When approaching retirement, clients have saved a decent amount of money in their 401ks, IRAs and pension accounts. But should they use those funds to pay off their mortgage when they retire?

The first task is to get your mortgage info together. You’ll need to know your balance, interest rate and the makeup of your payment (principal, interest). If your insurance and taxes are included in your payment, you’ll want to know that info as well. Your mortgage statement should provide you with this info.

Once you have gathered that info, you’ll need to make sure you know what your expenses will be like in retirement. Even if it’s just a legal pad estimate, that will give you an idea of how much you’ll need in retirement. It won’t hurt to estimate a little higher as well to be on the conservative side.

With the info above handy, you’ll be able to work through what paying off the mortgage will look look. Let’s take a look at the pros and cons of paying off your mortgage when you retire.

Paying off your mortgage when you retire: The Pros

• Lowers your monthly expenses. A mortgage payment can be a decent chunk of your monthly expenses and paying it off can relieve some of the stress in funding your retirement.
• Get rid of higher interest debt. If you haven’t had the chance to refinance your home lately (rates are pretty low at the time I wrote this) then you might have a high interest rate on your loan. Paying off the loan will remove the high interest loan from your liabilities.
• Can be better for “spenders.” If you have a spending problem before retirement (might be a good idea to change that before you retire) than you might not do well if you have access to a large chunk of money. Paying off your mortgage will reduce your overall nest egg (see con below) but it will also keep you from spending it if it’s wrapped up in your home’s equity.

Paying off your mortgage when you retire: The Cons

• Lowers your overall nest egg. Taking out a large sum out of your retirement assets lowers the total you have to live off of in retirement. Reducing the amount of liquid assets in retirement makes you less flexible to deal with any unexpected financial needs.
• Possibly a bigger tax bill. If you use pre-tax assets like those that are in your 401k (if you chose to invest in a pre-tax account) or a deductible traditional IRA – you’ll have to pay the taxes on the full amount you take out. Depending on the amount you need to pay off your mortgage, this might increase your overall income tax liability. It’s a good idea to work with your tax professional and financial advisor to make sure it’s a good idea BEFORE you pull out funds to pay off your mortgage. If you decide to pay off your mortgage, try to do it with after-tax dollars so the tax impact might not be as great.
• Ties up more of your assets. If you need access to the equity in your home (the amount your home is worth minus any outstanding loans) you are at the mercy at whatever the market is doing at that time. Currently, it’s pretty easy to sell a home here in Texas. But what will the real estate market look like if you need to access those funds?
• Still have to pay your property taxes and insurance. If your property taxes and homeowner’s insurance are included in your monthly payments, you’ll still have to pay those each year.
• Could lose the mortgage interest deduction. Depending on your individual tax situation, you might lose the interest deduction you get from the interest that you pay on your mortgage. Work with your tax advisor to see if this might affect you.

Unfortunately, answering the question “should I pay off my mortgage when I retire” is not as easy as a quick yes or no. “It depends” is the only answer I can give you for the time being. Working with a financial advisor and/or your tax professional to make sure it’s the right move for you might be a good first step.