Is The Decision to Retire Affected by Housing Choices and Mortgage Financing Options in the United States?

Historically, financial planners have recommended that households should have their mortgages paid-in-full prior to retiring so that they will have more funds available for other expenses and reduce the risk of not being able to afford the mortgage payment. Recent research (Storms, 2001) suggests that this advice may not be followed by those households who have decided to retire versus those who continue to work and are considered to be of retirement age. What options are available to those who are considering retirement and still have a mortgage? First, they can decide to pay off the mortgage with some of their other accumulated financial assets. This will have the effect of removing a fixed payment, but it may be at the cost of reducing more liquid assets. Second, they can downsize to a smaller unit which would allow them to pay off their mortgage and invest any equity that is left for retirement income. Third, they can take the option to keep an existing mortgage in their retirement years and instead build-up a cash reserve for liquidity purposes, obtaining tax benefits if they want to itemize their deductions, and/or a protection against the ravages of inflation by making payments with ever less expensive fixed dollars. There is very little research on the impact of the option to have a mortgage on the primary and/or secondary residence during the retirement years because of the assumption that those who retire will have paid-off mortgages. The purpose of this study is to examine the impact of the option to finance the residence on those who retire versus those who continue to work. We hypothesize that individuals who have more expensive homes and larger mortgages may be less likely to retire.