Using former mortgage money to improve your lifestyle is appealing after decades of being shackled to a mortgage.zamrznutitonovi/iStockPhoto / Getty Images
Life is cheaper in retirement, and here’s why.
When you retire, you no longer have to save for retirement. Retirement savings should be one of your biggest monthly costs in your final years in the work force. How to free up money to save for retirement: Get your mortgage paid off in your 50s.
The ideal time to save for retirement is in your 30s and 40s because you get several decades of compounding working for you. But expensive home prices mean people often have to devote their full financial attention to down payments and then to affording mortgages, property taxes, insurance and maintenance. Yes, home ownership is a handful.
And then there’s the move-up home purchase many people make after outgrowing their starter home. Moving up after six years can restart the mortgage amortization clock and further delay your ability to turn mortgage payments into retirement savings.
Owing money on a mortgage in the years ahead of and during retirement is normal, so no shame on those in that position. Statistics Canada recently reported that households where the main earner was 65 and up had total mortgage debt of $141.2-billion in the first quarter of this year, up from $97.2-billion in the same period of 2020.
I asked financial planners in my LinkedIn community about the percentage of their clients who retire mortgage-free, and the answers ranged from 60 per cent to 90 per cent. Of course, people who use planners tend to be affluent and thus have the financial means to pay down their mortgages.
What are mortgage-free people doing with the money they save by not making payments? You can offset some lean retirement-saving years in the past by redirecting your entire mortgage payment into retirement savings, but planners say this doesn’t always happen.
Adam Jenkins, a certified financial planner in Kingston, said 70 per cent of his preretirement clients are mortgage-free. Within that group, roughly half of the money that used to go into mortgage payments has been rerouted.
Using former mortgage money to improve your lifestyle is appealing after decades of being shackled to a mortgage. “For some people, it’s almost like winning the lottery when their mortgage is paid off,” Mr. Jenkins said.
If you can resist that temptation and direct all or most of your mortgage money into retirement savings, there are two rewards. One is that you top up your registered retirement savings plan and tax-free savings accounts. The other benefit plays out more subtly after you retire.
A key aspect of retirement planning is to balance your expected income needs with the projected income you’ll get from your savings, government benefits and pension, if applicable, each year.
Having a mortgage in retirement increases your retirement income needs in a big way. The same applies if you pay off your mortgage and start spending the savings realized by not having to make payments any more. If you inflate your lifestyle before retirement, dialling it back after leaving work seems like quite the downer.
If you turn a $2,500-a-month mortgage payment into monthly savings of $2,500, then your postretirement expenses drop by $2,500 a month.
Mr. Jenkins said that mortgage-free clients are increasingly taking on new mortgages or lines of credit to help family members afford a home down payment. His take is that while giving these gifts is a generous thing to do, carrying debt in retirement adds a layer of stress.
Earlier this year, I wrote about how some retirees with traditional mortgages are paying them off using reverse mortgages. With a reverse mortgage, you don’t have to repay accumulated interest and principal until your home is sold.
One more reason to strive for mortgage freedom in retirement is to insulate yourself from interest-rate increases. In its report on retirees and mortgages, Statistics Canada noted that mortgage interest costs jumped 46.2 per cent from July, 2020, to the same month in 2024.
Finally, let’s be clear that owing money on a home equity line of credit in retirement is not much different than having a mortgage. HELOCs may be more of a danger to your financial health because you can make interest-only payments. With mortgages, you’re on a path to paying your principal in full as well as the interest you owe.
Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.
