In an episode of The Ramsey Show titled “Should I Pay Off My Mortgage or Save for Retirement?” a caller named Dan from Colorado asked for advice on whether he should prioritize paying off his mortgage or saving for retirement. At nearly 59 years old, Dan shared his complex financial history, including owning a business for 21 years, having significant debt, and securing stable employment later in life.
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Dan’s situation isn’t unique. Many people in their late 50s struggle with paying off debt and saving for retirement. Dan’s annual household income is about $145,000, and he’s reduced his credit card debt from $92,000 to $5,000. However, he still owes $206,000 on his mortgage and has only $40,000 in retirement savings.
Dave Ramsey, a well-known financial advisor, gave Dan a clear plan of action. “Write a check today and pay off the credit card,” Ramsey advised, emphasizing that the credit card should be cut up and that debt should no longer be relied upon.
Next, Ramsey recommended building an emergency fund of three to six months of expenses. Dan said he had started saving and had set aside $7,000. Ramsey suggested increasing that to about $20,000 to create a solid financial cushion.
After setting up the emergency fund, Ramsey advised Dan to save 15 percent of his income for retirement. This works out to about $20,000 per year. “If you save $20,000 to $30,000 a year for 10 years, you’ll have about $600,000 to $800,000,” Ramsey explained, illustrating the potential growth of Dan’s retirement fund.
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Ramsey stressed the importance of aggressively paying down the mortgage. By living on a strict budget and putting a significant portion of their income toward the mortgage, Dan and his wife were able to be debt-free much sooner than expected. “Let’s pay fifty [thousand dollars] and put it into the house for a year,” Ramsey suggested, figuring the house could be paid off in about four years.
Finally, Ramsey stressed the need for disciplined spending and budgeting to achieve financial stability. “You have to stop spending. You don’t have time to waste money,” he urged, emphasizing that strict budgeting and adherence to small steps would lead to long-term financial success.
There are several factors that come into play when deciding whether to pay off your mortgage or save for retirement. Paying off your mortgage can lead to significant interest savings over time, as well as the psychological benefit of being debt-free. For example, if you pay an extra $188 per month on a 30-year mortgage, you could pay it off in 20 years, saving about $27,216 in interest.
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However, investing for early retirement can yield higher returns because of the power of compound interest. For example, starting early allows investments to grow significantly over time. A consistent investment of $10,000 per year with an average annual return of 8% can grow to nearly $2.8 million in 40 years.
For people like Dan, the decision may depend on their financial situation and goals. If mortgage rates are low and retirement savings are minimal, it may be wiser to prioritize retirement savings to take advantage of compound interest and potential employer contributions to retirement contributions. Conversely, if the psychological benefit of being debt-free is significant and mortgage rates are relatively high, it may be beneficial to focus on paying off the mortgage.
Ultimately, a balanced approach may work best for many. Paying off high-interest debt first, contributing to retirement savings, and making extra mortgage payments can provide a path to financial stability and growth. Consulting with a financial advisor can help tailor this approach to individual circumstances, ensuring both immediate financial security and long-term growth.
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This article ‘You Don’t Have Time to Waste Money!’ 59-Year-Old With Only $40,000 Saved Asks Dave Ramsey: Pay Off My Mortgage or Save for Retirement? originally appeared on Benzinga.com
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