Dear Carrie: I'm 60 and will probably retire between age 66 and 70. I currently have $375,000 in IRA/401(k) funds and I'm adding 8 percent of my income annually. My employer matches a portion. I still have a mortgage of over $165,000 at 4.75 percent.
I'm wondering... should I stop my 401(k) contributions and apply that money in extra principal on my mortgage? If I do, I'd pay my house off in about 10 years, making life a lot easier when I retire. But I'd lose the tax advantages as well as the employer match. One idea is to contribute enough to get the match and put the difference toward the mortgage. I'm swimming in possibilities! -- A Reader
Dear Reader: First let me congratulate you on doing some smart thinking in exploring the alternatives for paying off your mortgage. Not having a mortgage in retirement can be a real plus.
But first things first: Under any circumstances, I absolutely agree that you should keep contributing at least enough to your 401(k) to capture the employer match. At your age -- and with possibly 10 years before you retire -- it's crucial to keep saving. In fact, the real crux of the matter is: How close are you to your retirement goal?
Decreasing your retirement savings to pay off your mortgage is a trade-off that takes money from one pocket to put into another. Before you make this decision, I think you should step back and take a more holistic view of your financial situation. Here are some things to consider:
HAVE YOU SAVED ENOUGH FOR RETIREMENT?
Now would be a good time to realistically assess how much money you think you're going to need when you retire. It's a simple formula.
-- First, determine what your annual expenses will be. It's probably safe to assume that you're going to need basically the same amount in retirement as you're living on now.
-- Next, subtract your projected annual Social Security benefit (plus any other source of income you may have, such as rent) from your spending needs.
-- The result is the amount you'll need to withdraw yearly from your retirement savings to cover your expenses.
Now take a hard look at your savings. Will $375,000 -- even assuming a 5 percent annual growth rate for the next six to 10 years -- be enough to give you the type of retirement you want? Industry experts suggest that you withdraw no more than 4 percent of your portfolio in your first year of retirement, adjusted annually for inflation, to comfortably fund a 30-year retirement. Since you plan to retire after age 65, you might increase your first-year withdrawal rate to 5 percent.