How a Mortgage Impacts Retirement Income

Does your employee retirement education include information about carrying a mortgage into retirement?

It can have a big impact on retirement wealth, says a report from the National Center for Policy Analysis (NCPA). Retirees have many reasons for carrying mortgage debt. For example, if the mortgage payments are small, a worker may not consider it an issue to pay them in their retirement years, or some retirees may purchase a home to move to a less costly, low-tax state to reduce their living expenses.

Retiring with mortgage debt is becoming much more common. According to research from LIMRA, for those ages 55 to 64, 37% of people were retiring with mortgage debt in 1989, while 2010 saw that figure rise to 54%. For those ages 65 to 74, the figures over the same time frame increased from 22% to 41%. And for those 75 or older, the figures over that period increased from 6% to 24%.

Mortgage interest may not concern some retirees, as it is a tax deductible expense. But, the NCPA article points out, Social Security benefits and retirement account income will likely put retirees in a lower tax bracket than while they were working. Itemizing, therefore, may not be the best way to reduce their overall tax liability. For tax year 2013, the standard deduction is $6,100 for singles or marrieds filing separate, and $12,200 for marrieds filing jointly, which could be more than if they itemized. So paying interest on a mortgage gives the homeowner no tax advantage.

If moving to another state, retirees should weigh their options before a home purchase. In the report, NCPA Senior Fellow Pam Villarreal uses the State Tax Calculator to consider the example of a 64-year-old New Jersey resident who plans on retiring in Texas, a state with one of the lowest tax burdens, at age 65.

With a home in New Jersey valued at $300,000 and $50,000 left on his mortgage to be paid off in five years, he could move to Texas and purchase a house for the same amount ($300,000) and assume a $50,000 mortgage for 10 years. His monthly payments will be low, but he will gain only $79 a year in additional discretionary income for the rest of his life. Assuming he lives to age 100, his lifetime gain will only total $3,404.

If he instead purchases a $250,000 home using the proceeds from his previous home, he will gain an additional $2,318 in annual discretionary income, resulting in an additional lifetime wealth accumulation of $99,334.

“The State Tax Calculator really demonstrates how mortgage debt can sap your wealth, even in states with lower taxes,” says Villarreal. While paying down higher-interest debt should take priority, Villarreal urges seniors to seriously consider the pros and cons of carrying a mortgage into retirement.

The report, “Retiring Soon? Pay off the House First” is at