The goal of being debt-free at retirement is certainly a worthy one, but seniors thinking about retiring don't have to fret if they realize that they will be making mortgage payments long after they retire. Not all financial planners believe that paying off the mortgage upon retirement should be the number-one goal for seniors. As always with financial questions, there's no one answer that fits every individual.

Rule of Thumb for When to Pay Off Your Mortgage

A recent article on Kiplinger.com offered this rule of thumb: keep your mortgage "if your after-tax interest rate is lower than the expected after-tax returns from your investments."

For example, paying off a mortgage with a 6% interest rate probably makes sense if you would otherwise have the cash invested in money market funds or certificates of deposit earning today's low rates of roughly 1% to 2%.

The problem is that paying off a mortgage usually requires a substantial lump-sum payment. It can be hard to make that kind of withdrawal from your liquid investments, and homeowners who stretch to do so could end up without enough cash reserves for their living expenses. Kiplinger recommends that homeowners who opt to pay off their mortgage should withdraw money from a taxable account rather than a 401(k) or IRA, because the tax consequences could be significant otherwise.

Alternative Solution: Reverse Mortgage Financing

One possibility for seniors over age 62 is to use a reverse mortgage to improve cash flow after paying off the original mortgage. Comparing reverse mortgage quotes and programs should be a first step in evaluating the benefits of this option. Homeowners still in a mortgage but with significant equity can also qualify for a reverse mortgage; paying off that first mortgage is not a requirement.

Another option for seniors wanting to reduce their mortgage debt is to sell their current home and downsize to something less expensive. In addition, reverse mortgage rules as of 2009 give you another option: when you purchase your new downsized home, you can take out a reverse mortgage on the new home and have an extra cushion for living expenses.

If you're facing retirement and are concerned about continuing mortgage payments, know that it can make financial sense to keep your mortgage if your other investments are generating higher returns than your mortgage interest rate, after taxes are taken into account. If you decide that having no mortgage payments is important to your financial footing in retirement, you have many options available to you: making extra mortgage payments now to pay off the mortgage loan more quickly, paying off your loan in a lump sum drawn from other accounts, or taking out a reverse mortgage to tap home equity.

Michele Lerner
Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance and business. Her clients include The Washington Times, Bankrate.com, Urban Land Magazine, NAREIT's Real Estate Portfolio and numerous Realtor association publications. Michele's first book, "HOMEBUYING: Tough Times, First Time, Any Time" is available now from Capital Books. Michele has a B.A. and an M.A. in International Affairs from George Washington University in Washington, D.C.