If my casual conversations are any indication, many near retirees are nervous about the increased volatility in the stock market. Should they sell? Stay the course? Buy? My answer is usually to shift the perspective: What is your margin of financial safety?

For many people, this response changes the conversation from trying to time the market (hazardous to your wealth) to a more fruitful examination of overall household finances. One of the best ways to protect yourself from downside risks is to focus on entering the traditional retirement years debt-free. You can’t control what the stock market or the economy does. But you can direct your income toward eliminating debt.

Of course, there’s little debate about getting rid of credit card debt, auto loans and other consumer loans.

What about the mortgage? About one-third of households headed by people ages 65 to 74 are still making mortgage payments, according to the latest Federal Reserve Survey of Consumer Finances. At least some of those households believe they can earn a higher return investing in other assets rather than paying down the mortgage more quickly. Maybe they can. Still, the risk-reward trade-off backs reducing overall household risk the simple, old-fashioned way: Pay off all debts — including the mortgage.

A margin of safety approach suggests very different answers to the mortgage question for young adults and near retirees. Many young adults share the desire to be mortgage-free — fast. My concern is when you are younger and starting out with your career and family, you don’t want all your investment eggs in one basket — a home. It’s important to use household income to create a well-diversified portfolio, everything from immediately accessible emergency savings to retirement portfolios you won’t touch for 30 years.

To be clear, my objection is with the pedal-to-the-metal pay-down strategies. There is nothing wrong, say, with adding an extra monthly mortgage payment every year (pretending there are 13 months a year).

For near retirees, a margin of safety approach calls for owning the home free of debt for the next chapter in life. Older adults have typically accumulated some assets, including retirement savings. Household finances are diversified. Looking ahead, eliminating the fixed income expense of a mortgage boosts household financial flexibility and reduces downside risk. I’d put owning your home free and clear toward the top of the list when planning for retirement.


Chris Farrell is senior economics contributor to “Marketplace” and a commentator for Minnesota Public Radio.