Keep the mortgage or pay off the house?

"Between Social Security and an untaxed nest egg, people are thrown into a position where all of their withdrawals and the majority of their Social Security is taxable. The longer people can defer touching their untaxed nest egg, the better off they are," says Sheryl Garrett, founder of the Garrett Planning Network, based in Shawnee Mission, Kansas.

Don't mess with your 401(k) 

If, in order to pay off your mortgage, you have to reduce or stop contributing to your 401(k), you're likely not making a good decision.

In a recent research report, economists posed this question: "If I have extra money for savings, should it go toward retirement or paying down my mortgage?"

They examined the tax advantages of itemizing deductions, typical mortgage rates and savings interest rates on retirement accounts. After analyzing those variables, the economists concluded, "About 38 percent of U.S. households that are accelerating their mortgage payments instead of saving in tax-deferred accounts are making the wrong choice."

One of three authors of the report, Clemens Sialm, an assistant professor of finance at the University of Michigan, says his conclusions are actually more dramatic than they appear. He says the number of people who should be saving instead of paying off the mortgage is closer to 60 percent because the economists relied on very conservative investment returns to calculate their findings and didn't take into account employer matches.

Sialm says anyone with an employer match who is accelerating payment on his mortgage at the expense of maxing out his tax-advantaged retirement account is almost certainly making a mistake.


"The typical match is 50 percent of the first 6 percent saved. That means if you save 6 percent of income, you get 3 percent additional saving, effectively a 50 percent return on your investment. Forgoing that is a costly mistake," Sialm says.

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