Is It Better To Pay off Your Mortgage or Save For Retirement?

You may be wondering whether you should be paying off your mortgage or saving for your retirement. Opting for either one is the right choice because it helps you save or invest for the future. We will take a more in-depth look at the pay off your mortgage vs. save for retirement discussion in our article below.

Option One: Pay Off Your Mortgage

You have decided to buy a house as a future investment. Deciding to take a mortgage is a weighty one, and it is not a matter to take lightly. You must take into consideration the fact that you will be paying thousands of dollars in interest. All these even before you start paying off the principal amount.

You decide to take the mortgage and are now nearing the end of the mortgage payments. You have several payment options available, and maybe wondering whether it would be a good idea to do it at once. At the beginning of the payments, most of the money goes towards settling the interest. You will find that you are not making many inroads with regard to the principal amount. If you decide to make extra payments early, you get to reduce the interest faster, before starting to pay the principal amount. You also get to make smaller payments towards the end, which will assist with meeting your payment obligations.

You could also opt to make payments later, and service the loan principal. While it will not reduce the total interest faster, you get to build on your home equity. You also end up with shorter loan terms in the long run. You must, therefore, decide which makes the best sense for you.

What You Should Know About Mortgage

The one thing about mortgage interest is that it is slightly different from other types of debt. It is tax-deductible, and you can end up with quite a bit of saving.

If you take the non-standard or adjustable-rate mortgage and are working towards settling the principal amount, it could be an advantage for you. You get to build your home equity using adjustable-rate loans, making it easier to seek refinancing for a fixed-rate mortgage.

There are times when the local real estate market will go down. You may see zero appreciation, and in the worst-case scenario, depreciation. Paying down your house mortgage is one way of keeping your head above the water. You will, however, find it difficult to sell, or refinance the home, as well as obtain any other credit.

Advantages and Disadvantages of Paying Off Mortgage Before You Retire

You may opt not to pay off your mortgage despite having the assets to do so. You then decide to take this money and invest it somewhere else. What you should know is that you are investing in cash that is not yours. It may, however, be a good idea to invest elsewhere, but only after taking into consideration the Taxes, risks, and rate of a return, among others. You may, for example, find that what you get from your Investments exceeds the final amount you will pay in interest. It will be a better idea to invest and use that money to pay off your mortgage.

Let us look at the advantages and disadvantages you will enjoy if you pay off the mortgage before you retire below.

Advantages of Paying Off Mortgage

One of the main benefits you will enjoy if you pay off your mortgage is that it is risk-free. You have the option of investment vehicles such as treasury Securities, and bank certificates, among others.

Stocks are another excellent option for anyone who is looking to invest long-term. You have the potential of earning a higher return that will most likely exceed your mortgage cost. If you are borrowing the money from a bank to invest, you must be aware of the risks you face. If you mismanage your investments, you could get meager returns. You may, therefore, want to engage the services of a professional, who will give you the right advice, allowing you to make rational, non-emotional decisions.

Pay close attention to aspects other than interest when you are taking a loan. Getting into debt is heavily dependent on your ability to pay back the money in the future. You may be basing it on your income levels, but life can be unpredictable. In the future, you may find yourself in a situation where you cannot service your loans. You may, therefore, find that it helps to pay off your mortgage earlier, especially if you are nearing the retirement age. If you have the right investments, you will continue to get an income even after you retire. You can then continue to pay your mortgage way into your retirement.

Choosing to pay off your mortgage early may be a good option for anyone who is not a good saver. Some people cannot save, and anytime they see money, they want to spend it immediately. If you are such an individual and you come across some extra cash, you should think about paying off your mortgage early.

Tips for Paying Off a Mortgage Faster

Disadvantages of Paying Off the Mortgage

As with everything, there is a flip side when it comes to paying off your mortgage earlier. It’s important to consider these arguments as well, especially if you are making plans for the future and deciding whether this is the right thing to do.

You Must Maintain Some Liquidity

When you pay off your mortgage very early, you will reduce your liquidity. Having funds in your investment or bank account makes it easier for you to access cash whenever you need it. If your home provides you with home equity, if you need money urgently, you may not be able to access it that fast. Once you pay off your mortgage, you should sign up for a home equity line of credit. You get additional liquidity, thus access to funds whenever you need it.

Liquidity is essential, especially when you have a personal emergency or an economic downturn.

You Must Make the Right Call

Unless you have a background in finance, you may need to get the services of a financial advisor to walk you through the whole process. You may be thinking that Investments are a good option. But your financial adviser may be able to point out certain disadvantages that you are not aware of. There is also no guarantee in investments, and you may end up losing all your money.

What Assets Can You Use To Pay Off Your Mortgage When You Retire

You may retire while still having mortgage payments to make. You have the following options for liquidating assets to pay off your mortgage.

  • Look at the risk-free investments in your portfolio, and let them be the first option if you have to liquidate assets. Your taxable savings account is one such option.
  • You can also look at risky investments that you have in taxable accounts. You work off the basis that this investment has the potential to earn you good returns, and you do not mind trading them in so that you pay off your mortgage.
  • Those who are above the age of 59 can get access to tax-deferred accounts to pay off the mortgage. You must, however, note that making withdrawals from the tax-deferred account will make you liable to taxation at the end of the year. You will find yourself in a higher tax bracket, especially if you go for money out of 401k, or IRA.

Reasons Why You May Not Want To Pay Off Your Mortgage Early

Many people struggle with prioritizing their money requirements. You may, for example, be struggling with a credit card interest rate that is higher than what you pay for a mortgage. You may also be wondering whether you should save for the future, or pay your child’s education, among others. All this will have an impact on your ability to take and keep up with the mortgage payments.

Taking a mortgage also provides the double-edged sword conundrum. You know that owning your home will give you peace of mind. Yet, you know that before you pay it off, you will have sleepless nights wondering how to pay for it. There is a level of financial insecurity as long as the mortgage payments are hanging over your head. You may, however, opt to go for a mortgage, and we would advise that you take the low fixed-rate mortgage.  There are specific situations where you may need smart mortgage tips, by prioritizing the extra mortgage payments, and these include:

Pending Debts

You have other pending debts that you should not put off. Such include car loans, school loans, home equity lines of credit, credit card debt, among others. Some credit card debts may give you leeway with regards to 0% interest rates for the first 18 months. Missing a payment after could impact very negatively on your credit score. The interest rate may also be high, and you do not want to incur the penalties. So, if you belong to this huge number of Americans who have debts awaiting to be paid off, maybe you should consider dealing with them first.

Lack of an Emergency Fund

Financial experts will advise you to have an emergency fund. It should be able to tide you over between 6 to 12 months before you think about making early payments on your mortgage. Without a doubt, it can be difficult to save this amount of money, if you have other debts as well as the regular mortgage payments.

When You Are Not Putting Aside Savings

Do not make any extra payments on your mortgage if you are not saving some of your income. Cash needs are ever-present, and you do not want to find yourself cash-strapped because you use up everything that comes into your account. Have a 5-year plan for regular expenses such as vacations, weddings, education, among others. Financial experts say that you should save up to 20% of your gross income annually.

You Are Looking At Other Investment Options

Investing your money into other vehicles is a good idea. There are several options available, including stocks, bonds, and government treasuries.

Option 2: Save For Retirement

Paying off your mortgage is an excellent option, especially if you can do it earlier. Once you no longer have to worry about the mortgage debt, you can start saving for your retirement. However, you also have the option of saving for retirement with or without mortgage payoff. The compound interest you will enjoy on your savings will give you more value in the future. The longer you save, the more interest resulting in a better payout on your retirement.

The Experts recommend that you start saving for your retirement from a very early age. The truth does not necessarily apply to take a mortgage when you are still young. Although, if you can do both, it would definitely not hurt you. The earlier you start, the more you can absorb the impacts of market fluctuations on your product portfolio.

Saving For Retirement: What You Need To Know

Unless you have old money or are very wealthy; you may need to set aside some money for your retirement years. The reality is that some people do not save any money, and may eventually become a burden to other people.

It is never too early to start saving, and you have various options available to you. You have options such as Social Security, IRA, and 401k, among others.

The main challenge most people have with saving for retirement years is they barely have enough to meet their daily expenses. They also cannot put aside anything every month in savings due to their daily living expenses.

So What Can You Do To Start Saving?

Start small; you can try and set aside something every month towards your retirement. You will find that you get into a saving habit that will help you create a nest egg for your Golden Years. The financial experts will offer no fee, no minimum retirement accounts.

Get a financial advisor who can give you the best investment options. Think about investment risks for anything you decide to sink your money into. You may, for example, find that investing in risky areas such as biotech, leveraged funds, and gold may give fantastic returns. They are, however, not the best for someone who is just starting the journey of saving or investing their money. You may want to consider things such as index funds to invest. Also, you must be realistic about investment. And you must be aware that if there is a downturn in the market, you could lose your money.

With retirement savings, it is not so much about how much you put aside, but the amount of time you give it to mature. You get to enjoy compound interest thus giving you better Returns.

Types of Retirement Plans Available

There are various retirement plans you can consider, and these include –

  • The employer funds pensions or defined benefits, and you will get a monthly benefit until you retire. You will find fewer companies offering them nowadays because many employers are not willing to promise a hefty payment to their employees once they retire.
  • Cash balance plans where you get a promise of a certain amount depending on your contribution and the returns from the investments. Many companies are now gravitating to cash balance as opposed to pensions
  • Profit-sharing plans where the employer agrees to share the company products as an incentive for productivity. It leaves you at the mercy of your employer to decide what they feel you need to get
  • Defined contribution plans like the 401k, where both you and your employer will contribute.
  • Federal Government plans are for civilian employees and include social Security, thrift savings plan, or a basic defined benefit plan
  • The simplified employee pension plan is for small business owners. Only the employer can make contributions, and it is set up like a trust fund.
  • Solo 401k plan is for the business owner and the spouse
  • Nonqualified deferred is mostly for top Executives and may have the option of employer only, or employee and employer contributions
  • Cash value insurance plan will give a death benefit while allowing you to save for your retirement needs

A Combination of Option 1 And 2

Financial experts say that if you can afford it, you should find a compromise between saving for retirement and making mortgage payments. The right adviser will tell you where to find the compromise and how best to benefit from it. You can, for example, take a mortgage and try to make small additional payments as you go down the years. The benefit is you reduce the interest, thus allowing you to focus on the principal amount at a later stage.

If the market fluctuations are unpredictable, and there is a downward spiral, you can consider down-paying, so that you do not lose your investment funds.

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A Better Choice: Paying Off a Mortgage or Saving for Retirement

There is no simple answer to the mortgage versus savings for retirement conundrum. It comes down to the individuals and the circumstances within which you find yourself. You may want to talk to a financial expert to give you advice and help you plan for your future. One thing you should not do, however, is to sacrifice your long-term savings by focusing too much on paying off your mortgage. You must also have a plan of action which will guide your activities in paying off the debt you have currently. Some experts say that you should not bother with saving for retirement until you finish all your debts. Once you get rid of the Debt burden, you can then direct as much as 15% to your retirement savings.

You may, for example, want to think about other retirement options to pay off your mortgage. If you are struggling with the high-interest rates, do away with it by, for example, looking at refinancing options.

Before choosing whether to pay off your mortgage or save for retirement, you must put your finances in order. Ensure that you have an emergency fund that can take care of your expenses for up to six months. If your employer has the 401k savings option, try and match your employer’s contributions so that you save as much as possible.

The other option is to rank your debts according to the amount. You can then pay off the smaller ones first and then go onto the larger ones. Consider paying the minimum amount for any debt you have. You get to remain current with the payments. Any other money you get after paying off such debts will go into making extra payments and the high-interest debts until you finish the payments. You will eliminate your debts faster, but it will largely depend on how much you can put aside for the extra payments.

You must also think about the pros and cons, or why the option is the best, to make sure that you cover all your bases.

Final Thoughts

The decision on whether to save retirement or pay off your mortgage first is an individual choice. Very wealthy people who have a set future will not worry too much about retirement. They have a source of income for the rest of their lives can live their lives free of worry about the days they stop working.

The average American, on the other hand, has to struggle with debt payment as a daily requirement of life. You may find that what you have leftover after taking care of all your financial obligations does not allow you to put aside anything for retirement. However, financial experts will say that you should try very much and put aside something every month for your later years. What you need to do is get into the habit of saving. Other experts also say that you must take care of your debt obligations before you save for your retirement. Only you can decide what you need to do, but you must look at the pros and cons of each side of the coin. You must also do your research and take advantage of the best plans available.

The best thing you can do is find a compromise between the two options and work towards realizing your goals. The ability to pay off your mortgage, while putting aside something for retirement is something many people can only dream about.


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