Should I take money out of my 401(k) to pay off my house and save money on the mortgage payments in retirement?

I owe $20,000 on my house. I want to retire in one year at age 66. Should I take money out of my 401(k) to pay it off and save the mortgage payments? I am paying 5.75 percent interest on my mortgage.

Co-Published on Investopedia

Co-Published on Investopedia

The answer to this question will also depend on how much money you have in your 401(k), what your Social Security benefit is expected to be, and how much your annual expenses will be in retirement.

If you have a sizable 401(k) (think more than 15x to 20x your annual retirement expenses) then paying off your home may be a good idea from a psychological standpoint - that is just relieving the stress of having a mortgage payment.

If your 401(k) is less than this amount, you would likely benefit from the flexibility created by keeping the money invested and making the mortgage payments monthly. Also, if you are in good health, you may want to keep the money in your 401(k) to allow you to hold off on claiming Social Security until age 70. Waiting another 4 years to claim Social Security can make a significant difference in your lifetime SS benefit, increasing your benefits by nearly a third.

Joshua Escalante Troesh is the President of Purposeful Strategic Partners and a tenured professor of Business at El Camino College. To explore working with him on your personal financial planning and investment advising needs, simply schedule a free Discover Meeting.

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