We are in our 70s. Should we pay off our 2.5% mortgage or build up our savings?

By Quentin Fottrell

'Let's say 10 years from now, when I'm 84, we need a substantial amount of cash'

"Instead of making extra mortgage payments, we've decided to put that exact same money into a high-yield savings account." (Photo subject is a model.)

Dear Quentin,

We're a retired couple living in Southern California. I'm 74, and my wife is 70. We are weighing up the wisdom of investing in a market driven by artificial intelligence and deciding whether to instead keep money in cash or pay off our mortgage.

I enjoyed your article about the couple with the mortgage (We have a $300,000 mortgage with a 2.75% interest rate. I want to pay it off. My husband says I'm crazy. Who's right?).

Our mortgage carries a slightly lower interest rate (2.5%) than the one in that story, and my original plan was to make extra payments and pay it off in 15 years.

But then I started asking myself a different question: If we need access to cash at some point in the future, where is that money better off - in home equity or in the bank?

Let's say that 10 years from now, when I'm 84, we need a substantial amount of cash. At that point, would I rather have the money tied up in the house or available when we need it?

So instead of making extra mortgage payments, we've decided to put that exact same money into a high-yield savings account and, as the balance grows, build a CD ladder.

As I see it, there are two primary benefits and a possible third one as well:

-- Liquidity over home equity. I'd rather have cash in hand than money tied up in the house. In other words, a bird in the hand is worth two in the bush - especially as we get older and having readily available funds becomes increasingly important.

-- An added layer of title protection. Keeping a mortgage with an established lender may offer some additional safeguards, although it's not a substitute for independent title monitoring or other protective measures.

-- A potential tax benefit. Mortgage interest may still be tax-deductible. However, with the standard deduction, that benefit may be limited or nonexistent for many homeowners.

I'm simply suggesting that, particularly in retirement, having accessible cash and maintaining financial flexibility may be worth more than paying off the mortgage early.

What do you think?

Homeowner in my 70s in Temecula

You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com. The Moneyist regrets he cannot reply to questions individually.

Related: My wife never went back to work after raising our kids. Do I have to share my retirement savings 50/50?

Given your favorable situation, especially with your low interest rate, there's no right or wrong decision.

Dear Homeowner,

You're in the home stretch with your financial journey, and I sure hope you are enjoying it.

With a 2.5% rate on your mortgage, you'll still be ahead if you put your money into a high-yield savings account or CDs. By all means, have an emergency fund, preferably a year's worth of expenses, but please try not to keep a large sum of money in a checking account, because inflation will eat away at that cash over time. Remember, too, that you can buy title insurance with or without a mortgage, and that a lender will always keep its own financial interests at heart.

Given your low interest rate, there's no right or wrong decision. You can get CD rates of 4.5% and HYSA rates of up to 4.25%. That's marginally above the latest consumer price index rate of 3.7%. So you'd be more or less treading water between your returns and inflation with your money stashed in cash equivalents. How much of your excess cash you put in cash or bonds versus the stock market depends on your risk tolerance and purchasing power.

With such a low mortgage rate, there's nothing inherently wrong with paying off your mortgage while building your savings, provided your returns after taxes and other costs justify it. A well-structured CD ladder, in addition to other more readily available sources, is also a good idea. This would allow you to meet unexpected expenses without having to sell investments during a market downturn or, perish the thought, borrow against your home.

Having faith in the market

When you're in your 70s, financial advisers generally recommend you have 30% to 50% of your portfolio in bonds or cash equivalents, and the rest in stocks. The idea is to avoid being held hostage by a major market correction or, worse, a recession by being forced to withdraw money during a down market. But plenty of people in your age group dance to the beat of their own financial drum and have 70% or more in stock while relying on Social Security and other forms of income.

The S&P 500 SPX, Dow Jones Industrial Average DJIA and Nasdaq Composite Index (COMP) have all been on an upward trajectory this year. The Nasdaq has benefited from the AI gold rush. If you have faith in the long-term future of U.S. equities, as history would suggest you might, you could invest in an exchange-traded fund that tracks the total market, the S&P 500 or some other diversified index, perhaps a Vanguard Total Stock Market ETF VTI.

In October, Yardeni Research published a research note cautioning that the yield on the 2-year Treasury note had risen 115 basis points from its December low, indicating higher borrowing costs that could put pressure on stock valuations. However, Yardeni analysts also noted that credit conditions outside the AI sector do not yet show the widespread excessive lending that preceded some prior market downturns (which is not quite a confidence booster).

The International Monetary Fund, also in October, warned that global financial markets face elevated risks from an AI-driven market correction if the billions of dollars being spent on AI don't generate the expected economic returns. "Three key risks have been increasing, each with the potential for broader implications: an artificial intelligence-driven market correction, a sharper rise in sovereign bond yields, and cyberattacks," the IMF said.

Mulling over safer havens

For other safe havens, consider shorter-duration bonds or mutual funds and exchange-traded funds that invest in bonds with maturities of less than five years, as well as Treasury inflation-protected securities (TIPS), which are inflation-protected bonds issued by the U.S. Treasury. Some analysts also see upside in value-oriented and defensive sectors, including consumer staples, utilities and healthcare stocks, for retired investors who seek safety over higher returns.

Ultimately, your investment strategy in retirement will depend on your lifestyle, how much money you have in your retirement-account balances, your goals, your views on the current socioeconomic backdrop and, yes, whether you think the tech boom will continue unabated (there is no consensus on that). Do you have long-term-care insurance or life insurance? How much longer do you have to pay on your mortgage? Will your passive income in retirement continue to cover your expenses?

The question you ask is timely because you can't answer it in isolation. It forces you to step back and look at your entire retirement plan. Are you, for example, comfortable withdrawing 4% from your retirement accounts in the first year and adjusting that rate for inflation in subsequent years? How much of your retirement savings are in traditional accounts versus Roth accounts? And, yes, how big are your mortgage payments? Do they account for more than 30% of your monthly income?

Once you answer these many questions, you can make your decision with relative ease.

Related: 'People in the U.S. need to wake up': As a mortgage loan officer, I rejected applications from wealthy couples. Here's why.

Check out The Moneyist's private Facebook group, where members help answer life's thorniest money issues. Post your questions, weigh in on the latest Moneyist columns or email The Moneyist at qfottrell@marketwatch.com.

More columns from Quentin Fottrell:

'I don't want to die on the sales floor': I'm 67 and earn $19.50 an hour at a big-box store. When can I finally retire?

'I am a pretty cautious person': My financial adviser wants me to invest $350,000 in a UAE data center. Is this risky?

My sister moved in with our mother, 78, and now says she deserves the $925,000 family home. Is she right?

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-Quentin Fottrell

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10-28-26 0515ET