Retiring with Mortgage

There isn't really one answer as to why there are some of us who are at retirement age but still have quite a mortgage left on the house. Before the problem with subprime loans, the statistics looked bad. For example, for homes with someone age 65 to 74, more than 32 percent had a mortgage on the primary residence. In 1992 it was only 19 percent. Just a picture of things to come.

But there is hope. Here's what you should do. Do everything you can to pay off that mortgage so you can live without it in retirement. That will free up a ton of cash, no? If you have a big savings account, simply pay off that mortgage. Many of us have cash in a money-market fund in a regular taxable account. Sounds bad, but maybe using that money to pay down your mortgage is a good move. Yes, your mortgage might only cost you 6 percent and the interest is probably tax deductible. But your money-market is probably only around 5 percent. And you have to pay tax on that income.

If you're dealing with IRA's and 401k's, a study by the AARP found that many employees leaving their jobs cash out their 401k's using the money to pay off some of their debt. But that is just crazy. A big 401k withdrawal means paying big income tax - so you're better slowly withdrawing to make mortgage payments. That way, you can use the mortgage tax deduction against the withdrawal and it works out.

If your mortgage right now is so large that paying it off will put you in a bind, you can refinance. Yes, getting that payment down is what is important. Better still, trade down, if you can. You can even refinance later in retirement further shrinking those payments. Banks regularly loan to retirees. Turns out they are a good risk.