I am retired. Do I have to pay the mortgage payments?

It’s 5 pm on Tuesday, and you can listen to it Ramsay Show And you are sitting in a traffic jam. Dave Ramsey talks about the best ways to pay off debt and why it is essential to be debt-free. You have two things working in your favor: (1) You have the money to do it. (2) Simply navigate rush hour traffic for a few weeks longer, as you will retire at the end of the month.

The next day, I started doing some research on paying off your mortgage, and I found Rick Edelman, founder of one of the largest personal finance companies in the country. His advice is the exact opposite of Ramsey’s: You should extend a large mortgage for as long as possible, he asserts.

I think this leaves you confused. The truth is that personal finance is just that: personal. The right answer for you will not come from a person who talks to a million people and gives one answer.

If you have the money to pay off your mortgage and are retired, or about to retire, this article will allow you to put yourself in one of three groups, to get closer to the right answer for you.

1. You have cash because you are afraid of the market

Should you pay off your mortgage? yes. In this case you must pay it.

why? There is a term we use in this profession: arbitrage. If applied in this context, you have a negative balancing. The bank pays you 0.25% on your savings account (if you’re lucky) and deducts 3.75% on your mortgage. So, you lose 3.5% every year you stick to this loan. This is of course an oversimplification, but you get the point.

What is the downside? First and foremost, you are losing liquidity. When you pay off a mortgage, you’re basically putting the money into a piggy bank that you can only get back if you sell the house or click on equity. The second is the tax return. Paying off your mortgage could mean you’re below the standard discount threshold because you don’t have interest on the mortgage to write off. This could raise the effective tax rate, but probably not significantly. Finally, but especially important today, getting a loan is an inflation hedge. Because the principal and interest payment remain fixed in a fixed rate loan, your housing expenses will likely inflate much more slowly than the cost of a CPI-W.

2. You have the money in the brokerage/taxable account

Should you pay off your mortgage? Mostly not.

why? Same idea as above, but reversed. You now (historically) have a positive balancing act. From 1991 to 2020, the S&P 500 returned an average of 10.72% annually. Each investment test, category, and disclosure will tell you that past performance is not indicative of future results. However, in this example, you would have lost (10.72% – 3.5%) 7.22% per annum. There is also a tax return if the investment you own has unrealized gains. Depending on your taxable income and the size of the gain, you will likely have to pay 15% or more of that gain into the Treasury before this loan is paid off.

What is the downside? Stocks can always swing the other way. Historically, stocks have risen about three-quarters of the time. In order to make money by earning more than the interest rate on the loan, it must be 75%. Imagine a scenario, like now, when you were planning to make 10% in the brokerage account and pay 3.5% interest. Instead, you lost 20% in your brokerage account and paid 3.5% interest. You had better pay off the loan before the drop. Unfortunately, no one has a crystal ball. I feel you have to bet on the odds that the market usually goes up and usually goes up by more than the current mortgage rates.

3. You have money in a retirement account

Should you pay off your mortgage? No, you should not pay the price in this case.

why? I get this question all the time, but no one asks me after I’ve already cashed out a retirement account to pay off my mortgage. I suspect the accompanying tax bill confirmed that it was a bad decision. In Scenario 2, the decision is mostly an investment decision with a tax return. This answer is mostly tax dependent. When you withdraw money from a pre-tax retirement account, those amounts are included in your taxable income and are taxed at regular income rates. Therefore, if you withdraw a large amount, your chip will jump, and you will see a much smaller amount enter your bank account before your loan is paid off.

What is the downside? cost. There is comfort in living debt-free in retirement. Having lower housing expenses gives you more flexibility in your discretionary spending. But, in this case, is it worth the cost?

Neither Dave Ramsey nor Rick Edelman was wrong. They just give different reasons for their advice. Ramsay mostly uses behavioral reasoning. Basically, he believes that people will not use discretionary income after 30-year mortgage payments to invest, but rather to buy things they don’t need. Edelman’s logic is purely mathematical. It doesn’t assume what people will do with extra income, but it does suggest that if you can earn more in an investment account than you pay in mortgage interest, you come out ahead.

The challenge for all these speakers is that they don’t know who to talk to. Everyone has a money script. If your parents lived through the Depression and gave you lessons about the evils of borrowing money, you probably don’t care about the math behind my thinking.

Here’s the good news: I’ve yet to find someone who regrets not having a mortgage in retirement.