Save for Retirement or Pay Down Mortgage Fast
It’s a question we get all the time on Marketplace Money: Should I save for my retirement or accelerate payments on my mortgage? The way the question is usually asked, most people want to pay down their mortgage fast. It’s understandable–who doesn’t want to say goodbye to the bank for the last time?
But that decision can come with a steep financial price. In “The Tradeoff Between Mortgage Prepayments and Tax-Deferred Retirement Savings” (NBER Working Paper No. 12502), scholars Gene Amromin, Jennifer Huang, and Clemens Sialm argue that the costs of using this approach can be significant. They find that nearly 4 in 10 (38%) of them would save money by redirecting those extra mortgage payments into a tax-deferred retirement account. The authors believe “To the best of our knowledge, this is the first paper to . . . [consider] retirement contributions and mortgage payments as two alternative forms of household savings decisions.” You can read a summary of their report on their website.
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