What Should You Focus On: Your Retirement Savings or Your Mortgage?

June 02, 2017

Are you over 50 and hoping to retire in a few years? Do you still have a mortgage?

Perhaps you’re wondering whether you should accelerate your contributions to your retirement savings account(s), or maybe double up on your mortgage payments?

This is one of the most common questions we hear. It’s also one of the most important.

Here’s a scenario. You’re married, in your late 50s, you both have 401(k)s that you typically max out, and you’re hoping to retire around age 65. You’re considering lowering your retirement account deposits so you can take that extra cash and pay off your mortgage.

This sounds reasonable. But let’s take a closer look.

Transitioning into retirement with the house paid off is usually a great goal. After all, if you have no mortgage, then your monthly financial burdens (and stress) are reduced.

Simple, right?

Maybe. Here are some things to consider.

First, consider what your income-tax situation is.

For various reasons, working couples in their mid-50s are usually in a higher tax bracket than at any other time in their lives. There are a lot of reasons for this, but a few common ones are:

The kids are out of the house
People in their 50s are often at the height of their earning power
The mortgage balance is lower, so the tax deduction isn’t what it once was

Because you probably have higher incomes now (in your 50s) than you’ll have once you retire, this may not be the best time to forgo the tax deduction that a 401(k) provides. That’s because, if you look at your retirement, the odds are good that your tax burden won’t be nearly as high.

So, in this scenario, if it’s a choice between paying more to your mortgage and less to your retirement account(s), I suggest you stay on track and keep investing the max in your 401(k).

Lower tax bracket in retirement?

Stay on track and keep investing the max in your 401(k).

But consider making this one change: Direct the majority of your deposits into a conservative fund within your 401(k), and earmark these dollars as future mortgage dollars.

Then, later, after you retire, roll your 401(k) into two separate IRAs: One will provide retirement income, and one will be used to pay the mortgage.

The bonus here is that, depending on your taxable income during retirement, you may actually be able to accelerate the mortgage payments from the IRA so that your home is paid off within a few years.

Now, how about the opposite scenario?

What if your current taxable income won’t be any lower during retirement?

Some people end up in a higher (or similar) tax bracket once they retire.

In this scenario, bypassing the tax deduction of contributing the max to your 401(k) in favor of paying down the mortgage might be the way to go. That’s because if you’re going to be in a high tax bracket later on, there’s not as much benefit to putting it in your 401(k) because your savings is going to be heavily taxed later on.

Higher tax bracket in retirement?

Lower your 401(k) contributions to pay off the mortgage.

So, generally speaking: If you’ll be in a higher (or similar) tax bracket once you retire, consider lowering your 401(k) contributions to pay off the mortgage.

Lower tax bracket in retirement? Consider maxing out your 401(k).

What if you retire with a mortgage?

What should you do then?

For people who reach retirement and their home is not paid off (and there’s still a significant balance), it might be best to contact your bank to refinance your loan to stretch out the payments for as long as possible (even for as long as 30 years).

That’s because once you retire, you’ll probably want to have the lowest monthly expenses possible to maximize your cash flow.

Consider this: What’s all that hard work been for?

I’ve seen too many people spend their healthiest retirement years not doing the things they’ve always dreamed of, just so that they could pay their mortgage off, say, by their 77th birthdays.

This makes no sense to me.

If you can’t pay your house off before you retire, and if there’s a good-sized balance (or loan duration) remaining, then I believe it’s better to have as small a mortgage payment as possible so that you’ll have better cash flow today.

What if you retire with a mortgage?

Refinance your loan to have as small a mortgage payment as possible so that you’ll have better cash flow.

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