Why you should pay off your mortgage before you retire

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More Americans are quitting the workforce without retiring their mortgages. The most recent Federal Reserve survey shows that 32 percent of households headed by someone age 65 to 74 were carrying home-mortgage debt.

That could be a mistake. Consider this scenario. Two retired couples have income of $16,000 from Social Security and $24,000 from individual retirement accounts.

The couple without a mortgage would be taxed on their IRA withdrawals, but with the standard deductions, they would owe only about $600 a year in taxes, leaving them with $39,400 in after-tax income.

The second couple took out a $200,000 30-year mortgage at age 50 that costs $1,200 per month until age 80. The interest deduction doesn't help because by the 16th year of their mortgage, just $8,400 goes to interest. Added to other deductions, they will have little more than the $11,600 standard deduction taken by the first couple.

To match the first couple's standard of living, they have to make large taxable withdrawals from their IRA. The withdrawals would drive up their total income, triggering taxes on Social Security. They would need total pretax income of more than $58,000 to have the same standard of living as the first couple, and they would pay more than $4,300 in federal taxes.

Financial columnist Jonathan Clements says there's another problem with carrying a mortgage into retirement. It limits the ability to tap into the home's value through a reverse mortgage. He says the reverse mortgage is a big financial backstop for cash-strapped retirees.

To pay off a $200,000 30-year fixed-rate mortgage at 6 percent with a $1,200 payment: Add $50 a month to pay off the loan in 27 years. Add $200 a month to pay off the mortgage in 21 years. Add $500 a month to pay it off in 15 years.

Calculate your own time frame and payments to see what you could do.

Long Island Investment Tips Articles > Why you should pay off your mortgage before you retire