The Budget Couple

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Episode 47: Paying off the House vs. Retirement Savings

Nate and Danielle discuss their thoughts on paying down the house or contributing more towards retirement.

Show Notes

Listener response to a question

[Our] goal was to get our mortgage down to a certain amount by paying extra but I’m rethinking this and I’m considering opening ROTH IRAs for us instead. I would ultimately like the house paid off in 15 years total but the gains on investments may be a better route (we have a 3.75% rate). So torn. 

They also mentioned that they are currently putting $38K a year into a 401K between the two of them.

Before we get into the house payment vs more on the retirement savings we want to take a moment to talk about 401K vs Roth IRA. We would highly suggest maxing out your Roth IRA if you are able to. Once you reach your match for the 401K, then go and max out your Roth, and anything that you have leftover, put towards the 401K.

The thinking behind this is

  1. A company match is free money, free money is good. Get as much of it as you can. Think of it as guaranteed interest.
  2. Roth IRA isn’t taxed when you take the money out. So if you’ve saved $500K by the time you retire, you can pull that out and not face a single penny in taxes. If you had the same with a 401K, you would be paying taxes on any money you take out.
  3. Once you max out your Roth, anything extra on a 401K is gravy

Now onto the discussion of paying off the house quickly or investing in retirement.

Your mortgage interest rate is 3.75% and the stock market on average returns 7%. So by pure math, you are correct, putting more money into retirement accounts makes sense on paper. It’s something that we have discussed and have also been torn on.

I want to offer up a different perspective on this.

Having a healthy retirement account is great, and I highly advocate putting money into them as previously discussed but they have one serious problem; you can’t touch them until you are at least 55. That means all of the money that you have out there, isn’t really reachable until you reach retirement age.

I’m more of the belief that paying off your house as quickly as possible gives you freedom. If you don’t have a house payment, it allows you to have significantly more money to do with what you want from month to month. Think of what you could do with your mortgage payment every month if you could spend it on something else.

It opens a lot of doors and also allows you to take more time off of work, travel, or just do things that you enjoy. 

So mathematically, investing the money into retirement accounts makes more long-term sense, but it cuts down on your flexibility. If you are able to put 10-15% of your income into a retirement account already, I would argue to put the rest of the money on the house, get it paid down, and once its paid off, you have some serious cash each month to do with what you want.

Sometimes finances aren’t always about making the sound decision, but about a lifestyle choice.

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