Our industry revolves around helping clients plan for retirement. Most people have debt – generally including at least a home mortgage, and many feel that the smart choice is to pay debt down or completely off before they get started with investing and saving for retirement. Unfortunately, when we examine the math of that logic, often, paying down debt before saving for retirement is the wrong approach in preparing for your financial future.
Since most home mortgages have rates somewhere around 2 to 4 percent, and most long-term retirement portfolios earn substantially higher than this at around 7 to 9 percent, the smart financial choice is to prioritize saving and investing for retirement above paying off their home mortgages. However, we see many clients come through our doors incredibly debt-averse because they long for the feeling of freedom that comes from living “free and clear” in their homes. Often, these individuals will make increased or even double mortgage payments to reduce debt and avoid redirecting these funds into a retirement investment account. If the client can earn more money by investing the funds now than they will lose by having their mortgage for longer, we encourage them to begin investing with their extra funds to improve their financial outlook in the long run.
Paying down debt may be the wiser choice when interest rates of that debt – such as with credit cards and other consumer debt – are higher than average investment earning rates. This very rarely makes sense with lower interest rates. In addition, it might be wise to save and invest even when you feel you cannot afford it simply to get into or stay in that investment mindset and habit.
We also find some clients are less interested in stock market investing and prefer to focus solely on real estate or investing in their personal businesses. Since nearly 50% of business startups fail and most business owners focus entirely on building their personal business as their source of retirement income, most do not save or invest in other products, individuals with this strategy are at real risk of finding themselves with no retirement savings or investments. Market investing is an incredibly valuable addition to diversify investment holdings beyond these investment projects and lower individual risk.
We recommend you speak to a financial advisor to review your debt and investments and find out – where will your money best be working for you?