Pre-pay your Mortgage Now; Save for Retirement Later?


We all have competing goals with our money. One of the most common questions is whether to pay off the mortgage OR to save for retirement.

Here’s an interesting argument on Kitces blog that accelerating your mortgage payment to pay if off earlier is less risky than keeping the mortgage in today’s interest and market rates environment: Why Keeping A Mortgage And A Portfolio May Not Be Worth The Risk – Kitces | Nerds Eye View.

This is an interesting proposition. Not to put words into Kitces mouth, with what he didn’t say, but I’d like to expand on the concept to help people understand an important nuance with this.

Simply paying off your mortgage (say a 30 year mortgage, or any mortgage term you may pick) means you are now 30 years too late (or whatever term you have remaining on your mortgage) to start saving for retirement! So what you really need to figure out is how to accelerate your mortgage first, AND get your budget accustomed to that higher dollar amount needed to pre-pay it, so that WHEN the mortgage is paid off, you redirect that same dollar amount now towards retirement.

Naturally, the more time you have before retirement, or the more you already saved towards retirement, or the less time left on your mortgage, the better this works because the dollar amounts are more manageable. This said, you likely already have retirement savings, so those would need to be considered in the mix too (see second calculator).

cake and eat it

Let’s look at how having your cake and eating it too might work.

You need to use two calculators at the same time:

First you need a mortgage calculator that picks up where you currently are with how many years you have left with your mortgage: such as this one. With no additional monthly payment you get a simple payoff schedule for the life of the mortgage. When you enter into the calculator both the years remaining on the mortgage, and how much extra you can pay on the mortgage, you get an accelerated payoff schedule and how many years and months the mortgage repayment schedule has been shortened. Note this important example to understand time from the mortgages point of view here: a 30 year mortgage with 20 years remaining (means that 10 years have already been paid on the mortgage) and an additional payment above the normal mortgage payment may shorten the payment schedule by 12 years for example. In other words, the mortgage is paid off in this example in the mortgages 18th year (30-12 = 18) … in other words it is paid off in 8 MORE years FROM NOW in this example (18-10 = 8). You can see these years on this calculator and its report.

I foot stomp the 8 years in the above example because that is how long you are delaying putting that extra payment of the mortgage towards retirement.

Now you need the second calculator to determine how much you may have between now and when you retire (how many years is that from now?). The first calculator tells you the total of your “accelerated payment.” You would enter this accelerated payment amount as the “additional contributions,” and enter how many more years to payoff your mortgage (say 8 years from my example above) as the number of “years to postpone savings.”

Beyond the scope of this blog (to keep this blog shorter) you also need to have in mind how much you need to have saved by the time you retire – for purposes here let’s call that your “retirement number.”

An iterative process which would have different numbers for everyone: You may try different “additional contributions” amounts until the lower number in the second calculator amounts to how much you need (your “retirement number”) to have saved over the number of total years you have remaining from today until retirement. In the first calculator, you would subtract your current mortgage payment from the “additional contributions” value of the second calculator and enter that difference as the “additional monthly payment” value in the first calculator and see how much shorter the mortgage would be. Then enter that shorter period as the new number of years to postpone savings in the second calculator in order to see if the “wait X years” value has reached your “retirement number.”

Eventually, using both calculators, you will have arrived at the extra amount you need to pay and the number of years your mortgage will be shortened in the first calculator, and still make it to your “retirement number” in the second calculator over the number of years you have between now and retirement.

And this is how you can have your cake and eat it too.

Oh … a PS. This same strategy could work with any other type of long term debt you have too … consumer debt, student debt, etc. The key though is to redirect those funds towards savings after the debt has been paid. Otherwise, you’ll be worse off even though debt free because you won’t have the savings either.

and a PPS. When you pay down debt you are essentially deleveraging … reducing risk as a result of having more exposure to something if the price declines.


– this only works if you have more years to retirement than you have after shortening your mortgage repayment schedule PLUS the number of years to make up not contribution to retirement during the accelerated mortgage period. Otherwise, you should plan on carrying the balance of the mortgage into retirement (or downsize, or some other suitable strategy).

– the calculations are a bit more complex than this due to market volatility. However, the main goal here is to explain the concept of how both goals may be achieved if there is sufficient time and resources to do so.

– the above is for those who have not yet retired. For those already retired the math would be different where the effect of withdrawing a lump sum from savings to pay off the mortgage would be compared to the net monthly income from your total remaining retirement savings. The risks of keeping the assets invested for retirement income versus paying off the mortgage would be a discussion point and consideration too. This comes down to risk tolerance and capacity so there is no universal right answer since people are all different in this regard.

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