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Should I pay off a mortgage or save more for retirement?

As with many financial-planning decisions, determining whether to pay off a mortgage or save more for retirement depends on your personal situation. Consider these factors before making your decision.

Investment Return Opportunities
Some investors need nothing more than a simple equation to help them decide whether to increase retirement savings or decrease mortgage debt. If the interest rate you’re paying on your mortgage exceeds the annual return on your retirement investments, your net return is negative. If your investment return exceeds your mortgage interest rate, your net return is positive. In this case, saving more for retirement—and earning a positive net return—is the better decision.

Employer Match
If your employer matches your retirement plan contributions, saving at least enough to earn the full match makes better financial sense than routing the extra money toward your mortgage. If your employer matches $0.50 for every $1 you contribute up to 5% of your pay, for example, you earn an automatic 50% return on the first 5% of your contributions—and it’s completely risk-free.

Tax Advantages
Making mortgage payments and contributing to your employer-sponsored retirement plan both offer tax advantages: The interest you pay on your mortgage may be deductible when you file your federal tax return, and the pretax contributions you make to your retirement plan lower your taxable income.

If you’re within 10 to 15 years of paying off an amortized mortgage, you’re likely paying more toward principal and less toward interest at this point in the life of the loan. That means your tax deduction is less than it was when you first started making mortgage payments, and it may be to your advantage to maximize the pretax benefits of retirement plan contributions.

Conversely, if your mortgage payments are still being applied more to interest than principal, you may want to focus more on paying down your mortgage and less on growing your retirement account balance for a few years.

If you’re still unsure of which option will work best for you, consider seeking professional guidance. An advisor will consider your entire personal financial situation to help you reach the right conclusion.

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