Happy Senior Couple in the Front Yard of Their House.We used to simply assume that we would retire debt-free. In particular, a paid off mortgage was a staple of the American dream. But now that Americans are carrying more mortgage debt than ever before, it may not be possible to retire without a monthly house payment. In some cases, it might not even be a good idea!

If you plan to take a lump sum disbursement from your retirement account, with the intention of paying off your mortgage, that may or may not be a good idea. Every situation is different, but in general you should not take this step if:

  • You fall into a higher income bracket (talk to your financial advisor about what this means)
  • The interest rate on your mortgage is particularly low (generally less than 5 percent)
  • Paying off the mortgage will cost you a healthy cushion of cash to cover unexpected medical expenses or other such emergencies
  • You won’t have to sacrifice your standard of living if you keep making the monthly payments

Withdrawing funds from your retirement account to pay off your home means that you lose all of the interest that money would have earned in the future. If your retirement account is earning interest at a higher rate than you pay on your mortgage, taking this route is often not a good idea.

On the other hand, it’s possible you should pay off your mortgage with a lump sum distribution if:

  • Your retirement funds are earning a lower rate of interest than you pay to your mortgage company
  • You have another source of retirement income (multiple retirement funds)
  • You won’t be able to cover your high mortgage payments once you stop working, and you would prefer to stay in the home rather than sell it

Retirement dilemmas rarely come with easy solutions, and what worked for your neighbor might not work for you. Before taking a lump sum distribution to pay off your house, consult with your insurance agent about the drawbacks and benefits of this plan. He or she can help you make the decision that best benefits you.

14330 – 2015/4/6