William Lako: Retire smart: The debate on mortgage payoff and its impact on cash flow

Thinking about paying off your mortgage before retirement? It's a common emotional consideration among investors who believe they'll sleep better at night without their most substantial debt hanging over their heads — figuratively and literally! But here's the twist: many couples who take this route end up "house-rich, cash-poor." While they own their home outright, their cash flow may lack flexibility, especially if they need money for family needs, car or home repairs, or even healthcare. It's like trading one worry for another.

Looking at this from a purely financial viewpoint, let's first consider whether your money could earn more if invested than what you're paying in interest on your debt. Many people locked in extremely low mortgage rates between 2010 and 2020 — often below 4 percent. With cash-equivalent investments like money market accounts, Treasury bills, and certificates of deposit currently paying between 4 percent and 5 percent, an investor can easily earn more on their investments than they're paying in mortgage interest. Furthermore, homes are generally considered appreciating assets, thus increasing your equity.

Secondly, if you're following the Ten Year Rule, your mortgage payments are generally more secure in retirement than during your working years. Ideally, you should have 10 years of spending needs in fixed-income investments that are shielded from the stock market's volatility. During market highs, replenish your fixed-income buckets so that you always have a rolling 10 years of expenditures covered, generally allowing you to wait out a market downturn before needing to sell investments to cover your expenses.

It's undoubtedly a wise decision to enter retirement without a high cost of living, meaning you should consider paying off consumer loans, credit cards, and car loans. However, one benefit that comes with owing on a mortgage is that the interest and property taxes you pay may be tax-deductible, providing you with significant savings in income tax. This can be particularly beneficial once you're required to take distributions from your retirement accounts.

If you have substantial equity in your home, you might want to secure a home-equity line of credit (HELOC) before you retire. A HELOC is generally structured as a revolving line of credit. You can borrow as much as you need, whenever you need it, by writing a check, provided your total borrowing does not exceed your credit limit.

Although it may be tempting to put off applying for a home equity line of credit until you need it, getting approved for a loan may be harder once you're retired and have no income. The beauty of a HELOC is that there is no requirement that you actually touch the money. You just know that it's there in case you need it. Additionally, interest on HELOCs can be tax-deductible if you use the proceeds to buy, build, or substantially improve your main home, but the interest is not tax-deductible if you use the proceeds for other expenses.

While it may be comforting not to owe on your home, I recommend having a financial professional run the numbers for your situation to help ensure you're making the best financial decision for your circumstances.