Paying off your mortgage and investing for retirement are two of life's biggest and most enduring financial priorities. Most people will live with their mortgage for 25 years and, if they're lucky, will spend about the same amount of time socking away savings. But there's a challenge. Everyone knows the longer you take to pay off your mortgage, the more you pay in interest charges. But the longer you wait to start investing, the less time your money has to grow and the less able you are to take advantage of the tax break offered inside a Registered Retirement Savings Plan (RRSP).
It may look like a math problem. But it's not.
To calculate the relative advantage of paying off your mortgage faster or saving more aggressively for retirement, you would need a crystal ball that can predict interest rates and potential market returns over time. Good luck finding one of those.
It's really an emotional choice.
Big, lifetime decisions are tough because they are not just about money. We all get emotional payoffs from the choices we make. When a mortgage causes a lot of stress, paying it off faster can bring relief. If anxiety about coming up short in retirement is keeping you up at night, you're going to sleep better when you step up your effort. Here are some questions you can ask yourself to help you come to the right decision.
Do you have the right mortgage?
Interest rates are very low right now. Would you be better off refinancing your mortgage, taking longer to pay it off, but putting more money into your retirement plan over the same time? This decision will hinge on how many years are left on your current mortgage and when you plan to retire. The good news is that the decision is reversible down the road. You could pay down your mortgage faster once you've met your savings goals. Your Lawyers Financial Advisor can help you estimate the potential advantages.
Does your financial plan still align with your appetite for risk?
Most people like to reduce their investment risk as they approach retirement. That might tilt the balance toward paying down the mortgage, since you're less likely to make an outsized return with low-risk or no-risk investments.
Would adding or increasing insurance be more effective?
The answer to the mortgage or retirement savings question could be, "neither." Life insurance is intended to fill in the gaps and provide for your loved ones if something happens to you before you reach your financial goals. A term life insurance policy could lower stress levels and take the urgency out of your need to pay off debt faster or accelerate your retirement plan.
Do you plan to live in your home forever?
If your plan is to downsize to a less expensive home when you retire, the equity in your home might be enough to cover the next one, especially if it has gone up in value. You could pay off the outstanding mortgage balance when you sell. So this may be a low-risk plan that helps reduce stress.
Do you know how much money you need in retirement?
Lawyers have no mandatory retirement date. You can work as long as you want or retire as soon as you're ready. It's up to you. If it's been a while since you ran the numbers with your Lawyers Financial Advisor, it's a good idea to revisit your plan. You might be surprised to learn that some people make the mistake of saving too much for retirement.
These are just a few of the scenarios you and your Lawyers Financial Advisor can brainstorm. The right answer for you should be the one that gives you the greatest confidence in your plan and doesn't demand a crystal ball to predict the future.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
