NCPA - National Center for Policy Analysis

Retiring Soon? Pay off the House First

February 14, 2014

By 2031, the last year of the boomer generation will reach their full retirement age. Many will consider moving to a less costly, low-tax state to reduce their living expenses. However, more than half of those on the verge of retirement -- 55 to 64 year olds -- still carry mortgage debt, and some will carry it into retirement for many years, affecting their lifetime wealth, says Pamela Villarreal, a senior fellow with the National Center for Policy Analysis.

Retirees have many reasons for carrying mortgage debt. If their mortgage payments are small, they may not consider it an issue to pay them in their retirement years. But it could have a substantial impact on their wealth. Using the NCPA's State Tax Calculator (, Villarreal considers a 64-year-old New Jersey resident who plans on moving to Texas (a state with one of the lowest tax burdens) and retiring at age 65. She assumes he has $500,000 in tax-deferred retirement savings and $75,000 in regular savings. He currently earns $75,000 a year, and has a home in New Jersey valued at $300,000, with $50,000 left on his mortgage to be paid off in five years:

  • If he moves to Texas, purchases a house for the same amount ($300,000) and assumes a $50,000 mortgage for 10 years, his monthly payments will be low ($506 a month at a 4 percent fixed rate) but he will gain only $79 a year in discretionary income for the rest of his life. Assuming he lives to age 100, his lifetime gain will total $3,404.
  • If he instead purchases a $250,000 home with cash, 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!

Despite Texas' overall low tax burden, its median property tax rate is about the same as New Jersey's. Though property taxes and mortgage interest payments are both tax deductible, they are not enough to reduce his federal tax burden and increase his wealth. Thus purchasing a less expensive home and paying it in full increases his wealth by reducing property taxes and interest payments.

Since a home is often considered an investment, many retirees may just assume that buying a bigger home is simply replacing a cash asset with housing wealth. While seniors could eventually tap into this equity through a home equity loan or a reverse mortgage, their homes do not always appreciate. Indeed, a home can be a poor investment if it is the only primary asset.

When considering a move for their senior years, whether to another home or another state, pre-retirees should look at the pros and cons of carrying a mortgage. Paying down higher-interest debt, such as credit cards, should take first priority, but those who have only mortgage debt should think carefully before taking on another mortgage or extending their existing one.

Source: Pamela Villarreal, "Retiring Soon? Pay off the House First," National Center for Policy Analysis, February 14, 2014.


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