A while back I wrote a post on Retirement Savings vs. Debt Reduction and it prompted some of you to ask me about when it made sense to choose investing (retirement or otherwise) over paying off your mortgage early. Most people agree that getting out of credit card and other “dangerous” types of debt is a good plan, but the mortgage is viewed as a different animal altogether. Why? I believe it is because most people live with the idea that you can never pay off your house and that it is a “safe” type of debt anyway, usually with a low interest rate. Let’s tear into this idea and see where it takes us.
The question that made me really want to bring this up in a post was from a reader who wrote me and said, “I asked our financial advisor about paying down our house and he advised us…that directing that money into our investments would do much more for us.”
I think your financial advisor is giving you bad advice. In the perfect world, if you were able to direct every penny of money you would be using to pay off your mortgage into investments that provided a good return (KEY), your financial advisor would be correct. However, debt equals risk and there is no exception to that equation. Let’s assume life happens (and it does every day). What about the possibility of a job loss, disability, death of a loved one, etc. that would change your income to a point that it would make it difficult to pay your mortgage payment?
Then there’s the discipline required to use every penny of income that would go to a mortgage payoff to instead invest. Yes, there’s no tax deduction when you don’t have a mortgage and yes, you’re missing out on the opportunity to invest, but how much more could you invest if you had NO HOUSE PAYMENT!?
In our situation, we paid off our house just before Stacy turned 30 and being debt free, we are now able to put back enough for retirement that at our current pace (and we’re not really stressing ourselves toward it), I could retire at age 45. I don’t plan on retiring at that age but being completely debt free gives us total control of how we spend our money. I would ALWAYS counsel someone to pay off their house before paying lots and lots extra toward retirement.
That being said, I don’t think you should avoid paying into your retirement/long-term investing altogether for the sake of paying off your mortgage early. I believe and teach that before you pay extra on your mortgage, you need to be paying 10-15% of your income into retirement savings so as to ensure you don’t get behind on the retirement savings goal. Once you’ve done that, you can put everything else extra toward the debts to free yourself from them. This is exactly how Stacy and I did it and it has (so far) worked out even better than expected.
Within the next few days, I’ll address a deeper aspect of the financial advisor’s argument and hopefully help settle this discussion for you (if I haven’t already).
What says you? Should you put every extra penny onto your retirement, your mortgage, or somewhere in between?