Celebrate the freedom when you pay off your mortgage, and then dig into your next big financial commitment.
Retirement saving for many homeowners gets de-emphasized during the years of raising a family. Paying off a mortgage can potentially free up thousands of dollars a month that can backfill registered retirement savings plans and tax-free savings accounts.
A recent reader question zeroed in on the all-important moment when a household becomes mortgage-free: “My wife and I are on the verge of paying off our mortgage, which has been a significant portion of our expenses since forever,” he wrote. “What should we do with the money that now won’t be coming out of our account every two weeks?”
My suggestion here is to do an assessment of all financial resources available for retirement – Canada Pension Plan, Old Age Security, personal savings to date and company pensions, if applicable. Check the adequacy of the retirement income these assets are likely to produce, and then top up as required using money that used to go toward the mortgage.
The federal government’s Canadian Retirement Income Calculator is a good place to start on this analysis. For greater detail and analysis, hire a fee-for-service financial planner to look at your retirement readiness.
The mechanics of repurposing your mortgage payments for retirement are simple. Just as your mortgage payment is withdrawn automatically from your chequing account, so should money be transferred to TFSAs and RRSPs and immediately invested. Don’t put yourself in a position of having to manually transfer your former mortgage money into retirement savings. Doing so creates a risk that you’ll be tempted to use the money for other purposes.
Age 55 seems a good target for getting a mortgage paid off because it leaves you a decade, give or take a few years, to top up your retirement savings. But today’s young homeowners may need a few extra years. If you buy at age 35 and take 25 years to pay off a mortgage, then you’re not addressing your retirement shortfall until age 60. Working past age 65 can take the pressure off if you buy a home later in life.
And what if you’re set for retirement at the time your mortgage is paid off? Consider helping your adult kids with money to pay off a student debt or build a home down payment. I know parents are commonly providing this help these days. It’s best for everyone in the family if they first make sure their retirement is fully funded.
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