Having money set aside for retirement can be a huge relief. But as you near retirement, you’ll inevitably start to see the benefits of losing your monthly mortgage payment. If you have extra money to put toward retirement savings, the decision to pay off a mortgage or invest your money can be a tough one.

Often the choice of whether to pay off house or invest comes down to your own individual circumstances. The number of years until retirement, how much you owe, and whether you plan to move in the future all factor in.

Paying Off Your Mortgage vs Investing for Retirement

Finding the best way to pay off your mortgage after retirement can be tough. If you start before you retire, you’ll have a head start. But you have three choices: paying off your mortgage, investing, or saving. You may even opt for a combination of some or all of those choices. Here are some things to consider while you’re making those important decisions.

How long do you have until you retire?

The decision to pay down a mortgage or invest starts with determining how long you have until the day you leave the workforce. Those who have just entered the workforce have plenty of time to set money aside. If you’re only a few years away, it may be a good time to think about reducing your expenses. If you’re in your peak earning years, though, the decision can be a little more complicated.

One thing to consider is how the magic of compound interest will work for you. If you can find a low-risk investment, choosing to pay off your mortgage early or invest could also be a matter of how much that money will accumulate over the years. Crunch the numbers and compare what you can earn on that money versus what you’ll save in mortgage interest. This compound interest calculator can help.

How much do you owe on your mortgage?

Another factor in the decision of paying off mortgage vs investing or saving is how much remains on your balance and your associated interest rate. In the early years, your payments are primarily interest, but as you go along, more of that monthly payment will go toward paying back the money you borrowed.

But even if you still owe hundreds of thousands, that doesn’t mean the answer to should I pay off my mortgage or invest is to pay it off. You also need to look at how much that interest is benefiting you at tax time, since it’s tax deductible. Also look at the tax gains you could get by investing in a Roth IRA, which will give you tax-free withdrawals after retirement. Another intermediary option may be to consider refinancing your mortgage to a lower interest rate if rates are competitive. Refinancing could potentially save you hundreds of dollars a month and lead you to pay a lot less interest over the remainder of the loan.

Are you planning on moving?

Paying off your home makes more sense if this is the home you’ll live in post-retirement. Still, the question whether it is better to pay off a mortgage or invest can be answered by looking at whether it will free you from a mortgage payment after retirement. But if you plan to move before you retire, or if you’re still in your younger, early years as a homeowner, paying off your home likely won’t give you the benefits that it would if you were granting yourself a mortgage-free retirement.

But there is another consideration in the should I pay off mortgage or invest question. If you downsize, you may be able to make money on the deal. If you only owe $100,000 on your house and you sell it for $300,000, that’s $200,000 minus fees. You can put that money toward your new house, potentially giving you a mortgage-free retirement, or at least a mortgage that’s more affordable than the one you have now.

Is investing better than paying down your mortgage?

There’s no clear-cut answer to whether it’s better to pay off a mortgage or invest. Why? There are different types of investments. If your employer matches your contributions to a 401(k), putting that money in is to your advantage. But once you’ve done that, it’s a matter of types of investments.

Before deciding if it’s best to pay off my house or invest, consider the tax benefit you’ll get from putting extra money into your 401(k) before taxes. The downside of that is that you’ll have to pay taxes when you take the money out. You can instead switch to a Roth IRA, which will give you tax-free income when you retire, which may be when you need it most.

The bottom line, though, is when you’re asking should I pay off my mortgage before I retire, it’s important to look at the monthly cash flow implications and the interest you’ll save each year. You can put extra interest toward saving and investing, making it a win-win.

Final Thoughts

On a month to month basis, you may only have the money to pay the mortgage or invest. But as you get extra funds, you may find yourself with the money to prepare for your later years. One of the best things you can do is sit down with a Certified Financial Planner® to review your particular circumstances and assess your retirement goals to see which option may be the best for you.

Need help making sense of it all?

We're here to help you navigate your retirement journey.

Talk with a Retirable Advisor