Save. Spend. Splurge.

Should you save more money in retirement or clear your mortgage?

Reader JW was wondering if clearing a mortgage or investing the money instead makes more sense.

This age-old question also applies to if you are in debt – should you be saving for retirement AND clearing debt at the same time?

(If you are offered a company pension plan with a matching contribution, you should ALWAYS, UNEQUIVOCALLY invest the maximum you can into this plan even if you are deep in debt, because it is a 100% return on your money and no debt, or stock market boom will ever give you that.)

So, the answer I am afraid, is that it depends… on you, where you live, and what you are comfortable with.

So I say “where you live”, because my American readers are lucky.

They get to write off that mortgage interest on their taxes (lucky ducks), AND they can lock in those low and sweet mortgage rates for more than 10 years.

We Canadians, cannot write off the mortgage interest against our taxes, AND we only have locked in rates for 10 years, then it needs to be ‘updated’ to the newest rate.

It is part of the reason why I decided not to take a mortgage, even though it was at 4.5% (?) at the time my banker offered me $600K as a personal mortgage (my partner was set on no mortgage at all for him.)

I figured that yeah – I could make on average 7% on the stock market by investing it, BUT… what if things tank? What if that 7% in the next while, ends up being 1%? Or going into the negatives?

I also personally didn’t feel comfortable with that kind of debt hanging over my head, and even at a low rate like that, I would still be paying interest, and I am not a fan of paying for money I didn’t even need to borrow in the first place.

So I paid my place in cash, handed over a $300K cheque and was done with it.

Now, I have very little in housing expenses (under $500/month), and while that capital I gave for the house payment could have been sitting on the market right now, earning returns, paying it in full gave me a mental peace I don’t think I could have otherwise achieved, especially as a rocky road freelancer.

Obviously I do wonder if I missed out on it all. In the time that $300K was paid, I have had pretty decent returns on my investments from 7% – 20%.

Then again… I do wonder what I would say if everything had then crashed right afterwards.

Now if you are looking at the process of weighing those pros/cons against saving money in retirement instead of clearing your mortgage, the general consensus is:

If you are saving money in retirement, and you are younger, you can take advantage of the compounding interest.

The more you save today at a younger age, the more money you’ll have when you’re older, and it’ll take your older self much more cash to catch up to what compounding interest can give you just with some time.

If you are saving money for retirement and you’re older, HELL YES YOU NEED TO SAVE MORE MONEY. No questions asked, you don’t have time on your side any more.

Kind of like a really good, slow marinade, and then a low and slow grill that cooks everything so gently (save more money when you’re younger and let it simmer and slow cook into big returns), versus cranking that grill up to scorching hot and throwing on food hoping it will make up for the lack cooking time but you end up burning everything (not saving enough money and then trying to frantically save when you’re 50, scorching your apron in the process and burning it until only a small edible chunk is left).

So did I give you a clear answer about what to do?

No, because there is no clear one size fits all answer.

It’s a crapshoot really because it depends on so many variables that we can only guess at, and make decisions with based on how we feel about our money, and where we think it is best to be used.

We can’t predict if the market would crash or go up during the length of a mortgage to see if it would have been a better deal to invest it instead.

We can’t predict if we will lose our jobs and then curse that we should have paid that house so that we did not have to deal with a mortgage that is now knocking at our door at a higher interest rate that we did not expect.

I cannot predict what will happen to me, to anyone, to anything! Hindsight is 20/20.

The answer is really in you, and it depends on your situation:

How secure are you in your jobs and its income?

I am very risky in my contractual work, so I cannot predict if I will work for a period of time or not. I have worked from 10 weeks to 2 years!

No one knows, and even if a paper is signed, they can end my contract at any time.

Do you plan on any life changes?

Some people have children, and half of the income goes poof while they are on maternity leave.

In that case, I’d actually want to save more aside in cash to plan for that pause in income, and also consider that one of you might decide you want to stay at home with the children instead of going back to work (don’t laugh, this has totally happened to people who were formerly workaholics).

Would you feel better if the mortgage is cleared and you pause retirement savings for while?

Or the reverse – are you hoping to take advantage of the market knowing everything about the length of time it needs to marinate to really produce a juicy nest egg at the end?

What do YOU emotionally and mentally feel makes the most sense, knowing your family’s situation?

For me, it happened to be to clear the house in cash and not have a mortgage, mostly because of my rocky job income, and that I am still quite young and not pushing 50 trying to frantically save my pennies to retire.

Personally if I were in JW’s position, I’d do both.

I’d continue paying the mortgage, invest money in my retirement fund, and know that I am meeting both goals, and enjoy the rest of my money rather than trying to squeeze my life down into the pennies and then be unhappy.

If I could save more into a mortgage or retirement fund without compromising on happiness and making my life a working hell, I’d do it.


A possibly unpopular option would be — can you sell your current home, downsize and buy something smaller but then clear it in cash and then we don’t have to have this discussion at all? 😀

So, what do you think? What would you do?


  • SarahN

    I’m Aussie, which means I get, by law 9.5% of my salary put into my retirement account.

    For nine years of my career, that percentage was higher – our staff bargained more payment into super (what we call retirement funds), so my balance is a six figure number at 34, which is uncommon. There’s also a cap, only $25k can go into this account per year, at the concessional 15% tax rate, after that it gets confusing and % tax taken gets higher…

    So my current goal is – pay off mortgage. We can’t deduct interest here if we live in it, or fix the interest rate for ten years. We can fix for a max of five years, but yeah, I’m not fixed currently, as if you fix the interest rate, you fix the repayments, therefore making it harder to ‘overpay’ or ‘pay out’ your mortgage.

    • Sherry of Save. Spend. Splurge.

      I don’t know/remember the amounts we MUST pay into the pension funds (CPP Canadian Pension Plan/OAS Old Age Security) but it is a big bucket, and not tied to your name. It means if I paid 9% of my salary into this bucket (I think it is less though), it could very well mean there is nothing left for me at the end because someone else who was older used it all up by living longer, and/or I saved too much in my own personal pension plan (RRSP registered retirement savings plan) and the government claws it all back saying you don’t need that money anyway as you’re flush.

      Your mortgage is similar to ours here. Can’t deduct interest, but the fixed interest rate is 10 years, but at a higher rate than a variable one.

      I suspect that mortgage-interest-free thing in the U.S. is why Americans tend to be ok with buying a home versus Canadians who know it can be riskier. Or not.

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