Rich Dad, Poor Retired Dad: Retirement Savings or Paying Off Your Mortgage Early
Fatherhood brings on a variety of new responsibilities. Children obviously bring a higher level of financial obligation and being gainfully employed to provide for your family is paramount. But what happens when the days of your “9 to 5” end and you no longer have employment income?
Retiring comfortably requires adequate cashflow to cover your monthly living expenses, medical fees and whatever else you need to make your retired life more comfortable. People often wonder if it makes more sense to pay off their mortgage early or accumulate retirement savings?
Wisdom of the ages…
It has been common for young newly weds to purchase homes with massive mortgages. Once the reality of paying off the huge debt comes to fruition, they begin to worry about how much of a debt they owe and start to scramble for any cash to put towards their mortgage.
This may sound very familiar to you, as it may be the path you have taken with your family. However, if you ask any retired person who decided to pay off their mortgage early instead of saving for their retirement, they would most likely tell you that the decision proved to be financially detrimental to them in their Golden Years. The defining factor is that if young couples chose to save for retirement, their mortgage would eventually vanish on its own.
What about increasing your mortgage payments?
A 2014 survey by the Canadian Association of Accredited Mortgage Professionals, showed that three years ago 15 percent of home owners had been increasing the amount of their mortgage payments in the preceding five years. This is down from 19 percent in the 1990’s and late 2000’s. The trend has shifted to home owners paying down their mortgages with lump-sum payments. Over 16 percent of owners did this within the last 10 years and the rate continues to rise since the 1990’s.
The problem with increasing the amount of your monthly mortgage payments is that it limits the flexibility you have in managing your household cashflow. Hence, lump-sum payments have become increasingly attractive. Another benefit of lump-sum payments is a hedge against the risk rising interest rates. Also a significant reduction of a mortgage balance over time through lump-sum payments will ensure you have less to refinance when its time to renew. Likewise, periodically larger payments are most effective in the first 2 years of your mortgage when payments go towards interest more than the principal.
Saving for retirement is the right plan
As you get the most benefit from repaying your mortgage in the earlier stages of home ownership, you get equivalent results when applying that logic to retirement savings. The more you contribute towards your retirement savings when you’re young, the more more profitable the contributions are once it’s time for you to retire. Which also means if you do pay off your mortgage early, there may not be enough time for you to catch up on years of not contributing enough to retirement savings.
Another bad idea is using your retirement savings to pay off your mortgage. As with all of your key investments, whether registered education savings plans for your kids or savings bonds, do not use savings to pay off your mortgage earlier.
Things to remember…
• Stick to your plan. Resist the temptation of taking on new large debts. If the opportunity to buy a larger house or a new car comes along, be sure that your income can support the new debt as well as long-term savings, monthly living expenses and mortgage payments.
• Always have Emergency Funds. If you choose to make lump-sum payments on your mortgage, you should ensure that you still have adequate emergency funds saved in case something unexpected happens that negatively affects your cashflow.