Whether it’s better to pay off your mortgage ahead of schedule or invest and save towards retirement is a perennial – and perennially difficult question in the world of retirement planning. It really depends on your current financial situation as well as your age. More to the point, it largely comes down to whether you’re still working and expect to for at least the next several years or you’re close to retirement or already out of the workforce.
If you plan to pay off your mortgage early, you’ll want to make sure you already have some kind of cushion for emergencies. Paying down your mortgage is a great thing, but don’t break the bank to do it; it’s better to keep some savings to allow you to continue paying your regular mortgage payments if something unexpected happens.
Another consideration is whether the savings on mortgage interest are greater than the income you could reasonably expect to generate through investments. Obviously, you’ll want to take a close look at the interest rate on your mortgage and make a conservative estimate of what your investments should yield before you make this decision.
Mortgage interest is fairly straightforward, but remember to include the tax implications in your calculations. Depending on which tax bracket you’re in, you’ll be able to deduct most (and maybe all) of your mortgage interest, which can reduce your effective mortgage rate by as much as 1%.
Figuring out how much you’ll make investing is a more complicated question. The market can be unpredictable, so don’t overestimate your potential returns – somewhere in the neighborhood of 4% to 5% is probably a reasonable return for the average investor.
Retired Or Close To Retirement
If you’re out of the workforce, you’re generally better off going for a mortgage payoff than investing, given the inherent volatility of the stock market. This isn’t to say that you shouldn’t invest at all, but keep in mind that the stock market can see periods of a decade or more of below average returns – which could give you a much lower ROI than just paying off your mortgage early. Also, the tax advantages of having a mortgage in retirement are much smaller than they are when you’re still working. You’ll probably be in a lower tax bracket and you’ll be paying more in principal and less in (deductible) interest.
There is no one size fits all answer to this or, for that matter, a lot of questions people have about retirement planning. A mortgage payoff could be the right answer for you, but depending on your circumstances, it might make more sense to keep investing. Keep the guidelines here in mind and you should be able to arrive at a solution that works for you. Finally, remember that whether you choose to pay off your mortgage or invest more towards your retirement, they’re both far better than doing nothing at all to plan for the future.
Bill Kinder @BKAssocAdvisors
Bill Kinder is the President and Chartered Financial Consultant with Bill Kinder & Associates. A company that helps people from all walks of life and income levels to position & manage their money wisely, minimize their taxes owed, protect their assets and plan for a comfortable retirement. Bill has been in business for over 35 years, holds a BS degree, plus a Chartered Life Underwriter and Chartered Financial Consultant certifications, as well as the Million Dollar Round Table’s “Top of the Table” honor. Follow him @BKAssocAdvisors or if you would like to ask him a question, send it to email@example.com. If you’d like a FREE ‘WISE Money’ Consultation, call him at (304) 250-0250.
|Early Retirement Tip #3|