Dilemma: Pay Off Mortgage or Beef Up Your Retirement Program?

 by Greg Cryns 

There is an old myth that time speeds up as you get older. Of course, it does seem that way especially when you near retirement age.

My wife and I began a plan about 20 years ago to pay off our home mortgage as quickly as possible. We sent an additional payment (whatever we could afford at the time) along with the 

regular mortgage bill. The net effect is that we retired the mortgage on our previous home in 15 years. This resulted in a gigantic saving of interest on our 30 year mortgage.

Recently we sold that house and moved to another state. One of the reasons to move was that my wife obtained a job that set up a generous retirement plan and we needed a LOT more money added in a short period of time. At our age of 55 the idea of retiring with insufficient funds is very scary. 

My recent research showed that experts say that adding to a qualiified tax deductible pension plan is more financially advantageous than paying down the mortgage principal. Here are some reasons:

1. A mortgage is often a relatively cheap way to borrow money as opposed to using credit cards and other direct loans from banks. There is little reason to end payments when you can obtain higher interest on other investments that will easily offset the low cost loan.

2. The government offers powerful incentives to help you build an ample fund for retirement. 

a:  a qualified plan is tax deductible. Thus, if you are in a 25% tax bracket you will see your income tax bill reduced by 25% of the amount you put into your plan.

b: a qualified plan defers the tax on the interest accrued during the life of the plan until you start to take it out. People are usually in lower tax brackets when the money is used.

c: people over age 50 can now deposit up to $5,000 per year into a qualified IRA account

Be sure to consult with a CPA about your options regarding pension plans.

So, the experts tell us to "max out" our pension plans before paying down a mortgage. However, there is a warning: make sure you pay off all significant credit card debt before you start working down your mortgage and sometimes before you beef up your pension.

Another caveat: sometimes the best thing to do is what makes you feel good. I must say that erasing our mortgage with our previous house gave us a tingling feeling in our gut. However, this time we will max out the pension plans because we also have a larger buffer of cash for emergencies since we had all of the money from the sale of the house.

Greg Cryns is the owner of Flat Fee Real Estate Guide - http://www.flatfeerealestateguide.com