You hear it often: The more you can contribute to your 401(k) or other retirement savings accounts, the better.
But there's one situation in which you shouldn't focus on filling up those coffers, says personal finance expert Suze Orman: If you're thinking about leaving the workforce soon and still have a mortgage, "stop saving so much in your retirement accounts," she writes on Money.
Becoming mortgage-free before you retire instead will reduce stress and give you peace of mind. Plus, it makes sense from a financial standpoint, Orman says. Yet "more than one in three homeowners 65 or older is still paying off a mortgage."
That said, you should still contribute enough to get the full 401(k) match if your company offers one, she notes: "That is to never be turned down."
She explains by giving the example of an older homeowner with a $300,000 mortgage and a monthly payment of $1,389, which comes to $16,668 a year:
After 20 years of paying $1,389 a month you still owe $138,850. If you intend to use retirement funds from traditional 401(k)s or IRAs to make another 10 years of mortgage payments in retirement, you're going to need to pull out a lot more than $16,668 a year. Remember: You will owe ordinary income tax on every penny that comes out of those accounts.
If your combined federal and state tax rate is 25 percent, you would need to pull out more than $22,000 a year just to net the $16,668 for the mortgage.
While there are some pros to prioritizing paying off your mortgage before retirement, there are also a few cons to consider. One of the biggest cons "is not using the inflation-hedging ability offered by a fixed rate mortgage, where the bank assumes all of the risk," Deborah Nason reports for CNBC.
Other financial advisors say that whether or not it makes sense to focus on paying off your mortgage before retirement is highly situational. It depends on your asset and income levels, investment attitudes and tax situation.
But Orman is adamant: If your golden years are in sight, "stop saving at work and plow the extra money that will pop into your paycheck to reducing your mortgage debt ASAP."
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