Should I put off my retirement contributions to pay off my house early?
Having a paid-off house is a dream for so many. It means owning your home free and clear. No bank hovering in the background, waiting to take it away. But is it better to put your extra money towards paying off your house or building your retirement accounts to finance your future?
Here’s a question from a How Much Is That in Tacos reader:
Hi Mrs. Bean,
I know you said you and Mr. Bean have “decided to rent, for now,” but my husband and I are already homeowners. And we love our home.
Last year, we began taking our finances more seriously. We have paid off all our debt except for our mortgage!
We want to know if it makes sense to stop putting money into our retirement accounts for a while to get our mortgage paid off faster so that we can be completely debt-free.
I’m 44 and he is 45.
Our mortgage was for $300,000, 15 years ago, so we still have 15 years to go.
If we were to stop saving for retirement and put the extra $1,000 a month towards our mortgage, we can get it paid almost 7 years earlier!
So what do you think? Should we put our retirement savings on hold for a while and get the house paid off?
Love Those Tacos,
“Not Sure in Salem“
My Response
First off Not Sure, congratulations on becoming debt-free and taking hold of your finances! That is awesome and I’m so happy for you!
Now, to get to your question: deciding whether it makes more sense to stop contributing to your retirement and concentrate on paying off your mortgage requires answering some questions for yourself and a bit of math.
Since I do not have all of your information, I will give you some steps to figure out the best answer for you.
Knowing this information can help you not only make this important financial decision but hopefully, other personal finance decisions in the future as well.
1. How Much Do You Currently Have Saved for Retirement?
The first step is to figure out how much you currently have saved for retirement.
Add up any and all retirement accounts you may have:
- Employer-Sponsored Plans
- 401k, 403b, TSP, etc.
- Personal IRAs
- HSA (Health Savings Plan) – if you have high deductible health insurance and access to an HSA, many people like to pay for small medical expenses in cash while they’re still working and let their HSA grow. By saving their receipts from their working years, they can then begin to claim their previous expenses in their retirement years.
Add everything up and figure out where you currently stand.
Sample Retirement Accounts | |
401K | $100,000 |
IRA | $80,000 |
HSA | $20,000 |
Total | $200,000 |
2. Use a Compound Interest Calculator
Now that you know how much you currently have saved for retirement, you can use a compound interest calculator to see how much it will be worth by the time you’re ready to retire. (I like this calculator)
Most people plan to retire around 65. Input however many years until you plan to retire.
Since the average growth rate of the S&P is about 10% a year and inflation grows at about 3%, it makes sense to input a 7% interest rate in the calculator to see how your accounts will grow. This will account for inflation over the years. (Super Simple Investing to build a similar profile)
(Yes, inflation is currently much higher than 3%, but in the last few decades, it was much less. 3% is the average)
This calculation will let you see how much you can plan to have when it comes time to retire.
In this case, they will have about $733,936 by the time they’re 65.
3. Use the 4% Rule
The 4% Rule is a rule of thumb to estimate what your safe withdrawal rate will be in retirement.
(A safe withdrawal rate means you can take that amount of money out, every year, accounting for inflation, and not run out of money because your investments will keep growing.)
The 4% Rule is Not an exact science. It is just a simple way to estimate if you are on track for a financially healthy retirement.
To see if you’re on track, take the amount of future retirement funds you found in step 2 and multiply it by 4%.
Sample:
$773,936 x 0.04 = $30,057
This size Retirement Account will give them about $30,057 a year when they turn 65.
4. How Much Do You Need to Live Comfortably?
Now that you know how much your current retirement savings will give you to live on in the future, you need to figure out if that will be enough to provide you with the standard of living you’re used to.
The best way to start is to figure out what your life costs you now. How much do you need to be happy?
Track your spending:
- Household bills like rent/mortgage, insurance, utilities, etc.
- Groceries, gas, eating out, activities, car maintenance, clothing
- Don’t forget fun things like vacations
If you don’t already know your spending number, track it for a few months and average it out for the year.
There are lots of budgeting apps out there like Mint or YNAB. Or I prefer just simply tracking on a spreadsheet on my phone. Adding up past credit/debit card statements will also help you see how much you’re currently spending.
Of course, your needs and lifestyle will change in retirement. Medical bills may be higher or you may want to take more vacations. You will also have fewer work-related expenses and if you have a mortgage now, hopefully, that is paid off by the time your retire.
But having an approximate dollar amount will help you figure out if you’re on track.
We personally spend between $60,000 and $80,000 a year to feel comfortable while enjoying fun activities/vacations and good food.
So I’m going to use $70,000 as our example.
If you want:
- $40,000 annually, you will need to save $1,000,000
- $80,000 annually, you will need to save $2,000,000
- $120,000 annually, you will need to save $3,000,000
5. Decide If Stopping Retirement Contributions Would Be a Good Idea
After you have calculated how much your current retirement savings will provide you vs how much you need to live comfortably, you can decide if stopping your retirement contributions would be a good idea.
Estimated Retirement Income | VS | Required Living Income |
$30,057 | < | $70,000 |
In this sample case, the current future income of their retirement account is less than half of what they’re used to living on!
This is not some horrible discovery that they can never retire. It is simply an estimate of their current situation.
If this person is willing to work a few more years to give their account more time to grow or drastically cut their living expenses, it might make sense to stop contributing to their retirement accounts for a while to pay off their house.
But if that does NOT sound like something they want to do, it is probably best to keep stashing away as much as possible to continue building for their retirement.
Once they reach that sweet Coast FI number, they can easily decide to stop contributing towards retirement and work on paying off their house, or whatever is important to them. They’ll have enough invested in their retirement accounts that they will grow to cover future living expenses without ever adding another dollar.
Personal Finance is Personal
Remember, Personal Finance is Personal. The perfect decision for one person may be a ridiculous decision for someone else. That is why it’s important to understand where you personally stand.
In the case study sample above, I showed how a 45-year-old with $200,000 saved and 20 years until retirement could look at things.
You may be a 55-year-old with over $2,000,000 saved. Or a 28-year-old with $80,000 saved. Maybe even the other way around.
Everyone’s numbers are different so it’s important to figure out where you are right now.
Emotions can also play a huge part in your finances. If owning your own home outright is the only thing that will allow you to sleep at night, go ahead and make that your priority.
Either way, your decision to spend in one area may affect your ability to spend in another. As long as you believe it’s the right decision for you, go for it.
So do the math, take a hard look at what’s truly important to you, and start down the path that feels best to you.
(I wrote a whole article on following the Path to Wealth. Check it out.)
Wrap-Up
I hope these Steps to Figuring Out Your CoastFI Number are helpful in making your decision whether to put your retirement savings on hold to pay more on your mortgage or not.
And it doesn’t have to be all or nothing. Maybe you have $1,000 a month to work with and played with the Interest Calculator. If you found out you only need to contribute $500 a month to reach your Retirement number, maybe you want to throw that extra $500 towards the mortgage.
Or your child’s College Savings. Whatever is most important to you!
And as always, no financial decisions are final. If your circumstances change or it just doesn’t feel right anymore, do the math and make a change in your NEW right direction.
Where do you stand? Have you reached CoastFI or do you have a ways to go? Let us know in the comments below!
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