What are the ‘House Rules’ for Paying Off a Home Prior to Federal Retirement?

I am a FERS employee that has reached my Minimum Retirement Age. Is it wise to pay off our mortgage before I retire?

Q: I am a FERS employee that has reached my Minimum Retirement Age. I am considering retiring at the end of this year. My wife would like to have our mortgage paid off first. We have 13 years left, but, if we double up, we think we can have it paid off in 7 years. Do you think it is wise to pay off our mortgage before I retire?

A: I am going to view this question in a vacuum. We will assume the mortgage piece is the only piece that has not been resolved in your retirement plan.

The thought that we “Have” to pay off our mortgages before we retire is a concept passed down to us from a time when interest rates were substantially higher than they typically are today. I don’t see the assumed logic in this notion, at present, as a blanket solution for everyone.

When interest rates were 10%, 12% or more, paying off that high interest made loads of sense. Nobody wants to carry that type of interest heavy debt into retirement. But, today, with many Feds holding mortgage interest rates in the 2%, 3% or 4% range, the old (pay off your mortgage early) perception seems to be outdated.

What we are really talking about is; where is the best place to put excess dollars, towards paying off a low rate mortgage or adding to our retirement savings?

Obviously, this isn’t a one-size-fits-all subject, but, there are a few things everyone can consider before answering that question for themselves:

  • Placing an additional dollar into the equity of a home removes the growth potential for that dollar. The house will have an extra dollar of equity. But, equity does not offer growth potential. Equity is the anticipated value of a home, minus the current debt. But, equity is not a growth investment. The house may be a growth investment, but, the equity is not. So, paying down a mortgage to increase equity does not encourage any additional growth from your assets.
  • That same dollar placed into an account that has an anticipated growth rate provides an opportunity for that dollar to offer additional retirement assets.
  • If that dollar is placed into an account to be used for retirement, it maintains in a fairly accessible form.
  • Using that dollar to pay down a mortgage means that the only way to regain access, to the dollar, is to sell or re-finance your property.
  • Mortgage interest rates are one of the very few deductions that we can take advantage of on our 1040’s. Paying the mortgage down early will lower that deduction each year and ultimately eliminate this tax break much sooner.

I generally look at the difference between an anticipated potential growth rate and the mortgage interest rate before giving my opinion as to the best option. But, I do not think it is a foregone conclusion that a responsible retiree will have their mortgage paid off prior to retirement.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  Investing involves risks, including the loss of principal.  No strategy assures success or protects against loss.

Securities offered through LPL Financial, member FINRA/SIPC.

About the Author

Randy Silvey is the published author of You FIRST, Federal Employees Retirement Guide, one of the bestselling books of its kind on Amazon and Kindle. For over 18 years, he’s been educating and guiding Feds in pursuing wealthier retirement lifestyles. Randy can be reached at 816-524-1515 or visit his website at www.silverlightfinancial.com. Securities offered through Infinity Financial Services. Member FINRA/SIPC.