We’re in our 70s, retired, with $450K in IRAs, $400K in home equity, and just received $200K tax-free — should we pay off our mortgage, invest, or take dream trips before it’s too late?

Investing the money and boosting your retirement savings is always an option. As of 2022, the median retirement savings balance among workers aged 65 to 74 was $200,000, according to the Federal Reserve. Among those 75 and older, it was $130,000.

With $450,000 in IRAs, you’re already doing better, financially, than the average American in your age demo. And with $400,000 in home equity on top of that, you and your spouse are well ahead of the game — the National Council on Aging reports that U.S. homeowners aged 65 and over have a median $250,000 in home equity.

That said, while home equity can be used as an income source (by using a home equity loan, HELOC or reverse mortgage), that requires you to borrow money. So, it may be best not to count that equity as income, which would leave you with your $450,000 in savings and whatever your monthly Social Security benefit pays you.

That may be a decent amount of money, but it also means you’re probably not living large. So if a tax-free $200,000 just came your way, it’s important to put that money to good use. Here are three options you may be considering — and the benefits and drawbacks of each.

Paying off your mortgage

Roughly 30% of U.S. homeowners aged 75 and older had a mortgage in 2022, according to the Urban Institute.

The benefit of paying off your mortgage is eliminating one potentially large monthly expense. As a retiree on a fixed income, that could give you a lot more breathing room in your budget. Also, paying off your mortgage could result in some interest-related savings.

On the flipside, paying off your mortgage means tying up your newfound windfall in your home – a fairly illiquid asset. So unless you have a higher-than-average mortgage rate, it probably pays to hang onto that cash and keep paying your mortgage every month.

About 14 million U.S. homeowners refinanced their mortgages when rates fell to record lows during the pandemic, according to Liberty Street. If you were one of them, then you may be able to earn a higher interest rate on your $200,000 windfall by keeping it in a high-yield savings account than what you’re paying on your mortgage.

Even if you’re paying 5% or more on your mortgage, if you can afford your monthly payments, it could be a better idea to hang onto the cash.

Say you put it all into your home to become mortgage-free and a few months later, you find yourself with a $20,000 home repair on your hands. At that point, you might need to borrow the money to cover it in the absence of having the cash. And then you risk getting stuck with a high interest rate because that’s the borrowing environment we’re in right now.

Investing

Investing a $200,000 windfall gives you the opportunity to grow that money into a larger sum. You can also put that money into assets like dividend stocks, real estate investment trusts (REITs), and bonds that produce ongoing income.

That said, any time you invest money, you take on a degree of risk. Bonds are typically a less risky asset category than stocks, but that doesn't make them risk-free. Bonds can lose value based on factors that include interest rate trends and issuer finances. And if a bond issuer defaults, you may not get to collect the interest you're promised.

That said, you can lower your risk even more by choosing municipal bonds over corporate bonds. Though they typically offer lower yields, municipal bonds have a historically low default rate.

Plus, municipal bonds offer the benefit of tax-free interest at the federal level. And if you buy municipal bonds issued by your state of residence, you’ll avoid state and local taxes, too.