What paying off your mortgage (or not) means to your retirement

Conventional wisdom says you need 70 percent of pre-retirement income to keep the same lifestyle after you stop working.

That makes sense if you've been putting away more than 20 percent of your income in your final working years. With those savings, and no more work-related expenses for commuting and dry cleaning, you'd probably get away with a lower income.

But if you weren't saving heavily to the end, it's hard to see how you'll reduce expenses 30 percent instantly at retirement unless you've paid off the mortgage.

In 2010, the most recent data available from the Federal Reserve Survey of Consumer Finances, 40.5 percent of households nationwide where the head was between 65 and 74 years old were paying a mortgage. But while that's down slightly from 2007 (42.9 percent), it's up from 2004 (32.1 percent) and substantially higher than a generation ago.

"It really started to uptick around '95, and it's gone pretty much consistently upward since then," said Craig Copeland, an economist at Employee Benefit Research Institute in Washington.

Why, then, don't more people make paying off the mortgage before retirement a priority?

Copeland said a lot of things changed. Housing values went up and credit loosened at a time when many baby boomers were in their 50s. Many families did cash-out refinancings to help pay for kids' college tuition or renovations.

"You see a lot of people in their 50s buying bigger houses, new houses, as their incomes went up," he said.

Guy Cecala, publisher of Inside Mortgage Financing, said that in his parents' generation, a lot of people planned to pay off their house before they retired, then sell it, move to a smaller house in a warmer climate, which they would buy with cash and use the rest of the proceeds to live on.

"My parents, they had a house in Connecticut," he said. "They viewed that as their retirement, their nest egg. You don't hear people doing that anymore."

But, as the mortgage numbers show, a majority of people own their houses free and clear by 65 - people like Jim and Sallie Cappadora.

Jim, 63, and Sallie, 60, paid off their Ellington, Conn., house eight years ago. If they had let their 30-year mortgage run its standard course on the house they bought in 1986, they'd have three years left to pay.

"From the very first mortgage payment, we paid an extra $50 a month toward our mortgage, and after five years, we had paid off 10 years of principal," she said.

Copeland said it's possible someone in his or her 50s could build assets faster in a 401(k) by making the right investments instead of putting money toward mortgage principal. But, "even if you think you're investing properly, it's impossible to predict" the outcome.

He said anyone who has a 401(k) employer match should be putting enough in to get that match.

But once that's done, he said, the wisest thing for a person who's 55, who has just $30,000 in a 401(k) but also has 17 years left on a mortgage, would be to try to reduce the remaining years. If someone had a $130,000 balance at 55, at 4 percent interest, and paid an extra $175 a month, the mortgage would be paid off in 13 years and three months.

"It's easier to work two years longer than five years longer," Copeland said.

Whether the value of the house drops or not, owning a house free and clear has the same value.

"If you can get rid of something that's 20 percent of your budget, that is enormously beneficial," he said. "To be able to get rid of that expense is . . . a key choice they can make that will allow them to have an easier retirement."