Personal Finance

Save for Retirement vs Pay Down a Mortgage: Here's What You Should Do First

Maurie Backman

Published: February 15, 2025 10:23 am

Most people can’t afford to purchase a home in cash, which is why it’s a common thing to sign a mortgage in conjunction with becoming a homeowner. But if the idea of having that large debt hang over your head doesn’t sit right, you’re not alone.

It can be a very uncomfortable feeling knowing you owe a few hundred thousand dollars to a bank — and that you won’t own your home free and clear for a good number of years. So you may be inspired to try to pay off your mortgage ahead of schedule.

That’s not necessarily a bad idea if it’s something you can afford. But one thing you don’t want to do is pay down your mortgage at the expense of your retirement savings.

Why retirement savings need to come first

There are a couple of reasons why saving for retirement should take priority over paying down a mortgage early. First, the more time you give your savings to grow, the more retirement wealth you’re likely to end up with.

Say you invest $10,000 for retirement over a 20-year period of time, and your portfolio delivers an 8% yearly return during that window. That 8% is a bit below the stock market’s historical average. After 20 years, you’ll have close to $47,000.

But watch what happens if you give yourself 25 years to grow that $10,000 instead of just 20. Assuming that same 8% yearly return, you’re then looking at over $68,000.

This is just a basic example. But the point is that when it comes to building retirement savings, time is your most valuable tool. And you shouldn’t forgo years of savings just to get ahead of your mortgage.

Another reason it pays to prioritize retirement savings is that while you can finance a home in a somewhat affordable manner, it’s a lot harder to borrow money as a retiree to cover basic expenses.

Think about today’s mortgage rates. They’re pretty high, hovering around the 7% mark.

But historically, mortgage rates have been lower. And if you’re paying around 7% now, chances are, you can eventually refinance to a lower rate.

Now, think about what it might cost you to charge basic expenses like food and medications on a credit card in retirement and pay off your balances as you can. You could be looking at APRs in the 20% range easily. So it’s almost a no-brainer to put IRA or 401(k) contributions ahead of extra mortgage payments.

It’s a matter of striking a balance

It’s not a bad idea to get ahead of your mortgage if you didn’t lock in the best rate and you can afford extra home loan payments on top of retirement plan contributions. But it’s a dangerous thing to ignore your IRA or 401(k) and put all of your extra money into your mortgage.

A better idea is to strike a balance. Aim to max out your retirement account contributions first. And then, if there’s extra money, go ahead and put it into your mortgage.

You may also want to sit down with a financial advisor if you’re trying to balance the goals of funding your IRA or 401(k) while getting rid of your mortgage ahead of schedule. An advisor can help you map out a plan that potentially allows you to meet both objectives.