• Question
  • Priorities: should we pay down our mortgage or increase retirement contributions?

    Asked by a 55 year old woman from Alstead, NH on 6/1/2018

    We are expat teachers...54 and 53. Our annual income is $200+k. We currently have $700k in retirement, a 3-month emergency fund, and are debt-free except for our house ($317,500 remaining at 4% interest). Our employer contributes 8% into each of our vested 403(b)s. We have 2 children that we will cash-flow through college starting in 3 and 4 years.

    We plan to stay in our current jobs until our children are through college. Our parents are getting older and we may need to return to the US after that to help them. If that is the case, our income will drop substantially (by more than 50% initially).

    Given our estimated 10-year window of continuing at our current earnings rate, do you recommend that our priority be to increase our retirement contributions or pay off the house?

  • Categories: Paying Off Debt, Retirement Planning


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  • There are several considerations when answering this question: relative investment returns, liquidity, and risk aversion.

    Paying down your mortgage offers you a certain and safe return of 4%, although the effective return would be lower because you’d lose some of your mortgage interest tax deduction. Saving and investing should offer you a better return over time. Historically, over the past 90 years going back to 1928, the stock market as represented by the S&P 500 has returned an average of 11.53% per year, including dividends. Bonds as represented by the 10-Year Treasury Note have returned 5.15%, or an average of 8.98% for a portfolio consisting of 60% stocks and 40% bonds. It is unrealistic to think that investment returns going forward will be as high past returns because interest rates are still very low and will likely to rise over time, meaning bond returns will be subpar and we’ve had a 9-year bull market in stocks. Bull markets don’t last forever and this one is likely getting long in the tooth. Moreover, the US economy will likely grow more slowly going forward than it did over the past 90 years. However, I think that it is realistic to think that investment returns will equal or exceed 4% over your 10-year time horizon. When you include your employer’s 8% contribution to your 403(b)s and the fact that you are making contributions to your plan on a pretax basis, it further makes the case for increasing your retirement contributions rather than paying down your mortgage.

    An additional and important consideration is that of liquidity. You mention several things in your question that imply a need for liquidity. When you pay down a mortgage you are sacrificing liquidity because you can’t access that money without taking out another loan against your property. Conversely, once you reach 59½ you can take withdrawals from your 403(b) penalty-free, regardless of whether you are working (although plan administrators can elect to not allow current employees to take withdrawals). You may also want to consider saving some additional money outside of your 403(b) if possible. This would offer you more liquidity and flexibility.

    So, if you are investing for the long-term, which a 10-year time horizon is usually considered, and can stomach the market’s ups and downs over the course of the next 10 years then I would suggest investing increasing your retirement plan contributions. If you can’t sleep at night due to market volatility, then prepay the mortgage. Or you could compromise and do some of both. Most importantly, continue to save!

  • Login to rate this answer:   Answered on 6/11/2018
**All above answers are provided as general information only. No warranty is made regarding the fitness or accuracy of the information provided in this answer. You should seek advice from a licensed CPA, attorney or CERTIFIED FINANCIAL PLANNER™ as to your unique financial situation.