Mortgage Payoff vs Investing Pre-Retirement: Stay Flexible

The sneaky cost you’re probably ignoring: losing flexibility right before you retire

You’re staring at that mortgage balance and thinking, “If I just nuke this now, I’ll retire clean.” I get it. Certainty feels amazing, especially in Q4 when markets get twitchy and you’re 6-12 months from a fixed paycheck. But here’s the sneaky cost almost everyone underestimates: flexibility. Once that lump sum is locked into your walls, it stops working for you, and getting it back usually means re-borrowing right when lenders tighten up or your risk tolerance evaporates.

Quick reality check on the “rates vs returns” debate that dominates cocktail talk. Yes, mortgage rates have been stubborn. Freddie Mac’s survey showed the 30‑year fixed averaged roughly 6.9% in 2024 and has mostly lived in the 6-7% zone this year. Stocks “should” beat that over long stretches, sure. But right as you retire, long-run averages are frankly the wrong yardstick. Sequence risk is the big one, the pattern of returns in your first decade. Wade Pfau’s research (2013, updated 2018) found the correlation between the first 10 years of market returns and sustainable withdrawal rates is around 0.8. Translation: those early years dominate outcomes. And when markets crack, they really crack, since 1946, S&P 500 bear markets (down 20%+) have averaged about −35% (Yardeni Research).

So the real trade-off as we head into 2025 isn’t “beat 6-7% or not.” It’s certainty (debt-free) versus optionality (cash and investable assets). Optionality is what keeps you from selling low, from tapping expensive credit, and from gutting a portfolio that needs time to recover.

• Liquidity locked in drywall reduces resilience: Home equity is illiquid and conditional. In 2008-09, lenders cut or froze HELOCs across the board, right when people needed them. You don’t control that spigot.
• Sequence risk dwarfs small rate spreads: A 1% interest-rate gap is noise compared to a −25% market year early in retirement. A $1,000,000 portfolio withdrawing 4% ($40k) that drops 20% in Year 1 needs a much higher rebound just to get back on track, while you’re still drawing cash.
• Cash-flow stability > theoretical premiums: Morningstar’s 2024 update pegged a 30-year “safe” starting withdrawal near 4.0% for a 60/40 portfolio. That’s not generous. A steady cash buffer (or smaller fixed expenses) can be worth more than chasing an extra 1-2% expected return on paper.
• Your sleep-at-night factor is a real line item: If holding extra cash means you avoid panic selling, or you can skip drawing from equities in a down year, that peace of mind has a price. Treat it like insurance, not a vibe.

One quick personal note: I’ve watched more than a few clients pay off a house in April, then call in October asking how to “get some of it back” because markets dipped and RMDs or healthcare premiums crept up. The options weren’t great. And yeah, I’ve caught myself saying “liquidity premium”, what I mean is: dollars you can deploy fast are worth more than dollars entombed in property.

What you’ll get from this section: a clear framework to weigh being debt‑free against keeping flexible ammo heading into those first 5-10 years of retirement, when the order of returns, not the average, is what makes or breaks the plan.

2025 reality check: rates, markets, and taxes that actually matter now

Here’s what’s actually true right now, not 2019 folklore. Mortgage rates are still elevated. Freddie Mac’s weekly data showed 30‑year rates around ~7% at points in 2024, and 2025 has only eased a bit off those peaks, not a return to the 2-3% party we had in 2020-2021. Short-term Treasuries? Competitive. U.S. Treasury data shows 3-6 month T‑bills hovered near 5% through 2023-2024, and this year they’ve stayed relatively elevated by historical standards. That’s the backdrop. And taxes, yep, still weird. The 2017 tax law’s larger standard deduction and the $10,000 SALT cap remain in effect through 2025 unless Congress extends them. Which means your itemized deductions may still be capped this year; your marginal tax math might not look like your 2016 memory.

Why am I harping on this? Because payoff-vs-investing decisions are path-dependent. If your mortgage is at 3% from 2021, aggressively paying it off in 2025 when T‑bills are yielding something with a 4 or 5 handle is very different than it was five years ago. If your mortgage is 6.75-7.25% from a 2023-2024 refi or purchase, that’s a different animal again. Same decision bucket, different inputs.

Quick benchmarks I’m using on my pad today:

• Mortgage rates: ~7% at points in 2024 (Freddie Mac), modest easing in 2025 but still high versus 2020-2021 lows.
• Short-term yields: T‑bills near 5% across much of 2023-2024 (U.S. Treasury). 2025 has stayed relatively elevated vs long-run averages.
• Taxes: The $10,000 SALT cap + larger standard deduction from the 2017 law are still the rules through 2025 unless extended. After this year, parts of that law are scheduled to change.

Here’s how I think it through in plain English, yes, I’m literally weighing these on a napkin some days:

1. After-tax hurdle rate: If your mortgage is 7% and you can earn ~5% in T‑bills, the pre-tax spread is negative. But the mortgage rate is after-tax if the SALT cap blocks your interest deduction (common in high-tax states), while T‑bill interest is taxable at federal rates but not at state levels. Net it out for your bracket. The sign can flip based on SALT, state tax, and whether you itemize.
2. Optionality premium: Refi optionality is real. If rates fall later this year or in 2026, you can refinance. If you prepay the mortgage, you’ve “refi’d” to 0% but killed flexibility. Cash preserves choices; prepayment cancels them. That optionality has value, hard to price, but very real when life throws a curveball.
3. Sequence risk buffer: First 5-10 years of retirement are fragile. Earning ~4-5% in T‑bills while you wait can be a smarter bridge than drawing equities into a dip. I’d rather be boring and solvent than bold and forced to sell.

Old rule: “Always pay off the house.” 2025 rule: “Price liquidity, taxes, and your real after-tax spread, then decide.”

One more tax wrinkle. With the SALT cap still at $10k for 2025 and the standard deduction still larger than pre‑2018 levels, many households won’t get a mortgage interest deduction. So that headline “7%” is basically 7 after tax for them. Meanwhile, T‑bill interest is federally taxable but avoids state tax in most states, small edge that adds up. It’s not neat-and-tidy; it’s gray. Welcome to actual planning.

My bias, which I’ll admit openly: keep enough cash/T‑bills to fund 1-3 years of planned withdrawals, plus a surprise or two (roof, car, medical). If your mortgage is high-rate (say from 2023-2024) and you’re not itemizing, partial principal paydown might make sense, but I’d rarely zero it out all at once. Rates may ease, but timing is unknowable; the refi option is worth keeping alive. And yes, I’ve seen people prepay in May.. then ask for that money back in September. Doesn’t work that way.

Build the decision rule: compare after-tax mortgage cost vs after-tax expected returns

Here’s the clean framework I use with clients. You don’t compare a 6-7% mortgage to a pre-tax portfolio fantasy. You compare after-tax to after-tax, and you adjust for risk and liquidity. Yes, it’s nerdy. It’s also the only way this math doesn’t lie to you.

Decision rule: Pay down if your after-tax mortgage cost is higher than your realistic, after-tax return on the cash you’d otherwise invest (especially on safe/near-cash assets). If it’s lower, investing the surplus can make sense, but remember, equity returns are lumpy while mortgage paydown is guaranteed.

Start with the mortgage. The formula is simple:

After-tax mortgage cost = stated rate × (1, tax benefit)

• Tax benefit only applies if you itemize. With the SALT cap still $10,000 for 2025 and the standard deduction still elevated versus pre-2018, many households won’t itemize. In those cases, a 7% mortgage is basically 7% after tax. (Also remember the $750k cap on acquisition debt for interest deductibility on post-2017 loans, still the rule through 2025.)
• If you do itemize anyway because of large charitable gifts or big mortgage + property tax bills, the marginal benefit approximates your federal marginal rate (state rules vary). But be careful: the benefit is only on the portion of deductions over the standard deduction, so the real effective benefit can be much smaller than your bracket.

Now the investment side. Use what you’ll actually buy, not a 10% urban legend.

• Near-cash/T-bills: 3-6 month T-bills are yielding roughly the mid-4s to around 5% in October 2025. They’re federally taxable, generally state tax-free. In a 24% federal bracket, a 4.8% T-bill nets about ~3.6% after federal tax.
• High-grade bonds: Core bond funds’ SEC yields are hovering in the mid-4%s, give or take, and they carry duration risk, prices move if rates move. After-tax for a 24% bracket, call it roughly ~3.3-3.6%, depending on your mix and state.
• Equities: Long-run expected returns might be 6-8% nominal (pick your house view), with after-tax depending on turnover and capital gains rates. But year-to-year, it’s messy. 2022 was your reminder; 2023 snapped back; 2024 cooled again in parts of the market; 2025 has been mixed, big caps held up, small caps choppier. Point is: pre-retirement, sequence risk matters.

Put it together with a quick example:

1. Mortgage: 6.9% fixed from 2023, you don’t itemize. After-tax cost ≈ 6.9%.
2. Cash alternative: T-bills at 4.8% pre-tax; in a 24% bracket, ≈ 3.6% after-tax.
3. Call: 6.9% > 3.6% by a wide margin. Paying down is compelling for the safe bucket.

Flip it if you’re itemizing: suppose your effective tax benefit on mortgage interest is ~20% after the standard deduction math. Your after-tax mortgage cost: 6.9% × (1-0.20) ≈ 5.5%. That’s still above the after-tax T-bill yield, but now the gap is smaller. If you’re comparing to a tax-efficient stock index you plan to hold 10+ years, you might accept the risk. Before retirement, though, that certainty premium from debt payoff is real. I’ve watched too many folks take equity risk with dollars they’ll need in 2-3 years… and then need those dollars at a bad time.

Two more quick notes from the field (and yeah, I’m a little too excited about clean decision trees):

• Liquidity first: Keep your 1-3 years of planned withdrawals and emergencies in cash/T-bills. Don’t “win” the mortgage math and lose the liquidity war.
• Market reality check: Freddie Mac’s survey has 30-year rates in the high-6s this month, not 3-4%. The spread versus after-tax T-bills is still meaningful. If rates ease later this year, great, you can always revisit.
• Imperfect memory corner: I think the 2025 standard deduction for joint filers is around thirty-thousand-ish; the exact figure updates with inflation. The point stands: lots of families won’t itemize, so the mortgage “tax break” may be a mirage.

Bottom line, use your real after-tax numbers, weight them by risk and time horizon, and be honest about whether you’re buying guaranteed return (debt payoff) or accepting volatility for potential return (equities). If the after-tax mortgage cost beats your after-tax safe yield by 200-300 bps, payoff starts looking pretty attractive.

Stress-test the plan: cash buffer, withdrawal rate, and sequence protection

Even if the spreadsheet screams “invest,” retirement has a nasty habit of testing your timing. You don’t control when markets sneeze; you do control your liquidity and your burn rate. Right now, rates are still decent on cash-like assets and mortgages aren’t cheap. Freddie Mac’s survey has the 30-year fixed around the high-6s in October 2025 (roughly 6.8%), while 3-6 month T-bills are hovering near ~4.8-5.1% this month based on Treasury daily yields. That gap pays for optionality, specifically, the optionality to not sell stocks at the worst time just to make the mortgage go away.

Hold 12-24 months of core expenses in cash/short-term Treasuries. Around the retirement date, park a year or two of core spending (housing, food, insurance, taxes) in cash or T-bills. Boring is good here. At a 5% T‑bill yield, $120k covers $10k/month for roughly 12 months; $240k covers two years. If your mortgage payoff would drain that cushion below 12 months, that’s a red flag. I’ve watched too many near-retirees “win” the interest math and then panic-sell in month nine because equities were down and the cash bucket was empty, don’t do that to yourself.

Target a sustainable withdrawal rate, then decide on the lump sum. The old 4% rule (Bengen, 1994) still provides a baseline, but context matters. Morningstar’s 2024 research put a base sustainable rate near ~4.0% for a 30-year horizon with a balanced portfolio and some flexibility. If you’re very equity-heavy, less flexible, or want a higher success probability, think 3-3.5%. Make the decision on a mortgage payoff after you’ve sized a withdrawal rate and verified it against your actual asset mix, taxes, and spending volatility. If paying off pushes you above that rate, you’re basically borrowing from future-you.

Model a bad first 3 years for stocks. Sequence risk is the silent killer. Use real history as a stress input: the S&P 500 posted back-to-back negative years in 2000 (-9.1%), 2001 (-11.9%), and 2002 (-22.1%). From Oct 2007 to Mar 2009 the drawdown was about -57%. The 1973-1974 bear market was roughly -48% peak-to-trough. You don’t need an exact replay, assume, say, -20%, -10%, and flat for years 1-3 and see if the plan still works after a lump-sum payoff. If your plan breaks under that path, keep more liquidity or scale the payoff. Simple as that, and yeah it’s a little conservative, but that’s the point.

Keep a HELOC as emergency backup, just don’t count on it in a crunch. Access to a HELOC can cushion shocks or bridge a short-term gap without selling. But be realistic: during 2008-2009, many lenders froze or cut HELOC lines, and Fed bank surveys reported widespread tightening of home-equity credit standards. Helpful in normal times, unreliable in stress. Treat it like a seatbelt, not the airbag.

Put it together: Before you write a big check to the bank, confirm you’ll still have 12-24 months in cash/T‑bills, your withdrawal rate sits in the 3-4% zip code given your mix and flexibility, and your plan survives an ugly first three years. If yes, great, paying off might lower your required return and help you sleep. If no, partial prepayment or waiting keeps you in the game. And if rates ease later this year and mortgages drift down a bit from ~6.8%, you can always revisit with fresher math. I know it’s not as satisfying as “mortgage gone,” but staying solvent beats being right on paper every single time.

Personal note: I retired my own mortgage in chunks because I wanted my cash bucket intact heading into Q4 holiday bills and open enrollment season, life keeps happening while markets do their thing.

Tax levers most people miss in the payoff-vs-invest decision

Tax levers most people miss in the payoff‑vs‑invest decision

Here’s the piece that flips the math more than folks expect: taxes. We’re in the last TCJA year right now (2025) unless Congress extends it. That matters for whether your mortgage interest actually helps on your taxes and whether putting the lump sum into markets nets you more after‑tax dollars.

Standard deduction vs. itemizing. Most households don’t itemize, which means mortgage interest often saves you zero tax in practice. IRS data shows that after TCJA, itemizing dropped to a small minority. In 2021, roughly 13% of filers itemized (IRS SOI), down from about 30% pre‑TCJA. In 2024, the standard deduction was $14,600 (single), $29,200 (married filing jointly), and $21,900 (head of household). 2025 is indexed higher again, but the point stands: unless your itemized deductions clear that bar, your mortgage interest deduction doesn’t move your tax bill. And remember the SALT cap, state and local tax deductions have been limited to $10,000 per return since 2018 under the Tax Cuts and Jobs Act (2018-2025). That cap alone keeps many folks on the standard deduction even with a chunky mortgage. The SALT cap is scheduled to sunset after 2025, which could bring itemizing back for more households in 2026 if nothing changes.

Mortgage interest rules still matter. If you do itemize, only acquisition debt up to $750,000 on post‑2017 loans (grandfathered $1 million for older loans) is deductible. If you refinanced and pulled cash out for non‑home‑improvement uses, that piece typically isn’t deductible. Little details, big tax swing.

Roth conversion window while rates/brackets last. This year can be prime time for conversions, especially in gap years (early retirement, sabbatical, business lull) when your income dips. The 12%/22%/24% brackets are scheduled to revert higher in 2026. Converting IRA dollars to Roth up to the top of a target bracket can be a gift to your future self. But, writing a giant principal check to your lender can crowd out the cash you need to pay the conversion tax. I’ve seen people “win” emotionally on the mortgage payoff and then miss a once‑per‑lifetime conversion window. Painful. If T‑bills are still throwing off mid‑4s to low‑5s this year and your bracket is unusually low, I’d rather see a staged mortgage prepayment and a deliberate Roth fill‑up than an all‑at‑once payoff.

Tax‑location: where you hold what. If you keep the mortgage and invest, place the assets smartly:

• Bonds/T‑bills in tax‑deferred (traditional IRA/401(k)) when you can. Ordinary income from bond interest is taxed at your full marginal rate in taxable accounts. Sheltering it keeps your current tax bill down.
• Broad equity index funds in taxable. You get qualified dividends (often taxed at 0%/15%/20%) and long‑term capital gains treatment if you hold >1 year. Even with the 3.8% NIIT for higher earners, this is usually more tax‑efficient than putting the same equities in a pre‑tax account and bonds in taxable.

Why this changes payoff math. If your mortgage interest doesn’t reduce taxes because you don’t itemize, the effective after‑tax cost of the mortgage is basically the sticker rate. Meanwhile, an equity index in taxable benefits from lower dividend and long‑term gain rates, while Treasuries inside a traditional IRA defer tax entirely until withdrawal. In other words, the invest side often scores a higher after‑tax expected return than people assume, especially when you place assets correctly.

What to do this quarter (I know, messy but useful):

1. Project 2025 itemization: stack mortgage interest + SALT (cap $10k) + charity + other deductions. If you’re under the standard deduction, treat mortgage interest benefit as $0 for decision math.
2. Map 2026 brackets assuming TCJA sunsets: if your 2026-2028 income will be higher or the brackets widen back up, value Roth conversions in 2025 more heavily.
3. Sequence cash: if you want to prepay, keep enough liquidity to fund a planned Roth conversion tax bill and 12-24 months of expenses. Don’t starve future you.
4. Fix asset location before you rebalance: shift bonds into tax‑deferred, broad equity index funds into taxable, then evaluate payoff vs invest.

Quick personal aside: I once “won” a 0% feeling by killing a mortgage chunk… then realized I’d boxed myself out of a perfect conversion year. I still mutter about that in April. Don’t be me.

A practical 12-month playbook that doesn’t break your plan

A practical 12‑month playbook that doesn’t break your plan

If you’re 6-18 months from retirement, you don’t need a hero move. You need a boring, repeatable checklist that keeps cash flow safe while you weigh debt versus investing. And yes, boring wins here.

1. Set the floor first. Keep at least 12 months of core spending in cash or T‑bills. If you’re retiring within a year, push that to 18-24 months. T‑bills are federally taxable but exempt from state income tax, which helps if you’re in a high‑tax state. Also sanity check where you park it: FDIC insurance is $250,000 per depositor, per bank, per ownership category, don’t let a jumbo cash pile sit uninsured because it was “temporary.”
2. Run the after‑tax comparison with your numbers, not averages. Use your mortgage rate, whether you’ll itemize in 2025, and your actual asset mix. The SALT cap is $10,000 through 2025 under current law, so many households won’t itemize. If you take the standard deduction, mortgage interest delivers no tax offset in 2025, treat the rate as its full after‑tax cost. Quick example: on a 30‑year mortgage at 6.5%, every $1,000 of principal paid drops the monthly payment by about $6.32 (amortization math), so a $10,000 prepayment cuts roughly $63/month. Compare that guaranteed $63 to what your short‑duration portfolio is expected to earn after taxes and fees.
3. Try a hybrid instead of all‑or‑nothing. Make a partial principal reduction to lower payment and refinance risk, invest the rest short‑duration for flexibility. I like splitting into three buckets: (a) the cash/T‑bill floor, (b) a targeted principal curtailment to land the mortgage payment where your budget breathes, and (c) 6-12 months in short‑duration Treasuries or high‑quality bond funds you can tap without equity‑market timing. But keep duration short so you’re not taking rate risk right before retirement.
4. Schedule tax planning before year‑end 2025. Put this on the calendar now; Q4 gets busy. Decide if you’ll itemize or take the 2025 standard deduction, and look at “bunching” deductions, pairing this year’s charitable gifts with donor‑advised fund contributions can push you over the standard line. Also, if 2026 brings the scheduled TCJA sunset and wider brackets, a Roth conversion in 2025 may be cheaper relative to your future rates. Convert only what you can pay the tax on from cash; don’t cannibalize your spending floor.
5. Revisit in 90 days. Seriously. This isn’t set‑and‑forget. If rates shift, if your job outlook changes, or if markets move your allocation out of whack, re‑run the math. I keep a stubborn little reminder for clients: “Markets don’t care about your calendar.” Neither does your lender. Rebalance, refresh the payoff vs invest comparison, and update your cash runway.

A few real‑world guardrails while you work the list:

• Protect flexibility. Prepayments are one‑way doors; T‑bills can be sold with minimal price risk at short maturities. If you’re even slightly unsure about near‑term cash needs, favor liquidity.
• Mind sequence risk. A 20% portfolio drawdown early in retirement requires a 25% gain to break even. That’s not a scare line, just math. Your 12-24 month cash/T‑bill buffer is there so you aren’t forced sellers after a bad quarter.
• Itemization reality check. With the SALT cap fixed at $10,000 through 2025 and many mortgages originated at higher rates the last couple years, some households still won’t clear the standard deduction. If you don’t itemize, the “tax benefit” of mortgage interest is $0 in your spreadsheet.
• Refi optionality. A modest principal curtailment can improve loan‑to‑value and pricing if you refinance later. You’re buying a little flexibility, not just a feeling.

Quick personal aside: I once shaved a payment to feel “safe,” then rates dropped and my smaller balance didn’t qualify me for the promo refi the bank dangled to bigger loans. Right move, wrong size. Still bugs me when I check that old amortization schedule.

The headline: set the cash floor, run after‑tax math with your 2025 facts, split the difference with a hybrid, lock in tax moves before December 31, and revisit in 90 days. Boring, yes. But it keeps both doors open, lower debt and growing assets, while protecting the one thing that actually pays the bills: cash flow.

If you wait and do nothing, here’s what usually happens

Procrastination quietly picks for you. The mortgage keeps rolling, the cash pile sits there earning less than it should, markets move when you’re not looking, and tax windows close. It’s not dramatic in week one, but the compound effect is ugly: less flexibility, higher sequence risk when you actually stop working, and no clean way to pivot when the market (or Congress) changes the rules on you.

Here’s the core problem in retirement math that gets missed: carrying debt without a liquidity plan magnifies your sequence risk in those first 5-10 years. If markets take a normal dip early and your living expenses still include a fixed mortgage payment, you’re forced to withdraw more from a smaller portfolio. That’s the bad combo. Historical market behavior supports the risk: since 1980, the S&P 500 has had an average intra‑year decline of about 14% even in years that ended positive (J.P. Morgan Guide to the Markets, 2024). If one of those garden‑variety drawdowns shows up right as you retire and you’ve got no cash runway because you “meant to decide later,” the math punishes you.

On taxes, 2025 is a use‑it‑or‑lose‑it year for several provisions. The individual rate structure from the 2017 Tax Cuts and Jobs Act is scheduled to sunset after December 31, 2025, which means higher marginal brackets and shifting capital gains thresholds in 2026 unless Congress acts. SALT caps and the bigger standard deduction are set to change after this year as well. Translation: some moves, Roth conversions, gain harvesting while staying in a lower bracket, bunching deductions, may be more attractive in 2025 than in 2026. If you wait and rules change, you may miss a cheaper conversion window or a tidy capital gains harvest. I know, I know, tax law “might” change is annoying. But the sunset date is on the calendar; that’s not theoretical.

Analysis paralysis usually lands people in the worst mix: too much cash drag, too little debt reduction, and no tax strategy. You tell yourself you’re being prudent, but really you’re just holding optionality that decays. And yes, I’m talking to past‑me too. I’ve sat on cash “just a few months” and watched both mortgage interest and market returns run past me. Quick circle back to the earlier point on cash floors: building 12-24 months of expenses in cash is helpful, sitting on 60 months without a plan rarely is.

The fix isn’t heroic. It’s picking a path (payoff, invest, or hybrid), setting thresholds, and putting it on a calendar. Silence is a decision, usually an expensive one.

• Payoff path: If your rate is truly high and you won’t itemize, target a scheduled principal curtailment that eliminates the loan by a specific retirement date. Tie it to a liquidity rule: always keep 12-24 months of expenses in cash after the curtailment.
• Invest path: If your after‑tax expected portfolio return still clears your mortgage rate by a real margin, commit to auto‑investing monthly, plus a rule: if the market’s down ~14% from a recent high (the long‑run average intra‑year drawdown reference above), accelerate contributions instead of freezing.
• Hybrid path: Split surplus 50/50 or 60/40 for the next 90 days, then reassess. Pre-schedule a Q4 checklist: partial principal paydown, Roth conversion modeling with current brackets, and gain/loss harvesting. Lock in the tax moves by December 31 where deadlines apply.

Over‑explainy moment, then I’ll land the plane: you don’t need the perfect answer; you need a rule you’ll actually follow. A simple “if X, then Y” beats waiting for a magical rate or a perfect market tape. Rates are still elevated relative to the 2020-2021 era and equity volatility hasn’t disappeared this year. That’s normal. What’s not normal is letting the calendar make all your decisions. Set the rules, book the dates, and keep your flexibility, on your terms, not the market’s.

Personal note: I once waited for a “better entry” while also not paying extra on the mortgage. Guess what, neither happened. The spreadsheet was elegant, the results were not. Don’t do that to yourself in Q4.

Frequently Asked Questions

Q: How do I decide, quickly, whether to keep cash or kill the mortgage right before retiring?

A: Quick rule: keep 24-36 months of core expenses in cash-like assets first. If money remains, consider a partial paydown plus a recast to lower the payment. Only go full payoff if you’ll still have ample liquid reserves and diversified investments afterward.

Q: What’s the difference between paying off my mortgage and keeping the lump sum invested as I head into retirement?

A: Payoff = certainty and a guaranteed “return” equal to your rate (say ~6-7% this year), but you give up liquidity. Once that cash is drywall, getting it back means selling or re-borrowing, tough if lenders tighten or your income drops. Keeping the lump sum = optionality. You can build a 2-3 year cash bucket and invest the rest gradually, which helps you avoid selling stocks after a bad year. Sequence risk is the kicker: early retirement returns drive outcomes (Wade Pfau shows a ~0.8 correlation for the first 10 years). If markets crack, bear markets since 1946 average about −35% (Yardeni), liquidity lets you ride it out. Personally, I’ve seen more clients regret running too lean on cash than regret a slightly higher rate for a couple more years.

Q: Is it better to throw a lump sum at the mortgage this year or invest it, given sequence risk?

A: There’s no one-size answer, but I’d bias to a split. First, lock 24-36 months of spending in cash/T‑bills (cash-like yields are still decent), so a 2026 drawdown doesn’t force stock sales. Second, if your mortgage servicer allows recasting, make a targeted principal paydown to reduce the monthly nut, without draining liquidity. Third, dollar-cost average the remainder over 6-12 months into a diversified mix that matches your risk capacity (60/40 or your IPS). Full payoff only makes sense if: (1) you’ll still have robust liquidity, (2) your withdrawal rate is comfortably below 4%, and (3) you can tolerate missing potential market upside. Remember, the rates-vs-returns math is less important than avoiding a bad first five years of withdrawals. I know, not as satisfying as “kill it,” but it’s how you stay in control.

Q: Should I worry about liquidity if I can always use a HELOC or refi after I retire?

A: Yes, treat housing liquidity as conditional, not guaranteed. In 2008-09, lenders cut or froze HELOCs across the board, right when people needed them. And underwriting gets tougher once your paycheck stops. If markets wobble and your balance is already in the walls, your choices narrow to selling assets at bad prices, tapping costly credit, or slashing spending. Here’s a practical framework with examples:

• Example A (full payoff): You use $300k to retire the loan at 6.5%. Great, your “return” is 6.5% and cash flow improves. But if the S&P falls 25% in year one (sequence risk is real, Pfau’s work shows those early returns dominate), you may be forced to sell stocks to fund living costs.
• Example B (barbell): Keep $120k in cash/T‑bills for 30 months of expenses, pay $120k toward principal and request a recast (many servicers allow this for a small fee), invest $60k gradually over 6-12 months. You cut the payment meaningfully, maintain resilience, and reduce the odds of selling low.
• Example C (drawdown match): Build a Treasury/TIPS ladder for years 1-5 withdrawals, then decide on a mid-size paydown that keeps your emergency fund intact.

My bias, after two decades of watching retirements succeed or stall, is to protect optionality first, chase rate math second. Mortgages can be paid down anytime; rebuilding liquidity after a shock is a lot harder.

@article{mortgage-payoff-vs-investing-pre-retirement-stay-flexible,
    title   = {Mortgage Payoff vs Investing Pre-Retirement: Stay Flexible},
    author  = {Beeri Sparks},
    year    = {2025},
    journal = {Bankpointe},
    url     = {https://bankpointe.com/articles/mortgage-payoff-vs-investing/}
}