One of the most debated financial questions of modern times is whether you should prioritize paying off your home mortgage over planning for your retirement. The answer to that question often is rooted in emotion more than sound financial wisdom. Emotion embraces the dream of a retirement with no debt, great health, and doing whatever you want whenever you want. However, for the vast majority of Americans, this will not be their reality. Sound financial wisdom says that before blindly adhering to the mantra of paying off your home mortgage as quickly as possible, you should examine your situation to see if it really makes financial sense for you.
Here are some things for you to consider before choosing to put your extra money into paying off your mortgage early instead of setting it aside for retirement.
If 2020 has taught us anything, it’s that we never know what tomorrow holds. I am not encouraging you to live in fear or paranoia. I am encouraging you to live in wisdom. Consider what your older self might say to you about how the decisions you make today determine your future. As you consider your options, ask yourself if they include the ability to change them should it become financially necessary.
Do you have an emergency fund set aside with enough money to pay your bills for six months? According to the Federal Reserve, over half of all Americans could not come up with $400 in an emergency. What about you? If you have substantial equity in your home and lose your job, it is an almost impossible and lengthy process to convert your equity into cash. Having access to cash can make a difference when it comes to keeping your home and vehicles, as well as paying for everyday expenses like groceries and utilities.
Home mortgage rates are at historic lows. Have you taken the time to compare the potential return on your money inside an investment against the interest rate you are paying on your loan? What about the tax deduction you take for the mortgage interest you pay?
Is this your forever home? What about remodeling plans? Are you considering downsizing?
Do you have a substantial sum set aside for your retirement? Are you prepared for the very real possibility that the cost of medical care could drain your retirement savings? Statistics tell us 45 percent of American workers have no retirement savings. Do you? If so, do you want to live on the 4 percent or so per year that experts tell us we can withdraw from our retirement plan, hoping it will last for 30 years? How would a significant market loss affect your retirement plans or standard of living? Have you taken the time to go to the Social Security website and look at what your potential benefits will be?
Keep in mind that the money you have set aside in a tax-deferred savings plan, based on current law, can make up to 85 percent of your Social Security subject to income taxes. Are you comfortable knowing this will be your income in retirement?
When I talk with people who have listened to financial advice from celebrity advisors in the media, I encourage them to take a step back before they implement the general advice they heard. Something that is “generally correct” can just as easily be “generally incorrect”. I like to sit down with people and hear about their specific situation, find out what their dreams are and what kind of legacy they want to leave behind. Only after this kind of a conversation can I help them develop a financial road-map with built-in flexibility to assist on their journey to their personal destination. I’d love to begin a conversation with you.