Should I pay off my mortgage before I retire?

Should I pay off my mortgage before I retire?

If you're approaching retirement and still carrying a mortgage, it can be tempting to prioritize eliminating it as soon as possible. But deciding whether to pay off your mortgage before retirement isn’t always clear-cut. It involves balancing several factors to see what’s right for your situation.

In this guide, Splitero walks through five key factors: your monthly budget, your savings, market risk (sequence of returns), tax implications, and alternatives.

Key Takeaways

• It's important to consider your monthly retirement budget and how much cash you need to have available to you. A lower mortgage payment can reduce the income you need each month, but you want to be sure you still have enough accessible funds for surprises.
• A mortgage payment can increase the amount you need to withdraw during market downturns, especially early in retirement, when withdrawals can have an outsized impact.
• Funding a payoff from tax-deferred accounts can create a one-year income spike and may affect Medicare premiums later, so timing and tax planning are part of the decision.
• If a full payoff doesn’t fit cleanly, alternatives like a recast, extra principal payments, or equity-access options that avoid a new monthly payment can help you balance lower housing costs with flexibility.

1. Your retirement budget

If the mortgage is a large part of what you spend each month, paying it down or paying it off could reduce the income you need to reliably bring in each month. That can also reduce how much you may need to withdraw from savings in the early retirement years.

If the payment is already easily covered by a steady income (for example, Social Security plus a pension), or if your interest rate is low and the payment does not strain your budget, the monthly benefit of paying it off may be smaller. In that case, the decision may come down more to what you would give up to make a payoff happen.

It’s also important to note that paying off the mortgage does not eliminate housing costs. Property taxes, insurance, and maintenance still remain, so you are evaluating the impact of removing the principal-and-interest payment, not the full cost of owning a home.

Questions to consider

1. How much of your monthly income is going towards your mortgage payment?
2. If you removed that payment, would you feel meaningfully more confident about your retirement budget?
3. If you keep the mortgage, does your plan still work in months when expenses run higher than expected?

2. How much cash you have available

Cash in a bank account or a brokerage account is easy to use. But retirement accounts can have tax consequences for withdrawals, annuities and pensions may be fixed, and other assets like a rental property or a small business can take time (and paperwork) to turn into cash. With that in mind, it’s important to ask yourself if, after any mortgage payoff, you will still have enough money that’s easy to use if you need it.

Paying off a mortgage often requires using a large lump sum. If that payoff leaves you with very little cash or non-retirement savings available, you may be more vulnerable to common retirement surprises like medical expenses, a major home repair, or helping family.

This is where a mortgage payoff can create a tradeoff. Paying off the loan may reduce your monthly expenses, but it can also move a large amount of cash out of savings and into the home. If that leaves you with a thin cash cushion, everyday surprises can become harder to handle.

Questions to consider

1. After a payoff, would you still have a healthy emergency fund and accessible savings?
2. If you had a large expense next year, what is the most likely source of funds?
3. Would paying off the mortgage reduce your cash reserves enough that you would feel financially vulnerable?

Homeowners often assume they can use their home equity whenever they need to, but many ways of accessing it depend on lender requirements, such as income verification, which may be harder in retirement. If you have significant equity in your home and are considering it part of your future cash reserves, it’s crucial to assess your options for accessing it as you weigh the pros and cons of paying off your mortgage before you retire.

3. Market risk and sequence-of-returns

Sequence-of-returns risk, also referred to as sequence risk or withdrawal risk, means that once you start withdrawing from investments, the timing of market ups and downs matters. A downturn early in retirement can do more damage than the same downturn later, because you may be pulling money out while account values are lower.

This connects directly to your mortgage because a mortgage is a fixed monthly obligation. You can cut discretionary spending in a rough year, but you usually can’t pause your mortgage the same way. If paying down (or paying off) the mortgage reduces your required monthly expenses, you may be able to withdraw less from investments during volatile markets. That can lower the chance you’re forced to sell at an inconvenient time.

Questions to consider

1. If markets dropped meaningfully in your first 1–3 years of retirement, how would you cover monthly expenses?
2. Does your mortgage increase the amount you’d need to withdraw from investments in down markets?
3. Do you have a “bad market” plan (cash buffer, flexible spending, other income sources), and does the mortgage fit comfortably within it?

4. Tax implications

If you pay off the mortgage using a large withdrawal from a traditional IRA or 401(k), that withdrawal generally counts as taxable income. If you take a large lump sum in one year, it can push more of your income into higher tax brackets and can affect other parts of your tax picture (including how much of your Social Security becomes taxable).

Medicare is another layer. Medicare premiums can be affected by the Income-Related Monthly Adjustment Amount (IRMAA), a surcharge added to Medicare premiums for those with high adjusted gross incomes. Your IRMAA is based on your income from two years earlier, so a large one-time income spike to fund a payoff can raise Medicare premiums later, even if only for a limited period.

Finally, if you currently itemize deductions, mortgage interest may be part of that. Paying off the mortgage can reduce interest deductions, although many households take the standard deduction and won’t see a major change here.

Questions to consider

1. Where would the payoff funds come from (taxable savings, brokerage, IRA/401(k), a mix)?
2. Would a lump-sum withdrawal push you into a higher tax bracket or create a big one-year tax bill?
3. Are you near Medicare/IRMAA income thresholds where a one-year spike could raise premiums two years later?
4. Would spreading the payoff over more than one year reduce the tax impact?
5. Alternatives to a full payoff

If paying off the mortgage all at once would strain your cash reserves or create a tax spike, you’re not limited to “all or nothing.” There are several ways to reduce the mortgage’s impact on your retirement budget while keeping more flexibility in the rest of your plan.

• A mortgage recast: If your loan qualifies, recasting lets you pay a lump sum toward principal. Your lender then recalculates your monthly payment based on the new balance. You keep the same loan and interest rate, but your payment drops.
• Extra principal payments (lump sum or spread out): Another option is to put additional money toward the principal without fully paying off the loan. You can do this as a one-time lump sum to reduce the balance right away. Or you can spread extra payments over time, especially if the money would come from a tax-deferred retirement account, so you can manage taxes and keep more accessible cash along the way.

If the real issue is needing cash while keeping monthly obligations low, it may also be worth comparing options that turn home equity into usable funds without adding a new monthly payment. Depending on your circumstances, that could include a reverse mortgage or a home equity investment (HEI).

An HEI provides cash upfront in exchange for sharing a portion of the home’s future value, and because an HEI doesn’t require monthly payments, it typically doesn’t require income verification the way monthly-payment loans do, which can make qualification simpler for retirees.

The bottom line: Prioritize flexibility and retirement resilience

Paying off your mortgage before you retire can change your plan in meaningful ways. It’s a good idea to consider what a payoff would do to your monthly budget, how much accessible cash you’d still have, how flexible your plan would be in a down market, and whether the way you fund the payoff creates avoidable tax or Medicare premium surprises.

In many cases, the most helpful approach is to compare a few paths side by side (full payoff, partial paydown, recast, downsizing, or using home equity without adding a new required monthly payment) so you can choose the option that best fits your goals and timeline.

Because the tradeoffs can depend on details like taxes, Medicare timing, and how your accounts are structured, it can be worth running the numbers with a qualified professional, such as a fiduciary financial planner or tax advisor, before deciding to pay off your mortgage before retiring.

Frequently Asked Questions

Can I use my 401(k) to pay off my house?

You can, but it’s worth running the numbers first. Withdrawals from a traditional 401(k) or IRA are generally taxable, and if you’re under 59½ you may also owe a 10% early-withdrawal penalty. Even after 59½ (when the penalty usually goes away), a large one-time withdrawal can create a big tax bill and reduce the retirement savings you have invested for the future. Consider talking with a financial or tax professional before using retirement funds to pay off a loan.

Can I do this penalty-free after age 59½?

After 59½, you can typically withdraw from retirement accounts without the 10% early-withdrawal penalty, but you may still owe ordinary income tax on traditional 401(k) or IRA withdrawals. There are also exceptions like the “Rule of 55” for some 401(k) plans, but it’s plan- and situation-specific. If you’re considering a large withdrawal, it may help to plan the timing (or spread it out) to manage the tax impact.

Will a lump-sum withdrawal to pay off my mortgage raise my Medicare premiums?

It can. Medicare IRMAA is based on your income from two years prior, so a large one-year income spike to fund a payoff can increase your Part B (and possibly Part D) premiums later, even if only temporarily. If you’re close to IRMAA thresholds, it may be worth coordinating withdrawal timing with a tax professional.

Does a mortgage recast require an appraisal?

Usually not. A recast typically keeps your existing loan and rate, and the lender recalculates the payment after you make a principal reduction, often with a processing fee, but without the full refinance process. The key is that not all lenders (or loan types) allow recasting, so you’ll want to confirm eligibility and minimum-paydown requirements with your servicer.

This story was produced by Splitero and reviewed and distributed by Stacker.