Dear Dr. Don,
Should I put any extra discretionary money into paying off the principal balance on the mortgage or save it and put it in investments/mutual funds, etc.?

We are both retired and use our pensions and two Social Security incomes to cover monthly operating expenses.
— Samuel Savings

Dear Samuel Savings,
If you don’t have an emergency fund, I suggest building one. In retirement, you won’t face the financial risk of being unemployed. But it’s still a good idea to have some liquid funds available for a financial emergency. The Bankrate feature “Creating an emergency fund” will help you size and invest that fund.

After you’ve met your liquidity needs in the emergency fund, using discretionary cash in your monthly budget to make additional principal payments on the mortgage is a great idea. I like it better than investing the money in mutual funds because the savings from prepayment are certain and investment returns are not.

My rule of thumb is you should invest if you can expect to earn more on your investments on an after-tax basis than the effective rate on your mortgage. Most retirees are pretty conservative when investing, so it’s an easy decision to prepay the mortgage.

Bankrate’s mortgage tax deduction calculator can help you estimate the effective rate on your mortgage — assuming you can fully utilize the mortgage interest deduction on your taxes.

“Fully utilize” means the mortgage interest deduction isn’t just replacing the standard deduction available when you file federal income taxes. Review last year’s return or talk to a tax professional if you’re not sure if you’re fully utilizing the mortgage interest deduction.

The other benefit to paying down your mortgage is that by building equity in your home you can increase the monies available to you down the road in a home equity conversion mortgage, or HECM, should you need to tap your home’s equity. The Bankrate feature “Rules rev-up reverse mortgages” explains these mortgages in greater depth.

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To ask a question of Dr. Don, go to the “Ask the Experts” page, and select one of these topics: “Financing a home,” “Saving & Investing” or “Money.” Read more Dr. Don columns for additional personal finance advice.