When a mortgage is part of your retirement plan

There is no mistaking how Eric Markowitz feels about borrowing money: "I hate debt," he said. Markowitz, a dentist in Washington, took out a mortgage to buy a home for his family, but that's the extent of his borrowing. And he fully intends to have it paid off by the time he retires in 15 years or so. "I sleep better knowing I have limited debt."

Like Markowitz, Bill Malloy has been thinking about retirement planning a lot since turning 50 a couple of years ago. But after running a small business for nearly three decades, he's comfortable carrying debt. "There really isn't a good reason" to focus on paying off his mortgage, said Malloy, a partner in a Virginia-based education consultancy. "We're locked in at a historically low rate, and I like to have some flexibility and liquidity."

Who's right? Both of them, according to the financial adviser they share. "I am a fan of living without debt," said Ted Halpern, a Washington-area fee-only financial planner. "However, we're looking at interest rates that are unbelievably low. I can understand why someone would want to borrow at those rates and invest that money elsewhere."

Whether to carry mortgage debt into retirement is a perennial hot topic among financial advisers and their clients. Home loans tend to be Americans' largest liabilities, so their care and handling has a profound effect on how we experience life as retirees.

The best approach for you depends on how you feel about debt — and a handful of other factors. Among them: your age, how much money you've put aside for retirement and where it's invested, and even how disciplined you are about saving and spending.

Mortgage debt used to be far more attractive for many Americans, but revisions to our tax laws have changed that. The standard deduction for federal taxes has climbed to $24,400 for married couples filing jointly — vs. $12,700 just two years ago. Now fewer homeowners can itemize deductions on their federal taxes, meaning they will be unable to deduct their mortgage interest.

"Nobody in the middle class or below, in terms of income, is receiving any federal tax breaks from home mortgages anymore," said Laurence Kotlikoff, a professor of economics at Boston University.

"You can make your portfolio more conservative by buying bonds," said Rand Spero, a financial adviser in Lexington, Mass. "If you want even less volatility, you can pay off your mortgage and you know you won't have that debt anymore. It's a guaranteed return."

In the experience of the financial adviser David Markle, people who are undisciplined about money during their careers will be similarly undisciplined in retirement. So he pushes the anti-debt message hard with his clients, hoping to curb their free-spending impulses.

What if they don't have cash available to pay off their debt? Markle encourages clients to downsize into something more affordable.

Some people like hanging onto loans as a hedge against inflation. If the cost of living spikes, they're repaying the loan with money that is worth less than what they borrowed. Others figure they can earn more on the money in the stock market than they owe on their mortgage.

Working on this issue with most clients, Mast keeps coming back to the fact that paying off debt creates a risk-free return. "That's really valuable," he said. "So I'd say, if you're looking for a good return on your money somewhere else for the next five to 10 years, it has to at least double the rate you're paying on your loan."

When major expenses crop up, people sometimes take out a home-equity loan or even a reverse mortgage — but there are costs involved in securing those, and they're likely to come with higher interest rates than a primary home loan. As you weigh whether to pay down your mortgage, it's smart to consider just how liquid your assets are. Halpern recommends comparing whatever you have in pretax retirement accounts against your after-tax savings.

"If I have $2 million in retirement accounts and $200,000 in after-tax accounts, that's a very low liquid number for someone with $2.2 million put away," he said. "Let's say this person wants to pay off their mortgage. The reality is, a) they probably don't have enough to pay it off and b) it's going to leave them with nothing but tied-up money."

What's a good liquidity number? Halpern wants to see after-tax money equal to 50% or more of a client's tax-deferred savings. "Of course, it depends on how much money you have and how much you owe," he added.