Mortgage vs. Retirement

[Aristippus]

Just wanted to get some takes on this situation:

My wife and I bought a condo a couple of years ago. Because my career has had us living overseas for years, this is effectively our first piece of residential property; because we were already in our late 40s when we purchased it, we'll still have a significant chunk of the mortgage to pay off if I retire at 65.

We've recently retired some debt and now have some wiggle room in our budget. It occurs to me we could do one of two things with this newly-freed-up income: (1) spend it paying down the mortgage, so that we're mortgage-free by retirement (it's enough to accomplish this), or (2) up our contribution to my (tax-deferred) retirement plan, with the idea of then cashing enough out on the day I retire to pay off the mortgage.

I have no idea how to weigh the merits of these two options. Anyone want to weigh in?

[Petunia 100]

Just wanted to get some takes on this situation:

My wife and I bought a condo a couple of years ago. Because my career has had us living overseas for years, this is effectively our first piece of residential property; because we were already in our late 40s when we purchased it, we'll still have a significant chunk of the mortgage to pay off if I retire at 65.

We've recently retired some debt and now have some wiggle room in our budget. It occurs to me we could do one of two things with this newly-freed-up income: (1) spend it paying down the mortgage, so that we're mortgage-free by retirement (it's enough to accomplish this), or (2) up our contribution to my (tax-deferred) retirement plan, with the idea of then cashing enough out on the day I retire to pay off the mortgage.

I have no idea how to weigh the merits of these two options. Anyone want to weigh in?

I wouldn't consider saving in a tax-deferred account, planning to pull out a large chunk down the road to retire the mortgage. Because our income tax system is based on brackets, your lump sum will likely be taxed at a high rate, possibly higher than the rate you saved when you put the money in.

Instead, I would consider saving in a Roth account. Does your income allow you to contribute to Roths?

Also, you want to consider your time frame. How long until you retire? If you have 10 or more years to go, then it is possible you could come out ahead by going the Roth/lump-sum mortgage payoff route. However, a possibility is not a certainty.

[disneysteve]

What percentage of income are you currently saving for retirement?
What multiple of income do you currently have saved for retirement?

[MonkeyMama]

Impossible to say from info given.

How much is the mortgage? Interest rate? How long do you plan to keep condo? Is your retirement on track? Are you in a high income tax bracket?

In general, saving it in a retirement account and pulling it out the day you retire is not a very efficient plan, as Petunia stated.

[thesmartnickel]

You have to compare your expected return on your retirement funds after taxes with the interest rate you are paying on your mortgage. Also remember that your mortgage interest is tax deductible and ask yourself how comfortable you are with the risk of your return being more/less than expected. If you aren't too far from retirement, the risk would probably outweigh any benefits and you should just pay off your mortgage ASAP.

[greenskeeper]

Ever since the meltdown and QE, I've switched to aggressively paying down our mortgage. I still put money towards retirement, just not as much and throw the majority at the mortgage.

[Aristippus]

Sorry I didn't provide enough info; I was afraid that might be the case, but I didn't know what the relevant questions were. So, some further data:

Retirement

• I'm 50 now, so 15 years from retirement (retirement at 65 in my position is mandated by law).
• I currently save 10% for retirement; my employer kicks in another 5% (that's the maximum match).
• I currently have 2.5x my annual income saved for retirement.
• The amount of money I've freed up is equivalent to another 10% of my income.
• One other factor re retirement: I will have a pension upon retiring that will provide approximately 35% of my highest annual salary.

Mortgage

• We have 28 years to go on the mortgage, which is at 4.75% (it's a jumbo). We put 20% down when we bought.
• We bought at the bottom of the market, in a market (Washington DC) that weathered the housing crisis well, in a neighborhood that is stable and going up-market; I have no concerns about our housing as an investment.
• I have no idea whether we'll remain here after retirement. We love it here, and it would be a great place to retire to; but if our only child is living across the country, we might want to be near her (especially if we had grandkids). That's the one big unknown.

Thanks, everybody, for the comments so far!

[Aristippus]

Why don't you refinance your mortgage to a 15 year fixed-rate loan?

That would guarantee your mortgage to be paid off by age 65.

If you still have money left over each month, after the refinance, you could add that to your retirement savings.

I've thought of that, but I'm not sure I want to be locked into a higher monthly payment; with aging parents a wife with a condition that has required surgery in the past and could again, my gut feeling is that it's better to maintain some liquidity/flexibility.

[feh]

Another vote here to pay off the mortgage. I definitely wouldn't want to retire and still have 10-15 years of mortgage payments staring me in the face.

[MonkeyMama]

I don't know what the balance is on your mortgage, but going from a 30 year mortgage at 4.75% to a 15 year mortgage at 3.25%-3.50%, your payments should be pretty close to the same.

I would encourage your to check it out, if you haven't all ready.

Agreed. If you haven't run the numbers, you may be surprised. I would run the numbers on a 30-year refinance too. At these rates, the savings is substantial. I would think extra so with a jumbo loan. & if it doesn't make sense right now - today - I think it would be a worthy goal to pay down the mortgage enough to refinance at 15% - same payment. {That's my personal goal}.

From the info you provided, I would lean more towards funding retirement, and lowering the interest rate on the mortgage (in order to pay down faster without increasing payments). You did not mention your tax rate though. But I think it is safe to assume it is more than 15%? It is probably far more tax efficient to fund retirement plan and to take the current tax break. {But I am not advising this to cash it in later to pay off morgage...}.

Paying off a mortgage is great, but not at the expense of retirement savings. I didn't run the numbers or analyze too closely, but sounds like retirement savings is behind. Not necessarily behind if you increase contributions. Likewise, it sounds like you have other living options (could always move or downsize?), and ample equity. Basically, you have other options than "pay it off" to survive retirement.

For a more balanced approach, you may want to put the extra money into retirement and then put the "tax savings" to the mortgage. "All or nothing" is rarely the best answer.

[Aristippus]

Thanks, all; lots to think about, and very helpful!