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Mortgage free-fast

Chris Farrell Dec 16, 2010

Question: I am 57 so retirement is hopefully not far away. I am self employed and successful but would not be affected were the Democrats able to ‘tax the rich’. My wife and I have saved into the high six figures roughly half in retirement assets and half in taxable instruments. We have no debt and a substantial emergency fund.

Here is my question. Because safe returns are so meager, thank you Mr. Bernanke, I have been prepaying our 5.5% 15 year mortgage to the tune of 24 payments per year rather than maxing out retirement contributions. My thinking is that this gives me 5.5% return and much more cash flow when the mortgage is paid (some of which could go toward retirement). Am I thinking clearly? Mark, Cranston, RI

Answer: Yes, you’re thinking clearly. I’s a smart move. I just have one caveat for you to consider.

First of all, I wouldn’t tell you not to pay off your mortgage early. In the heart of every homeowner burn’s an intense desire to own a home free and clear. It’s a wonderful moment, and if you have the money there’s nothing wrong with rapidly accelerating payments to eliminate the debt. I also believe that most people should enter their retirement years with the mortgage paid off.

You’re also getting, as you say, a 5.5% return in an 0.5% world. And you’ll come out ahead financially since you’ll save so much on the interest tab to the bank.

My caution is one that I often make, but it bears repeating. It all has to do with making sure you have a strong margin of financial safety.

Among the most important reasons for hesitating about paying the mortgage down too quickly is you don’t want all your investment eggs in one basket–a home. It’s critical to build up a well-diversified portfolio of savings, both in tax-deferred retirement savings plans and in taxable accounts. A nice nest egg of diversified savings not only protects you from downside risk, but it also gives you the financial means to take advantage of opportunities when they come along in the future. It’s why I would still revisit the decision not to put the yearly maximum contribution into you retiremnt portfoio.

However, from the information you gave in your question your finances look extremely healthy. So, if accelerating the payments still works for you–go for it.

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