The American Dream of paying off mortgage debt on retirement and holding a mortgage burning party is no longer the solution to debt-free retirement.

For those few encumbered homeowners on the cusp of retirement during the remainder of this jobless Lesser Depression, the decision to eliminate mortgage debt is better off postponed, per Certified Mortgage Planning Specialist Institute and Manhattan Mortgage Company financial advisors.

Homeowners who decide to prepay their mortgage to eliminate debt on retirement are advised to retain between one and two years’ worth of living expenses in cash, readily available after the mortgage is paid.

first tuesday take: Anyone approaching retirement right now who has the cash savings to pay off their mortgage must be part of the 1%, or were wiser about the future than most of the herd of 99%.

Although older Baby Boomers have already burned their notes, the popularity of reverse mortgages and cash-out refinances over the past decades has placed some retirees in the same position as first-time homebuyers during the boom. Thus, homeowners planning on paying off their mortgage to stay in their homes and avoid monthly payments will be tapping their savings to do so. This makes no sense for these retirees right now.

Instead, homeowners on retirement will dissave, pulling money out of their stocks, bonds and 401Ks to maintain the standard of living they had pre-retirement. Although taking retirees’ wealth out of the stock market and spending it will weaken the growth on stock market investments, Wall Street has already accounted for the Baby Boomer flight from investment by adjusting current stock prices. [For more information on Baby Boomers’ dissavings, see September 2011 first tuesday article, Boomers bust open doors to real estate investment era.]

Most retirees have more than ample savings and pension to maintain their standard of living in retirement. Rather than sinking their excess (inheritable) cash into an asset they have an equity in such as their home, retirees will consider investing in the dirt-cheap homes in the neighborhood where they live and renting them out (or renting out their existing homes and finding new digs), the classic buy-to-let investment.

Re: “Retiring without a home loan” from The New York Times