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Thinking about retirement savings

Chris Farrell Mar 16, 2011

Question: I’m 51 years old and only 4 years into a 30 year fix rate mortgage. My change in jobs required that I move, so I got caught in the high prices of homes just before the bust. I was fortunate enough to be able to put down 30%, though, so I’m only slightly underwater. I make a decent wage and have no complaints, but as a local government employee, my employment status is tenuous (I’ve survived two rounds of lay-off so far) –at the very least, wage increases are not on the horizon for the foreseeable future. Still, I live within my means, have a decent emergency fund set aside, and consider myself lucky.

My question is about saving for retirement. I am able to double up on mortgage payments every couple of months if need be, but is that the smart place to put my money just now. Or should I sock as much as possible away into savings (CD’s, money market accounts, the market, or where?) I know that paying off a mortgage early saves a bundle, but how does that compare with investing it for the future? Sue, Eustis, FL

Answer: There are a couple of things to think through in deciding the right financial course for you. In particular, I would focus on job (in)security and your taxable and tax-deferred savings.

The more uncertain you are about your job the more I would sock away money in savings. It’s your personal safety net against a job loss, a forced shift to part-time work, or a pay cut. You can always take a chunk of the savings and put it toward paying down the mortgage principal later on if the risk of losing your job recedes. The savings also becomes part of your retirement portfolio.

Since you’re a local government employee you probably have a defined benefit pension plan, the kind that will pay you a steady income in retirement based on a job-tenure and earnings-history formula. You also may have a defined contribution savings plan, such as a 457 or 403(b). The reason for bringing up your pensions and other pots of savings is you don’t want to enter the retirement years asset rich (own your home outright) and savings poor. So, I would look at your overall financial picture befopre deciding on what to do.

My bias is to build up a well-diversified retirement portfolio before getting too aggressive with the mortgage.

That said, it’s smart to enter retirement debt free. So, let’s say you decide to concentrate on savings for now. You could still accelerate your mortgage payments by making 13 or 14 monthly payments a year rather than 12. The extra payments will make a difference. You’ll pay a lot less in interest to the bank, but you’ll still have enough income every month to top off your savings.

You can get even more aggressive once you’re confident about your job security and the depth of your savings set aside for retirement.

By the way, this is a suggestion on how to think through the decision. You may decide at the end the best thing for you financially and emotionally is to eliminate the mortgage fast.

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