. It’s a blessing but we had to work hard to get where we are. We are frugal but we know when to spend and when to save, it’s a lifestyle for us. We plan to take the money that we used on our mortgage to invest, take a trip or 10 lol.. and enjoy the rest of our lives together.
Canadian Budget Binder recently posted..Financial Advisors: 101~Get The Inside Scoop!
Good point Mr. CBB. It’s important to know when to spend. Sometimes people go to the other extreme and deny themselves enjoyment with their money.
Ideally, I think a mortgage free retirement is a great way to keep living costs down.
Alex recently posted..Happy Thought for the Day: Non Zero Sum People
I 100% aim to be mortgage free long before I retire. I couldn’t bare the stress of not working and knowing that I still had debt! I would love to be mortage free by 35!
Savvy Scot recently posted..Passive Income Series – Method 2: Income from Investing
I would definitely prefer a mortgage-free retirement, for the same reasons you listed. Mainly I would enjoy the fact that the house is mine free and clear.
DC @ Young Adult Money recently posted..$100 Giveaway – Valentine’s Day Gift Edition
I couldn’t retire if I still had a mortgage. The fear of having such a debt burden without an income would stop me sleeping and wouldn’t be a very fun retirement.
Glen @ Monster Piggy Bank recently posted..Giving Gifts on a Budget
Good post Justin! I would tend to side with you that we will aim to be mortgage debt free by the time we retire. We’re not in any rush to get it paid off now with our low rate, but definitely plan on being free of it before we retire.
John S @ Frugal Rules recently posted..$999.99 Giveaway: iPad or no iPad? Welcome to my Money Problem!
The rate that you have can greatly affect how quickly you want to pay off your mortgage, especially if it’s below inflation. But I still think there’s nothing quite like living mortgage free.
I’m hoping to have a mortgage free retirement. We’re close to paying off our mortgage now, but when we move to another city in the next few years, we’ll be signing up for one again, unfortunately.
Anne @ Unique Gifter recently posted..Tis the Season…To Save
Well perhaps its too late for me – I refi’d last year at this time. But it was for 3.75% which was great! Since paying off your mortgage is a huge financial goal, I can completely admire this since it will accomplish a lot for you. However, I’m on the other side of the fence – I’m investing the money rather than paying it down early. I’m after a higher return rate than 3.75%.
My Money Design recently posted..Believing In Yourself After Finding Out That You Suck
It really depends! I’ve heard it both ways: 1. keep a big long mortgage and keep refinancing to reduce payments and 2. pay it off as quick as possible. The problem I have with attacking my mortgage aggressively right now is that the interest rate is closer to 3%.
I would rather invest heavily in the market for the first few years, then attack the mortgage, eliminating it, right before I retire.
Johnny Moneyseed recently posted..Your Money or Your Life: Part 1
That’s what makes the question more of a problem. With interest rates that low, it’s possible that your rate is below inlfation. In that case, you may be better off holding off. However, I’d personally rather have it gone and not have to worry about making the payments.