save for retirement or pay off the house early??

[AngieB]

Dh and I have been having an on going debate which is better if you can only do one, save for retirement or pay off the house early?

Right now we put $50 a month away for retirement and I would like to do more. Dh thinks we should stop saving for retirement and put all our extra money towards paying off the house and then in 15 or so years we would have all that extra money to put towards retirement. I worry about the what if we don't get the house paid off and don't have anything saved for retirement. I should add that we plan to stay in our house forever and dh's work does not offer any retirement and I'm a SAHM.

[woodchick]

I am not an expert...but I'd say Save for Retirement.

The money you put away will earn interest and the interest will compound over the years. There is no way that you can "catch up" should you start saving later.

[Staceyy]

We put everything into our 401k. Then we will take part of the money out to payoff the mortgage. We are 55 years old. Interest rates are pretty good on our investments right now so we feel this is the best path for us to take.

[msjd123]

This article explains the issue fairly well: http://finance.yahoo.com/expert/arti...neyhappy/30425

[Cersha]

From my personal research....saving for retirement is the more appropriate option. I'd do that.

[UberMama]

I disagree. I'd put it towards your house. How much is your interest? Unless it's 0%, you end up saving money in the long run if you make larger payments now. You could always take 1/4 of your extra $ and put it towards 401k, and the other 3/4 towards house or something like that. Of course, by putting it into a 401k, you avoid paying taxes on it. So there's pros and cons to both options.

[polyhymnia]

For me it would depend on your ages and when you plan to retire. For example for us, being 25, do not anticipate retiring for at least another 40 years. For us, retirement savings takes priority. Paying off the mortgage in 30 years is reasonable and would still mean no mortgage in retirement. Our money invested NOW will make much more for our retirement than money invested later.

If, however, we were 45 and looking at retirement in 20 years... I would focus on paying off the house, so we didn't have that bill to pay in retirement - the money we did have saved for retirement would "go further" without having to pay a mortgage.

I don't know how sound that advice is - but I do think it is something to consider.

[meowee]

My DH is a financial wiz and he would say to pay off your house first, b/c the interest will exceed whatever interest you would get in a retirement account. But you should try very hard to pay it off before 15 years.

We paid off our house first and now everything goes to retirement. We have a proprietorship so we have our own 401k. We actually borrowed from our 401k TO pay off the house. That way we paid ourselves the interest.

[velochic]

Originally Posted by meowee

My DH is a financial wiz and he would say to pay off your house first, b/c the interest will exceed whatever interest you would get in a retirement account. But you should try very hard to pay it off before 15 years.

Unfortunately, your dh is wrong. If you did absolutely nothing but chuck all of your retirement into a total stock market index fund and keep it there for the next 30 years, it will probably make you an average 11% interest before taxes (and taxes on index funds are minuscule). That's about what the market has made in the last 80 years or so. If you are paying 6% in interest on your mortgage, you are ahead by at least 5%. And that's just using index funds... not actively managed funds that have a chance of beating the market.

If you have a $200,000 mortgage for 30 years, you are going to pay $231,676 in interest on it.

If you have $0 in savings right now and are able to contribute $5,000/year for the next 30 years... in 30 years you will (through the wonderful magic of compound interest) have $1,104,565... not by beating the market, but just keeping up with it.

OP - at any age, you need to be saving something for retirement. If you will have your home paid off before you retire, without making any extra payments, you are MUCH better off saving everything you can for retirement. Once you are retired, that's it... you can't borrow to pay for retirement. If the funds are not there, you simply don't get to retire. You will have to continue to work to make ends meet. IMHO, it is better to have a mortgage in retirement than to have less retirement and no mortgage. Your living expenses are going to be much lower in retirement, plus you will have the added bonus of some social security.

[wildmonkeys]

Save for retirement first.

BJ
Barney, Ben & Patrick

[Herausgeber]

What's your plan for retirement? Borrowing against the house? That's about all you can do if you don't save anything. You can't really make up for the lost opportunity by ramping up your savings later. You lose decades worth of tax breaks by doing that.

[aircantu1]

I would definitely save for retirement. The first dollars work the hardest and you can't make up for lost time.

I'm a big Dave Ramsey follower and he recommends saving 15% of your gross income for retirement, then paying off the house. Makes sense to me!

[skueppers]

If you can do only one of these things, I think it makes more sense to save for retirement rather than paying off the house early, because you can almost certainly earn more on your retirement investments than the rate on your mortgage.

To look at an example, let's say you have a $100,000 mortgage at 6% for 30 years. With that loan, you're paying $599.55 per month, or $215,838.44 over the life of the loan.

If you pay $50 extra toward the mortgage every month, you'll have it paid off about 5 1/2 years early, at which point you'd be able to invest $649.55 a month for retirement. If your retirement investments earn 8%, by the end of the 30 year mortgage period, you'll own your house free and clear, plus have about $53,630.91 in retirement savings.

On the other hand, if you pay your mortgage at the usual rate for 30 years, and invest $50 each month toward retirement (again earning 8%), by the end of the 30 year mortgage period, you'll own your house and have $74,517.97 in savings.

Seems like a no-brainer to me.

[mhurst]

Originally Posted by velochic

Unfortunately, your dh is wrong. If you did absolutely nothing but chuck all of your retirement into a total stock market index fund and keep it there for the next 30 years, it will probably make you an average 11% interest before taxes (and taxes on index funds are minuscule). That's about what the market has made in the last 80 years or so. If you are paying 6% in interest on your mortgage, you are ahead by at least 5%. And that's just using index funds... not actively managed funds that have a chance of beating the market.

If you have a $200,000 mortgage for 30 years, you are going to pay $231,676 in interest on it.

If you have $0 in savings right now and are able to contribute $5,000/year for the next 30 years... in 30 years you will (through the wonderful magic of compound interest) have $1,104,565... not by beating the market, but just keeping up with it.

OP - at any age, you need to be saving something for retirement. If you will have your home paid off before you retire, without making any extra payments, you are MUCH better off saving everything you can for retirement. Once you are retired, that's it... you can't borrow to pay for retirement. If the funds are not there, you simply don't get to retire. You will have to continue to work to make ends meet. IMHO, it is better to have a mortgage in retirement than to have less retirement and no mortgage. Your living expenses are going to be much lower in retirement, plus you will have the added bonus of some social security.

You are my hero!