Should You Tap Your Retirement Savings to Pay off Your Mortgage?

Should You Tap Your Retirement Savings to Pay off Your Mortgage?

🏡💰 Thinking about paying off your mortgage before retirement? Not so fast…
Going into retirement debt-free sounds like the dream, but should you tap your retirement savings to make it happen?
In this interview, Victoria with Vitality Investments and Erin Kennedy break it down 👇

✅ When it does make sense to pay off your mortgage
⚖️ How to balance the numbers vs. peace of mind
🚨 Why pulling from retirement accounts could backfire
📈 The hidden risks: taxes, reduced liquidity, and even higher Medicare premiums
Bottom line: A paid-off house feels great… but the strategy behind it matters even more. Before you write that final check, give Victoria a call at 941-413-0331 or reach out to us through our contact page here.

Transcript:

Erin Kennedy 0:03
Victoria, so good to see you. We start with a really common question: Should you tap your
retirement accounts to pay off your mortgage? A lot of people want to go into retirement debt-
free, which is why paying off your mortgage becomes a very common financial goal. But before
you write the final check, you recommend crunching the numbers first and thinking through
some unforeseen consequences. Let's do that, and let's start with the question: though, do you
recommend people pay off their mortgage before retiring?

Victoria Larson 0:32
Well, Erin, that depends. Yeah, yeah, it's not a straight answer. Sure, it's a very it's a common
goal people have, and if you can pay off your mortgage without rating your retirement accounts,
then yes, it's a good, it's a win because then all of a sudden your expenses are lower, so you're
not having to take out as much each month to pay those expenses, and your retirement assets
can grow. Now, why I say it depends is because many people refinanced over the last few
years, and they have interest rates at 3% or even lower.

Erin Kennedy 1:05
Right.

Victoria Larson 1:05
and so here we've got a situation where that is probably the cheapest money you'll ever borrow.
And if you are now got a 3% and you're using dollars that are earning you 567, percent, or even
worse, you're having to take money out of accounts that you have to pay taxes on. You could
find yourself in a poorer situation than by paying off that mortgage.

Erin Kennedy 1:29
Right. You know, I'm glad that we get to talk this through. As a parent, this is a financial and
emotional decision. So then, how do you help clients balance the numbers versus peace of
mind?

Victoria Larson 1:39
Yeah, this is where personal finance really is personal. So there's there's a math side to it, and
it's very simple. What's your mortgage rate, and you compare that rate to what is a conservative
rate of return your portfolio could earn. And if the rate of return is higher than that mortgage rate,
then the mortgage wins. You keep the mortgage, but for many having that mortgage and that
that added expense is a weight that can keep them up at night. We understand that. We

certainly want retirees to be happy and not worried in retirement. So here's what I would
suggest. First of all, if that is one of your goals in retirement, then look to be paying that off with
wages and putting extra payments toward that mortgage while you're still working. Second, you
might want to readjust your goal. If the goal is, hey, I want to have it paid off at 65, maybe you
say, let's target 70. Give yourself some time.

Erin Kennedy 2:38
Yeah, let's say though that I am one of those people, Victoria. I come into your office and I say I
am going to sleep better at night if I know that my mortgage is paid off and I see this great big
bucket of money, my tax deferred accounts there. When or should I ever tap that money to pay
off my mortgage?

Victoria Larson 2:54
Yes, that happened just yesterday. Client came in and chatted with us saying I want to pay off
this mortgage. Yeah, owes $300,000 out of that. Now happens to be, you know, not only does
he have to worry about federal taxes, but also state taxes. So I shared with him: if you need
300,000 and you're already in the 24% tax bracket, you're going to need 400,000 to pull out of
that, plus the addition for state taxes. So when you pull money out of tax deferred accounts,
those are the least favorable dollars to use to pay off your mortgage. Instead, like I said, you
want to look at wages potentially, or if you have extra cash in your savings account, or even
non-qualified, non-retirement accounts that have more favorable capital gains tax rates. If the
only dollars are your tax-deferred accounts, then my recommendation is you want to tap into
those dollars only staying within the current marginal tax bracket you are in. You don't want to
be taking money out that's going to bubble you up into a higher tax bracket, for example, going
from 24 to 32%

Erin Kennedy 4:09
Absolutely, something a lot of people don't necessarily consider. So let's walk through a couple
more of those pitfalls that catch people off guard when you take large withdrawals from those
retirement accounts. You just mentioned tax issues. Obviously, you're reducing liquidity and
increases on Medicare premiums.

Victoria Larson 4:26
Right, right. Taxes. Most people understand they're going to have to pay a tax from their their
IRAs when they take money out, but the liquidity is a real factor here. When you put money into
your home, accessing that money is is is not as easy as tapping into your IRA when
emergencies come up. So that's something you really need to be mindful of. The one that really
gets overlooked is the IRMA cost because it doesn't hit you until two years later after you've
actually taken those dollars out of the. Account, and for an individual that could potentially be an
extra $500 a month, and for a married couple an extra 1000. That's a huge added expense for
using those tax dollars. And the last one I'll share here is just the opportunity cost. If I'm pulling
out $400,000 out of the account, I don't have that compounding benefit of those dollars growing.

Erin Kennedy 5:24

Now it's really interesting to talk this through with you, Victoria. I'm sure your clients probably
have noticed as much that after you sit down with the spreadsheets and talk through all the tax
consequences and everything else, it can change how you feel about it. Which, as you
mentioned at the beginning, this is why this is all personal finance. The different, the answer will
be different for everyone. So, if somebody would like to sit down with you, crunch the numbers,
talk through the pros and cons, what's the best way to reach you?

Victoria Larson 5:47
Yep, they can email us at info@vitalityinvestments.org.

Erin Kennedy 5:53
All right, great. Again, Victoria, thank you so much for your time today. I really appreciate it.

Victoria Larson 5:56
Thank you.