Want to retire early? Your mortgage can help.

Downsize, Financial Insights

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By: Kelly Smith, Marketing Director

I met with my financial advisor this week to take a hard look at where I currently stand in setting myself up for retirement. I’m 42 and would like to retire by age 65. That’s 23 years to get this dialed in. That may seem like a lot of time, but when you have two kids who are growing like weeds and gray hair that seems to grow equally as fast as they do, I realize if I didn’t look at this seriously now, I could really pay for it later. 

Now, I know some of you may have this all figured out. And kudos to those of you future-minded people who have all your “i”s dotted and your “t”s crossed. I am not one of those people. I live in a more short-term, line-of-sight world. If it’s not staring me in the face forcing a decision, then I I tend to put it off. I admittedly procrastinate. 

But I also realize that when it comes to planning for retirement, procrastinators lose. Lose money that is. And since I don’t want to live off my children’s income when I’m retired and my 9-year-old daughter isn’t volunteering to plan my retirement for me, I figured I’d better get my ducks in a row. 

Planning for the future, whether it be 23 years from now or one year from now sometimes feels daunting. It takes a lot of thought, intention, and energy. And if you’re at all like me, you want to do it right!

So when I sat down with my advisor the other day, my questions to him were simply, “Am I doing enough?” And if not, “what else can I do”? I was worried his answer would be more self-serving and he’d convince me I should put more money in the funds he supervises. But he didn’t do that. He gave me honest direction I could understood in plain terms. He also told me that it wouldn’t require significantly more out of my paycheck or less out of my lifestyle. 

When he said that, I was all ears! He asked me about my debt and when I told him I just had a mortgage, he told me to pay it down faster. Yep. He told me to reduce any fixed debt ASAP. This does two things:

  1. It reduces the interest you pay on what you owe. The less time you owe money, whether it’s a car loan, a credit card, or a mortgage, the less interest you pay, and
  2. your fixed debt disappears faster leaving you more time with less expenses.

My conversation with him is confirmed by others too. In a recent CNBC article, self-made millionaire David Bach agrees that:

Buying a home is the escalator to wealth in America. Homeownership can also help you retire early, that is, if you pay your mortgage off.

Bach suggests that homebuyers should, “Take out a 30-year mortgage, but with the intention of paying it off in 25, 20 or ideally, 15 years.”

4 hacks to paying off your mortgage early

  1. Pay a little extra each month.
    “…If you were paying $1,000 a month, now you’re going to make $1,100 payments every month. Inform the bank that you are doing this and that you want the extra $100 a month to be applied to the principal (not the interest).” Bach explains that, “If you keep this up, you’ll wind up paying off your 30-year mortgage in about 25 years. Increase your monthly payment by 20 percent, and you’ll have that mortgage retired in about 22 years.”
  2. Set up a bi-weekly payment. Rather than paying $1,000 a month, you’ll pay $500 every two weeks. Doing this means you make 26 payments of $500/mo rather than 12 payments of $1,000. You end up paying an extra month each year, reducing your balance each year. You can use a bi-weekly accelerator calculator to plug-in your own numbers.
  3. Make extra payments. If you get a bonus, a monetary gift or inheritance, pay more down on your mortgage.
  4. If interest rates are more favorable now than when you purchased your home, you could consider refinancing to a shorter-term loan. You’ll want to factor in fees and closing costs, however, before refinancing your loan.

After meeting with my trusted advisor and getting confirmation on this strategy from other resources, I called my lender and had them set up a biweekly payment schedule for me. I should be able to pay off my mortgage years before I’d planned meaning I might be able to take that around-the-world trip while I’m still active and healthy.

Bottom Line

Start thinking about retirement now. Whether you’re 22 or 42, there are lots of ways to grow your money for the long-term. A mortgage is not a monthly expense like rent or bills. That money disappears as soon as you write the check. A mortgage is a wealth-building tool that, used wisely, can lead you on a faster path to retirement. Take it from my local financial advisor and from wealthy millionaires, consider either your first home purchase or paying off your mortgage early so that you can retire sooner with the money you will have saved!

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