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Should I Pay Off My Mortgage Early?

This is a fairly common question and one that people ask me quite often. I recently spoke to a journalist at Kiplinger's Personal Finance for an article that appeared in their May issue. While the author quoted my thoughts about which debts to pay off first (yes, the mortgage should be your last debt to pay off) we also discussed the issue of having all of your debts paid off by a certain age. With the financial crisis behind us, but a possible public debt crisis in front of us, I am recommending that younger clients plan to have their mortgage paid off by age 60 as part of their retirement plan.

One thing that I have learned over the years is that among our clients, those who are completely debt-free in retirement seem to be the most secure in their financial situation. The psychic benefits of being debt-free far outweigh any benefits of having extra funds invested in the market. Furthermore, if you compare the guaranteed interest cost of your mortgage (let's say 3-4%), that is much higher than the guaranteed rate one might earn on a cash account (less than 1%) or even a 10-Year Treasury bond (less than 2%.)

What if you are already over 60 and you have a substantial mortgage? Everyone has a different situation and the correct response may not be to pay off the mortgage at this stage. What if the only way to pay off the mortgage is to pull money from a retirement account such as an IRA or 401k account? In that case you might incur a substantial income tax liability which would be far worse than holding the mortgage. There is also the issue of cash flow. Amortizing debt over a long time frame could actually be the better situation as it allows you to have the necessary cash to enjoy your retirement. 

In summary, for younger folks you should ideally plan to be debt-free by age 60. If you are already retired and do have a mortgage, then you should consider your options and understand that what may be right for you may be completely different from someone else.

Feel free to contact me at 609-620-1770 if you would like to discuss your personal situation.

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