As the markets continue to rise and fall almost daily due to the various geopolitical developments around the globe, many Americans are feeling stressed about the future of the U.S. economy and their finances. According to Bankrate’s Money and Mental Health Survey, 43 percent of U.S. adults surveyed in March 2025 said that money negatively affects their mental health, at least occasionally. Economic instability and financial risk can be even more unsettling for near-retirees who are preparing to leave the workforce and tap their portfolios to cover living expenses in the next few years.
This is why, regardless of any broader economic factors, I always recommend that pre-retirees who plan to retire within the next five years do their best to pay off their home mortgage and convert two years’ worth of living expenses to cash prior to exiting the workforce. Yes, other financial experts may make a compelling case about the potential tax and investment benefits that run counter to this logic. However, I would argue both of these strategies can provide psychological benefits that, for a person about to make one of the biggest financial decisions of their life, are incalculable.
Paying off your mortgage helps unlock financial freedom
It is widely accepted that maxing out contributions to your retirement accounts in your 50s is one of the most practical moves any pre-retiree can make. After all, this is the point where the federal government encourages you to get serious about retirement by allowing you to make additional “catch-up” contributions to workplace retirement accounts, as well as any Roth or traditional IRAs.
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But far less attention is given to the strategic (and emotional) advantages that come from using those catch-up funds to enter retirement without a home mortgage. In fact, critics often caution against paying off a mortgage early, citing the loss of tax-deductible interest payments, among other reasons. But while mortgage interest has historically been deductible, the low standard deduction threshold does make itemizing this type of deduction less attractive.
The decision is not purely a mathematical one, either. Various financial models can support either keeping or paying off a mortgage depending on variables such as expected investment returns, future tax brackets or even having a low mortgage rate. What those models and rules of thumb can’t measure, however, is the peace of mind that comes with owning the roof over your head. The psychological assurance, just as you are preparing to enter what is often an emotionally uncertain phase of life, is a form of security that financial models can’t factor in.
For many Americans, housing is the single largest monthly expense, often accounting for more than 30 percent of the total household budget. Eliminating that payment dramatically reduces the amount of income you need to sustain your lifestyle in retirement. While ongoing costs such as property taxes, insurance and maintenance don’t disappear, they are generally modest compared to the principal and interest payments of a mortgage.
Reducing your fixed monthly expenses by eliminating your mortgage also has broader implications. The less income you need to draw from your retirement savings every month, the smaller your overall savings target becomes, thus allowing you to move up your retirement timeline and potentially exit the workforce years ahead of schedule.
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Converting income to cash avoids economic instability
Additionally, as anyone who began their retirement in 2025 can attest, the year in which you choose to retire can make a significant difference in how secure you feel in your decision to exit the workforce. Entering retirement during a bull market can give you a sense of confidence in your overall financial stability. Conversely, retiring amid a market downturn, known as a bear market, can make you question your retirement plan and whether you’ve saved enough to cover your expenses for the next 30 years (or more).
This conundrum is what’s known as “sequence of returns risk,” where the impact of a bear market at the onset of your retirement shrinks your nest egg just as you’re beginning to draw income from it, ultimately reducing your ability to participate whenever the market eventually rebounds. Poor timing doesn’t just shrink your nest egg. It can unravel even the most carefully crafted retirement plans, forcing you to make some difficult choices about your spending.
One way to avoid this is to convert two years’ worth of income to cash within your retirement portfolio a couple of years before your planned retirement date. In a bad market, this cash buffer would serve as your shock absorber, keeping you from selling investments and locking in losses. Rather, by putting aside a full two years’ worth of spending in a money market fund or the stable value fund within your 401(k), you give yourself the flexibility to continue spending, even during a downturn.
Bottom line
Obviously, the potential to capture meaningful returns in the market makes a strong case for staying fully invested in the years leading up to retirement. But what you give up in potential returns, you get back in the emotional stability that comes from paying off your mortgage and staving off the pressure to keep up with the daily market swings. For pre-retirees planning to retire in the next five years, it’s time to “do something” now. These steps will help offer peace of mind as you enter the next chapter of your life, even when the markets get too volatile.
