Why I Told My Client Not to Pay Off Their Mortgage Before Retiring

Paying off your mortgage before retirement sounds responsible. Sometimes it is. Sometimes it quietly costs you the best years of your life.

In this episode, James walks through the story of a client who delayed retirement for five extra years just to eliminate an $1,800 monthly mortgage payment. On paper, the decision looked smart. Her portfolio grew, her expenses dropped, and everything became more “secure.” But the years she gave up were the healthiest and most active years of her retirement.

The deeper issue is that many people focus on the balance sheet instead of the cash flow. The real question is not whether you still have a mortgage. It is whether your retirement income can comfortably support the payment alongside everything else you want your life to include.

James also explains the risks that do come with carrying debt into retirement, including sequence of return risk and the pressure a fixed mortgage payment can place on a portfolio during market downturns. The answer is not one size fits all. It depends on your withdrawal rate, reserves, and overall plan.

Because retirement planning is not just about maximizing wealth on paper. It is about making sure you do not sacrifice years you can never get back in pursuit of a goal that may not actually improve your life.

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Transcript

The Mortgage Rule That Delays Retirement

SPEAKER_00 0:00

My client had $2.5 million saved for retirement. She was 63 years old, and she decided that she was going to keep working for five more years because of an $1,800 per month mortgage payment that she wanted to fully pay off. This video is about why that was one of the most expensive financial decisions she could make, despite it looking very responsible on the outside. It's retirement advice that sounds very sensible. Pay off your mortgage before you retire. It feels right. There's no debt, it's clean, it's responsible, nothing to worry about. This is the mindset that many people have going into retirement. And for some people, in some situations, it's absolutely the right call. But I want to show you what this costs one of my clients. Because for her, and my guess is this is the same for many of you watching this, following that advice meant working five more years than she had to. And the years she gave up weren't the tired, worn-out years at the end. They were the healthiest years at the beginning. The years where she still had energy, the years where her husband was still healthy, the years that she was gonna look back on and wish she could have them back. The hard part now is she can't get those back. And she did, at least on paper, what seemed to be the wise, responsible, prudent thing to do. She just believed something that wasn't true for her situation. So let me show you the math for her situation. So

Susan’s Spending Plan And The 4% Math

SPEAKER_00 1:09

as you're exploring the same thing with your retirement, you might know what's best for you. So let's paint the picture in a little bit more detail. My client, let's call her Susan. She came to me at 63. She had $2.5 million in her portfolio and a mortgage that had about five more years until it was fully paid off. That mortgage payment was $1,800 per month. So about $21,000, $22,000 per year. She had done the math on what she wanted to spend in retirement. All in, including the mortgage, she needed about $100,000 per year. So this broke down to about $80,000 of non-mortgage expenses and about $20,000 per year in that mortgage expense. So here's the most important thing about Susan's situation. I want you to think about your situation as I explain this. I don't care what Susan's mortgage balance was or her payment or anything else there. All I care about here was what's Susan's total expenses, including the mortgage. And in this case, that came out to $100,000 per year. Now, $100,000 per year is exactly 4% of a $2.5 million portfolio. So to me, I don't care if Susan has one year left on that mortgage or 30 years left on that mortgage. What I'm focused on is can her portfolio support it? When you look at a 4% withdrawal rate for someone who's already in their mid-60s, that's a very comfortable and based upon long-term averages and historical norms, that's a very sustainable withdrawal rate. I mean her portfolio could sustain that over a 30 plus year retirement, assuming it was invested the correct way. That's before even accounting for the fact that yes, 100,000 is coming from the portfolio in the first years. But once Social Security kicks in, and especially once that mortgage is paid off in five years, that withdrawal rate shrinks even more. So from my standpoint, I'm not looking at the balance sheet here. I'm not saying Susan, you have a mortgage, therefore you can't retire. No, what I want to look at is Susan, what does your cash flow look like? What income sources are coming in, and how does that compare to the expenses you have going out? That's the equation that really matters for your ability to

The Hidden Price Of Five More Years

SPEAKER_00 2:50

retire. So it would have worked, but Susan had one rule for herself. She was not going to retire until that mortgage was paid off. This was an idea that was in her mind for the longest time and it was not something she was going to let go of. She held onto it her entire working life, so she decided to work five more years. Here's what happened the mortgage was paid off by the time that she turned 68. That was gone. Her expenses went from 100,000 per year at that point to 80,000 per year at that point. Her portfolio of 2.5 million at age 63 had grown to about $3.5 million by age 68. On paper, Susan was golden. Everything was improved, everything was optimized. But the reality is her life and your life and your retirement do not just live on paper. What Susan actually missed is five years where she and her husband both had their health and could travel and enjoy and spend time together in retirement. She missed five years because in her mind, yeah, I have 30 years of retirement, but not all those years are created equal. The first five to 10 might be the only years where you have your full health. And based on that math, Susan missed a giant portion, not of her lifespan, but of her health span. And here's the kicker. All she really had to show for it was a bigger portfolio and lower expenses, meaning there's just that much more money she was never gonna spend. And when I think about not spending money, what that really translates to in Susan's situation is that much more regret at what could have been. Most of her money at this point was going to her estate, not actually to her. She was optimizing for something that many of us feel is responsible. Have no mortgage going into retirement, have no debt going into retirement. And I get it. But my feedback to you is stop looking at the balance sheet and start looking at the cash flow. In other words, the right question isn't do I have a mortgage? It's can I afford the mortgage payment in my retirement years? So let me

Stop Tracking Net Worth Start Tracking Cash Flow

SPEAKER_00 4:30

point out two very real things before we wrap up here. This is not the same for everybody. There is a very psychologically sound reason for paying off a mortgage. It feels good. The peace of mind, the confidence that absolutely is true. I've spoken to so many clients, have so many clients where paying off the mortgage was the best thing they ever did. But what I'm going to push back on is what's it costing you to get that? It's not costing you money. I'm not looking at the opportunity cost of could you invest that money versus should you've paid off the mortgage? That's a fair thing to look at, but I'm looking at something much bigger and something much more important. What's it costing you in terms of years of your life to have this actually happen? Are you working longer than you need to? Are you sacrificing your healthiest years when you don't really need to simply because you are so stuck on paying off that mortgage? The answer is no. If you can pay it off, if you can do this and still have quality of life, by all means do it. There's so much peace of mind and so much confidence that can deliver to you. But if you are trading your best years to do something that's not actually helping you financially in the long term, really question the why behind that. Now, on

Peace Of Mind Versus Lost Time

SPEAKER_00 5:27

top of this, I do want to address the very real risk of not paying off your mortgage. And that comes down to something called sequence of return risk. When you look at your retirement, there are certain expenses you can cut back on if you need. If there's a major market downturn, you can cut back on some discretionary expenses. There's a major market downturn, you cannot cut back on your mortgage. Your bank doesn't care what's happening in the market, the bank is going to expect that mortgage payment. This presents a very real risk, and that risk is what's called sequence of return risk. Sequence of return risk says that one of your biggest risks in retirement is in those years when, not if, but when the market is falling. If you are forced to pull more money out of your portfolio at depressed share prices, that's a very real risk. You can dig yourself a hole that's very difficult to get out of if you happen to retire at a bad time in the market. Now, having a mortgage is simply increasing those fixed expenses that you cannot cut back on. In other words, it's increasing the amount you would otherwise have to pull out of your portfolio that's declining in value. That's an enormous risk if you're not planning for it

Sequence Risk And Building Cash Reserves

SPEAKER_00 6:26

properly. So here's the way that you address it. There's two steps to do so. Number one, understand what your total withdrawal rate looks like. When I go back to Susan's example, Susan was already at a 4% withdrawal rate, even including her mortgage. That's very sustainable over time, even in market downturns. In fact, that 4% rule originally comes from understanding what's the most I could take out of my portfolio for 30 years, even if I retire into a horrible market. That's where that number comes from. So Susan's kind of squared away there. Now, if that number started to creep closer to 5%, 6%, 7%, depending on how large that gets, you may no longer be in a position where that withdrawal rate is sustainable. So this is gonna depend upon the duration of the mortgage, the total life expectancy you have, your total portfolio value. Those are gonna be some variables that impact what is no longer a sustainable withdrawal rate here. But that's step number one. If you are looking at your total retirement expenses, including your mortgage, and it's under a sustainable withdrawal rate, to me, that is granting you permission to say, yes, you can still do this, even if the mortgage isn't fully paid off. Step number two is understanding this. You need to construct a portfolio that's designed to support that. So get out of the mindset of saying, oh, I'm retired, I should have a 60-40 portfolio, or I'm retired, I should have a 50-50 portfolio, or I'm retired, I should have any standard cookie cutter portfolio. You need a portfolio that is custom to your cash flow needs, custom to your withdrawal needs. If you're gonna have money that you know you're gonna need from your portfolio, you need to have a certain percentage of your portfolio in high quality, low-risk bonds, money market funds, cash equivalents, in other words, things that are not going to go down with the market when the market drops 20, 30, 40% or more. We call this at root financial, the financial planning firm that I run, we call that root reserves. How much do you need in your root reserves to be strategically aligned with your next five years of cash flow to ensure that regardless of what the market does, we have assets we can draw from and we're not gonna be stuck only having growth assets that have dropped significantly to fund our retirement needs. Now here's the kicker. If you're gonna retire with a mortgage, you need to increase the amount of those root reserves. You are increasing your cash flows you need to pull from your portfolio. Therefore, you need to adjust your portfolio allocation. Not just saying take this from 7030 to a 6040. No, that's too templated, that's too boilerplate. You are customizing it by saying how much do you specifically need in these reserves to protect against what will happen at some point. So

Final Framework And The Quiz Offer

SPEAKER_00 8:49

as we wrap up, I want to be very clear that this is not a video saying do not pay off your mortgage before retirement. There are plenty of good reasons to do so. What this is, is an attempt to properly frame to you what I've seen too many people give up just in the name of paying off their mortgage. What they're giving up isn't the opportunity cost, but that money could have done invested in the SP 500. What they're giving up is some of the best years of their life they had no need to give up in the first place. Now, if you want help running an analysis on your specific situation and the things that you should be considering, whether it comes down to mortgage payoff or investments or taxes, we have a retirement readiness quiz that we'd love to send you. If you comment quiz in the YouTube comments below, we will send that to you so that you can see where you stand relative to your goals. And if you enjoyed this video, please be sure to subscribe and share it with someone that you think could benefit as well.