Extra Money? What’s better – save more for retirement or pay off your mortgage?

Is your Mortgage longer than your Career?

So you think you are doing fine, you have extra money each month, you are saving pre-tax 401K money for retirement and you are making your mortgage payments and every once in a while putting more into the principle.  The question comes up – what to do with the extra money,  should you put more into your mortgage or should you put more away for retirement.  I would say that most people think they should be putting more into savings but oftentimes that is incorrect.  The fear is more real because remember no one is going to give you a loan for your retirement and with what we keep hearing about social security going bankrupt at some point in the future the fear that we will have to live with the kids and eat top ramen each day surfaces.

One of my clients had that same question and we ran an E-Trades Retirement Quickplanner and came up with this interesting scenario.  Carol (name changed) earned about 90K in salary, has about $220K in retirement and savings.  She has 26 years left on her mortgage but is 13 years away from retiring.  She has about $500 each month to decide what to do with.  She is already putting about $500 a month into her 401K.

In this first picture if she spends the $500 and doesn’t save any of it then she will have a shortage of retirement funds in the amount of $193K

 

 

Scary, I know.  Let’s say she decides to plow $500 more dollars into her retirement accounts each month.  What will that do to that shortage?  Well the shortage drops to $99K.  Better but not good enough.

 

Okay, let’s back up a bit and put that extra $500 into paying the mortgage off.  With United First Financial’s MMA system that 25.6 year mortgage will be paid off in less than 13 years so Carol will go into retirement without her $1500 mortgage payment (expenses lowered to $3250).  Look at that!!  Carol no longer has a shortage but now she has a surplus of $110K

 This was so clear for Carol’s situation (I’m not saying this is what everyone should do).  Using the UFirst MMA her mortgage will be paid off before she enters retirement and so her largest expense will be eliminated and her retirement savings will be able to stretch and cover that much more.  Carol is a firm believer now that she is on the MMA.

 

 

 

 

 

 

 

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