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Should You Save for Retirement or Pay Off Your Mortgage Early?

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After purchasing your forever home and feeling confident in your career, you may wonder whether it would be worthwhile to put your extra income toward retirement or use it to pay off your mortgage. 

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We asked financial experts from across the country how to make the most of your money. Most agree that the answer depends on where you are in your life, the amount of savings you have and your long-term financial goals. Find out how our experts answered the question: “Should I pay off my mortgage or save for retirement?

Savings Matter

The majority of our experts agree that if you have enough disposable income to make a choice between paying off your mortgage or saving for retirement, you are in a fairly good position. A healthy financial situation is critical before you can even consider putting additional money toward something other than your necessities. 

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You want to make sure you have enough cash to get through any unexpected expenses. Generally, you should have around three to six months of savings. This means money that is readily available to you in the case of an emergency. If you have built up your savings, now is the time to think about how to get the most out of the rest of your income.

Good Debt

Most financially savvy people know that carrying large amounts of debt is not a good idea, but it can depend on the type of debt you have. While credit card and other types of consumer debt is usually considered “bad debt” and should be paid off as quickly as possible, a mortgage is considered “good debt” — the kind that can help build wealth or increase income over time.

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Kevin Roche, CEO at Pouldrew LLC and managing director at Leo Wealth, said, “There are also tax advantages for most homeowners by holding a mortgage; interest may be tax deductible.” He strongly advocates saving for retirement under most circumstances.

Compounding Effect

Roche said the main reason individuals should choose saving for retirement is the “compounding effect.” Compounding is accumulating interest on interest. While there are some benefits to paying off your mortgage, he said, when you “compare long-term returns (for investments) versus the interest rate you pay on a mortgage, the difference favors investments.”

He also said there are “tax advantages to saving for retirement through a company-sponsored plan in addition to IRAs, in addition to generating returns on a tax-deferred basis.” He cautioned that concerned investors should not worry about the down stock market this year because “markets recover.”

“Currently, an investor can earn 4% on a 10-year Treasury,” he said. “If they got a mortgage over the last few years, chances are their mortgage interest rate is less than that.  So, borrowing ‘cheap’ and generating returns in excess of that [mortgage rate] will create a positive spread between the two rates, putting them on a path to wealth.”

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Age Matters

Adam Pippington, chief financial officer at Freedom Dividend, said, “When it comes to saving money for retirement or paying off your mortgage, there is no one-size-fits-all answer. It depends on your unique financial situation.

“If you are nearing retirement and have a large mortgage balance, it may make more sense to focus on paying off your mortgage,” he said. “This will free up more money each month to live on, and you won’t have to worry about monthly mortgage payments.”

Final Considerations

Pippington also said, “There are a few things to keep in mind when making [the] decision. First, make sure you are contributing the maximum amount to your retirement account each year. This will help you save for retirement more quickly. 

“Second, if you have a high-interest mortgage, consider refinancing to a lower rate. This will save you money on your monthly payments and allow you to put more money towards retirement or other goals.

“Ultimately, the decision of whether to focus on retirement or mortgage payments depends on your unique situation. Talk to a financial advisor to get more specific advice tailored to your needs.”

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