Issue Brief on Should You Carry a Mortgage into Retirement?

The Center for Retirement Research at Boston College has posted a new issue brief by Anthony Webb on “Should You Carry a Mortgage into Retirement?”

This Issue in Brief considers whether households should use retirement or non-retirement wealth to pay down their mortgage.  It first shows that it is unlikely that many retired households will be able to earn a return on risk-free investments such as bank certificates of deposit, Treasury bills, and Treasury bonds that will exceed the cost of their mortgage.  Liquidity considerations aside, households holding such assets will generally be better off using them to pay down their mortgage.  It then considers and (for most households) rejects the argument that households should retain their mortgage because they can earn a higher expected return in stocks and other risky assets.  It concludes with practical advice for most households.

The author concludes the following:

[The] analysis indicates that retired households are, in theory, better off repaying their mortgage. In addition to this theoretical conclusion, there is also a very practical argument against borrowing to invest. If a household with a mortgage mismanages its investments, or over-estimates the rate at which it can decumulate those investments, it risks losing the house, its only remaining asset.

One argument that is sometimes cited in favor of not repaying the mortgage is that retaining a mortgage increases the household’s liquidity, and enables it to better cope with sudden unexpected expenses. But households that retain a mortgage need to consider what they would do if the bad event actually happened – i.e., how they would maintain their mortgage payments once their financial assets had been spent.

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