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Mortgage in Retirement: Do You Really Want To Gamble?


It is common advice in financial circles today to keep your mortgage as long as possible. In fact, many even advocate keeping your mortgage throughout your retirement. The basic principle is relatively straightforward: with today’s incredibly low borrowing rates – where a mortgage can cost you less than 5% per year in interest – keeping a mortgage allows you to keep your assets invested where they can earn the higher long-term returns available in stocks.

For example, if you have a $250,000 mortgage, you owe $12,500 per year in mortgage interest costs to the bank. However, if at the same time you have a $250,000 portfolio that is invested in stocks capable of earning of long-term return of 10%, you can average growth of $25,000/year over time. Thus, by paying only 5% per year in interest ($12,500) to earn 10% per year in growth ($25,000), you can increase your wealth and assets available for retirement.

Unfortunately, though, sometimes portfolios don’t generate the returns we expect; the past decade has been a prime example. Investors who kept their mortgage outstanding in 2000 and put their money instead into the S&P 500 hoping to generate growth in excess of their mortgage interest have instead been rewarded with a barely 2% dividend yield and no price appreciation, while their mortgage payments have slowly eroded the portfolio. Ten years later, the investor is far behind where he would have been by simply paying off the mortgage and having less money invested in the first place.

In other words, investing for growth rates in excess of your mortgage interest has risk, and  superior returns are not guaranteed. After all, if there was truly a sure thing to earn returns higher than the cost to borrow money, the banks wouldn’t lend you the money – they’d just invest for the higher return themselves.

In the end, we all acknowledge that buying stocks on margin – where you borrow money to invest using the assets already in your portfolio as collateral – entails significant risk. The fact that you happen to borrow the money by taking out a mortgage and pledging your home as collateral, instead of your portfolio, doesn’t take that risk off the table.

So what’s the alternative? The good news is that by paying down your mortgage, you won’t have as many retirement expenses to support in the first place, without that monthly mortgage payment obligation looming! And you don’t face the risk that by earning less than your mortgage interest rate, you might end out with even less money than you had in the first place!

So if you don’t want to bet your home – and your retirement – on the stock market, you might consider just paying down your mortgage by the time you retire and making it work the old-fashioned way: save and invest the assets you have and take the less risky path. It’s really O.K.

Michael Kitces, CFP, is the director of research for Pinnacle Advisory Group, a private wealth management firm located in Columbia, Maryland that oversees approximately $850 million of client assets.  He is the publisher of the e-newsletter The Kitces Report and the blog Nerd’s Eye View through his website www.Kitces.com.  Kitces is also one of the 2010 recipients of the Financial Planning Association’s “Heart of Financial Planning” awards for his dedication to advancing the financial planning profession.  Follow Kitces on Twitter at @MichaelKitces.


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    • Great article Mr. Kitces.

      I am definitely in your camp as to whether a mortgage is a good thing in retirement. I have always believed it is best to truly own at least the house you live in and still put away savings to invest in the financial markets too. I am still at least 5 years from retirement, already have the house paid off and I am now in the final stages of building a substantial Dividend Aristocrats portfolio between my taxable accounts and my self-directed IRA. So it is not always a situation of having less flexibility if you pay off your mortgage, like some of the posters imply.

    • Kitces point that “common advice in financial circles” may not be the best advice for everyone is sound advice. Everyone is different and has different goals and views on accepting risk. One should take all advice, including “common advice” and alternate views to the common advice such as this article with a grain of salt. No one shoe fits all feet.

    • Soothsayer,
      Maintaining a mortgage when you can afford to pay it off while keeping a portfolio on the side is EXACTLY the same as buying the portfolio on margin. The only material differences are the collateral (your portfolio, versus your home), and the callability of the loan if the collateral declines in value.

      The point is not that it cannot work. The point is, as many other comments have pointed out as well, is that there is a material risk that it won’t – and that you can be left with a smaller portfolio and a large mortgage at the same time. In other words, it’s quite literally a risky strategy where you’re putting the equity in your home at risk in the market. And I seriously question whether buying stocks with leverage – with your house as collateral – is the most prudent route for the average individual to pursue their retirement success.

      - Michael

    • Several large banks have pulled out of the market and no longer offer reverse mortgages. This program’s future is in real doubt.

      Cash flow is important but the emergency need for serious cash must be considered a real possibility. Having a paid up home and then trying to figure out how to get money out of it without selling it when you are old and need money fast is not something I want to do. I’ll keep my mortgage.

    • Entire retirement with no debt of any kind if possible. It’s not about creating wealth in retirement, it’s about having enough cash flow the rest of your life to do the things you want and have the lifestyle you want.

      Your house is generally protected. If you run out of cash and need assistance, you generally are not going to lose your home. Thus, if you need cash, you can do a reverse mortgage and get it, but so what if the house depreciates? You need shelter, food, and clothing to live. I believe securely locking your needs is a prudent approach. SS can cover food and clothing; payoff your house!

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.