Planning to Retire

Pay Off Your Mortgage

By Emily Brandon

Posted: December 23, 2008

The benchmark interest rate on a 30-year fixed-rate mortgage has dipped as low as 5.17 percent, according to Freddie Mac. If you're getting a significantly higher return in the stock market (very doubtful right now), it might make sense to keep your mortgage going into retirement. But if you're not an investment wizard or don't want to take the risk, start prepaying your mortgage principal as you approach retirement. "You get an absolutely safe return by paying off your mortgage," says Laurence Kotlikoff, a Boston University economics professor and coauthor of Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard—Today and When You Retire. "If you have a 7 percent mortgage and 3 percent deflation right now, that means that you are paying 10 percent on your mortgage. Every dollar you pay [down on your mortgage principal] now is giving you a 10 percent real return."

More New Year's resolutions for retirement:

Delay retirement

Put off claiming Social Security

Get your 401(k) match

Avoid early withdrawals

Scrutinize 401(k) fees

Determine your risk tolerance

Rebalance your portfolio

Evaluate your target-date fund

Get a pension

Downsize

Bump up your contributions

More money-related New Year’s resolutions

Response to Wrong-headed

I used to believe this little "investment in stock market" story but I am a baby-boomer getting ready to retire who has not seen their investment portfolio advance in almost a decade (read my previous post)..

Do I have faith in the next 30 years? Frankly, the way it's going (and gone the last 10 years) I say big fat NO..

Read up on "secular bear markets" (which we are in the midst of right now) and you will find that these can last for years and years, even decades (like the bear market that ran from 1966 to 1982).

Average rate of return during a bear market, 1% per year (if you don't manage to lose your shirt first)...

And like I already noted, this type of market is generally long term. I don't think we'll be seeing a recovery here for many years to come...

More years than I have to wait around for..

So why in the world would you want to pay 6% a year on your mortage when you are only earning 1$ in the stock market? (Or none as in most 401k investors are finding)??

Pay your house off and even if you lose your job (and all your savings), you still have a place to call home..

That's a lot of peace of mind and security as far as I'm concerned..

Nancy of AZ @ Feb 07, 2009 17:41:19 PM

The smartest thing you can do is pay off your mortgage

Everyone keeps talking about retaining the 401k for future security but mine (don't know about yours) hasn't gained any value in the last 8 years, rather it's lost value (lot's of it).. What kind of investment value (or security) is that?

My husband was laid off from his high-paying corporate job in 2001. His 401k was worth $125k at that time. At the supposedly "normal" gains of 10% a year (what a bunch of crock) it should have doubled by now (according to all the financial wizards)...

Soon after 9/11 the $125k dipped to $90k. It took until mid-2008 to build to $125k again, but six (short months) later, it has dipped to $100k and the market is still moving downward. Pretty discouraging (and scary).

So exactly how much "security" and investment it is worth, seems at this point, zippo... The financial investors can run off their mouths all they want about what a bad idea it is to pay off the mortgage early but they're all wet. According to them, the best "plan" is to pay the bank huge amounts of interest (on your mortgage) and invest as much money as you can in your 401K.

Well, you might say, I'm seeing through this little investment banker scheme and have realized the best investment I can make is to pay my mortgage off early...

That way the bankers can go ... themselves (I'm sure you know what I mean) and the stockbrokers can also do the same..

I'm holding on to my own money in the form of hardcore assets (property, etc.). That way no one can rip me off again. Plus, I don't care if the value of the property goes up or down, I'll have a paid-off roof over my head and no one jacking my money around ever again!

Nancy of AZ @ Feb 07, 2009 17:11:55 PM

Wrong-headed

Paying off your mortgage is short-sighted. Unless you believe that we are doomed over the next 30-years, it makes a lot more sense to invest in the stock market over that period.

jimmy of LA @ Jan 14, 2009 10:24:02 AM

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Planning to Retire

Planning to Retire

Reporter Emily Brandon tells you how to get ready financially for retirement and to make your golden years the best they can be.

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