Pay off the mortgage or save for retirement? Three ways to decide.

The relative benefits of paying off a mortgage versus saving for retirement can be hard to assess. It’s important to consider your individual situation. 

Chuck Burton/AP/File
A home for sale in Charlotte, N.C. Stoffer says people in the early and middle stages of a career should focus on building their retirement accounts instead of paying off their mortgages.

The idea of paying off the mortgage — usually our largest source of debt — is appealing to many homeowners. But is it really the best financial strategy?

The relative benefits of paying off a mortgage versus saving for retirement can be hard to assess. It’s important to consider your individual situation. Are you close to retirement age, or many years away? Do you have significant retirement savings? What tax bracket are you in, and how much benefit do you receive from a mortgage interest deduction? Will the returns on your retirement investments exceed what you’re paying for the mortgage?

You may feel dizzy contemplating the range of factors affecting this decision, but the following considerations will help steer you in the right direction.

Paying off the mortgage by retirement

When planning for a secure retirement, consider the benefits of owning a home debt-free before you retire. Say that at your current rate you’ll need $100,000 per year for expenses — including your mortgage — after you retire. If you pay off your mortgage before you retire, you might only need $80,000 each year. An annual $20,000 reduction over a 25 to 30-year retirement adds up to significant savings.

The drawback: You might be in a high tax bracket when you retire, and paying off your mortgage would disqualify you for a mortgage interest deduction. These deductions can range from a few hundred dollars to several thousand dollars a year for some homeowners. But if you’re five to eight years away from paying off your mortgage, you won’t receive much benefit from the deduction anyway.

If you plan to retire in 15 years or less

If you’re late in your career and can make extra mortgage payments, should you? The answer depends on how much you have saved for retirement and your tax bracket.

Retirement accounts are an additional source of income in retirement. Your house most likely won’t be a source of income if you plan to live in it. If you haven’t saved much, you’re better off socking away the money in a retirement account, not only as a way to boost your post-retirement income, but also to lower your taxable income. If you’ve saved a lot and are in a high tax bracket, there may still be tax advantages to keeping the mortgage.

If you’re more than 15 years from retirement

Those in the early or mid stages of their career who can apply extra income to paying down the mortgage may find the idea attractive. While being debt-free is appealing, it may not make the most sense from a financial perspective. Tying up your money in the house won’t provide the income your retirement account will.

If you’re in a higher tax bracket, you may benefit from the mortgage deduction. If you have a low interest rate mortgage, you can probably earn a higher return by investing in tax-deferred accounts, such as a 401(k), than you would by paying off the mortgage.

To summarize

In some cases, you can reduce your annual retirement spending by at least $10,000 by paying off the mortgage beforehand. But if you’re close to retirement and haven’t saved a substantial amount, it doesn’t make sense to pay off the mortgage. You need to fund tax-deferred accounts to create a supplementary source of income in retirement.

People in the early stages or midpoint of their career should also focus on building their retirement accounts instead of paying their house off. Money invested in retirement accounts early has more time to grow and may provide a better return than paying off a low-rate mortgage.

Each situation is unique. The framework above provides generalizations that may not apply to you. You must consider your tax bracket, whether or not you benefit from the mortgage interest deduction and the likely returns on your retirement investments. If the math gets too complicated, seek professional help.

Learn more about Jeff on NerdWallet’s Ask an Advisor .

You've read  of  free articles. Subscribe to continue.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to

QR Code to Pay off  the mortgage or save for retirement? Three ways to decide.
Read this article in
QR Code to Subscription page
Start your subscription today