Mortgage Free – Why This is Essential for Traditional Retirement

Who in their right mind would argue that being mortgage free is the only way to be if you expect to retire in some traditional way, with a house of your own? That would be me. As they say, “opinions vary” and “results vary.” But, if you pay off the mortgage before you retire, that eliminates a large financial obligation essential for living – someplace to live. That’s one of the big reasons it makes sense to me.

From my vantage point, as an early self-retired individual, I see being 100% debt free as an essential part of having peace of mind when you retire, and I’m up on my soapbox to explain why. Gather ’round my financially fit friends and lend me your ears.

First, let me offer a few examples that I’m personally acquainted with. I know four retirees who own their homes free and clear. They’re able to make it financially on retirement programs because they don’t have a mortgage payment. Three are traditionally retired – work all your life and then retire. One is non-traditionally retired – stop working early to dodge income taxes and enjoy youthful retirement. All are doing just fine because they’re not feeding the banks with a monthly interest payment.

Yes, this is anecdotal evidence at best, and it only goes so far to convince anyone of anything. Most often, we need some hard numbers to sway our view. So, now let me now offer up a mathematical reason why being mortgage free is essential – especially if you’re counting on a traditional retirement funded by Social Security.

Take a look at the amount the Social Security Administration says you’ll get when you retire. You could retire as early as 62 or wait until you’re 70. The choice is yours, and it affects the amount you’ll earn. Let’s say you’ll earn $1,500 a month in benefits after you retire. Now, let’s work our way up from the basics to see how far that money will go. For easy math, let’s divide that money into five equal parts. Here’s how we might allocate this on a monthly basis:

$300 for food, condiments, meals out and the occasional aperitif.

$300 for utilities (electricity, gas, water, sewer, phone and cable).

$300 for health insurance (assuming you’re on Medicare), homeowners insurance, all insurance co-pays, and real estate taxes.

$300 for transportation (fuel, insurance, maintenance, repair and replacement costs).

$300 for clothes, household supplies, home maintenance and repair, entertainment, and a little mad money.

Total: $1,500 a month.

What’s missing from this accounting? It’s housing of course. Remember, that all-important place to live!

Whether you think allocating $300 a month for the above expense categories is adequate or inadequate, we haven’t even factored in housing. According to national averages, we should be allocating about 30% of our income to housing – that’s $500 a month. Take that amount out of the picture, and what would that leave us for the rest of the categories? Worse yet, what would that get us in terms of a place to live?

Yikes! This doesn’t look like such a great financial picture at all. It’s no wonder folks get into their 60’s and realize that they can’t afford to retire. And, that’s why it’s so very important to start thinking this through long before you retire.

As if this picture isn’t sufficiently bleak, let’s add two more factors that many of us don’t think about. Here they are: 1) when you retire, you have about 60 additional hours each week to go out and spend money; and, 2) the cost of health care generally goes way up.

So, my financially fit friends, you best become a “hair on fire” enemy of debt and get rid of that mortgage payment if you have any hope of making it on Social Security (or other single retirement program) while living in your own home in a lifestyle that is largely what you’re used to now. Otherwise, you’ll need another source of income, a big pile of money, or both.

Clair Schwan hosts where he encourages others to build wealth and achieve financial freedom by becoming debt free. He’s also big on self-reliance and screams that at the top of his lungs as the host of a blog dedicated to helping others achieve happiness through a self-directed life filled with personal achievement.

Photo by Angela Rutherford

About Clair Schwan

5 Responses to “Mortgage Free – Why This is Essential for Traditional Retirement”

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  1. I totally agree with you. The only thing MAYBE is if you have a big house that isn’t paid off and sell it and buy a condo or something out right with profits from the sale. But still… at the end of the day you end up with paid off house.

    Even if you have more money than just social security coming in you can still have a much nicer lifestyle when you aren’t making a mortgage payment.

  2. Petunia100 says:

    I think a better title for this post would have been “Why You Can Not Retire on Social Security Alone”.

    While I plan to be mortgage-free before retirement, I disagree that it is always essential. Everyone’s situation is different. If you have income in addition to SS benefits, a mortgage may not be an impediment to your successful retirement at all. It just depends.

    First time visitor, I like your blog and will be back.

  3. Clair Schwan says:

    Ashley, yes, there are many variations on this theme. The idea is to get thinking, and a condo or something that is sufficiently downsized is just the kind of thinking we should be doing. Also, to have a nice reserve built up, it would be great to get things paid off for a few years so the income can help feather the nest a bit.

    There are just so many people who don’t have much of anything going for them in terms of retirement, so having a place that is free and clear is a giant step in the right direction – no matter what kind of “fixed income” you’re looking at over the longer term.


  4. Jenn says:

    The breakdown is an excellent starting point for your own personal analysis of what it will really cost you to live in the future. It is a great starting point to get you thinking. The numbers used need to be taken with the world’s largest grain of salt as they would have no relation to reality in many areas. The point though is to go through the exercise of figuring out what will continue in retirement, what will go away and what could/should be added. Personally my retirement budget must include a large travel fund, and I’d like to have some funds available for a gym/pool membership and to take some general interest courses.

    I agree that getting rid of the mortgage is essential. Likewise I can’t imagine having car payments in retirement, but we’ve always paid cash for used cars and don’t see the logic of a monthly payment even now while we have two incomes. FYI I think your amounts for home maintenance are way too low for any location. The estimate I’ve always used is ~2-3% of the value of your house should be set aside every year. You won’t need that amount each year but eventually you’ll be replacing big ticket items like windows, roofs, decks, etc. The past 6 weeks here, we’ve done over the roof on the house and garage ($18500, yes they are large and complicated), removed racoons/racoon proofed our roof soffits/vents ($2500) and we’ve got the quote in to replace our iron filter ($4400). Yes the iron filter and racoon costs are specific to living in the country and having hard well water, but the theory works every where. If you live in a hot climate you’d better plan on replacing your A/C every x yrs. When the time comes it shouldn’t be seen as an unexpected expense that causes you to dive into your emergency fund. Now that our house is approaching 20yrs old we are starting to look at replacing or renovating many things. The roof was just the first of what will be a long list. It’s painfull to spend huge amounts on items that give you no added enjoyment. If the money had all gone to new furniture or appliances, or a kitchen renovation at least I’d be enjoying it daily. A new roof (or windows) just mean you don’t have leaks, drafts, and you maintain the value of your home.

    Every time someone says renting is “throwing away your money” it’s all I can do not to roll my eyes at them. I think of the money we “throw away” annually on property taxes, insurance, and giant utility bills. Then there is the ongoing maintenance, repairs and renovations just to maintain your home. Everyone seems to agree a home is a good investment, but that implies that at some point you will cash in and collect on your investment. The equity in your home is just a number on paper if you never get your hands on it and enjoy it. Kind of like contributing to your retirement accounts all your working life and never making a withdrawl in retirement.

    We’re hoping to retire in 10 years (at 57/60) and the discussion has already started on whether or not to sell the “dream house” we built and downsize to either a very inexpensive home in a small town or a rental apartment in the city (my preference). Our monthly costs here even without a mortgage will make our retirement expenses high. Our property taxes are nearly $500/mth. Our electricity averages out to $500/mth (we’re in the country so well/septic means no water/sewer bill). Those costs won’t go away after the mortgage is paid off. For that $1000/mth we could rent a two bedroom apartment with electricity and pocket the ~$500k in equity in our home. Now that would make a heck of a travel budget!

    Yes I enjoyed designing and building this home. It’s been a great place to raise our kids. For me though, I want to be free to travel extensively without making arrangement for someone to cut the grass or blow out the laneway if there’s a blizzard, or to check the house every few days if we are gone for several months at a time. And I certainly don’t want to still be living here when the new roof is ready to be replaced again!

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