One of the most common dilemmas that many people stress over is whether they should put any spare money they have towards saving for their retirement, or would they be better off clearing down debt and paying off the mortgage as quickly as possible?
There are pros and cons to both sides of the argument, so here is a look at some of the key points and insights, which should help you to decide which strategy is best suited to your circumstances and future goals.
Here are several factors to consider.
The subject of money can be a stressful one and one of the big issues that many of us worry about in particular, is the prospect of finding that we don’t have enough money to see us through our retirement.
Running out of money is an unpleasant prospect and if you have retired and do not have a regular income anymore, it is a big problem to try and deal with. This nightmare scenario is what drives many of us to try and put away as much money as possible towards our retirement.
Mortgage Debt Levels
Saving can be a challenge, because as a nation, our level of indebtedness has soared and this can have an impact on your creditworthiness if you are juggling various debts, including a mortgage.
The problem comes sharply into focus when you discover that according to the Consumer Financial Protection Bureau about 30% of people at retirement age of 65 or older still have mortgage debt to pay off.
The prospect of heading into your golden years with mortgage debt still hanging around your neck is likely to induce some sleepless nights, which is why you need to consider whether a better strategy would be to focus on clearing this debt as a priority over saving for your retirement.
Losing Valuable Time
When you are in a situation where you have to choose between clearing your mortgage debt as quickly as possible or putting money aside for your retirement, you need to try and work out which option makes the most financial sense.
The argument in favor of investing for your retirement as opposed to putting all your spare cash into paying off the mortgage early, is that every year that passes where you don’t have money potentially growing as a result of your investments, will cost you valuable time that you will struggle to make up later on.
If you put away $500 every month towards your retirement for 30 years, with reasonable returns on your investments it is feasible that you could have accumulated somewhere in the region of $2 million for your senior years.
If you put that same amount into paying your mortgage off early, you might achieve that aim within 15 years or so, but unless your house soars in value and you can then put much more than $500 a month towards your retirement for the next fifteen years, there is every chance that you will poorer in retirement, despite being mortgage -free.
If you own your home then a reverse mortgage is something you can use to help cover your cost of living during your retirement. What is a reverse mortgage useful for? The reason it is called “reverse” is that it pays out in either a lump sum or monthly payments to you for as long as there is enough equity available and you want those payments. Unlike a regular home loan, reverse loan repayment doesn’t occur in monthly installments, at least not unless you want it to. You choose when you pay it back. Unless you leave your home by either dying or moving, you will not owe any money back to the lender. You can freely use the cash gained from the reverse loan to perform home repairs, pay medical bills, or spend it any other way you choose.
The financial argument towards saving for retirement and paying your mortgage off over the standard period of time is a persuasive one when you crunch the numbers. There is however an emotional aspect to the argument of paying down your mortgage as a priority, as it feels good to get rid of this financial burden so quickly. You just need to decide which of the two scenarios described you would be more comfortable with.