Should we pay down the mortgage or save for retirement?

family_jennifer_boomer.top.jpgKim Champney and Pat Minick with their three kids at their home in Juneau, Alaska. By Karen Cheney


(MONEY Magazine) -- For more than a year, Kim Champney, 40, and Pat Minick, 41, have been kicking in an extra $650 to their $1,048 monthly mortgage payments. "We don't like carrying a lot of debt," says Minick, who stays home with their three kids, ages 7, 8 and 10.

At this pace, the couple will pay off the loan in 2018, eight years early. But with their mortgage rate a low 4.4% after a refi, they wonder if the house is the best place to stash their cash.

chart_mortgage.gif

"Definitely not," said Grand Rapids financial planner Ryan Sheffer, who adds that the low rate and the tax break on mortgage interest make paying off the loan a lower priority than saving for retirement -- which the couple are behind on.

They make $87,000 a year, mostly from Champney's job as a quality-assurance director; yet they've saved just $68,500. She puts 1.5% of her pay in her 401(k); they each stash $3,000 a year in Roth IRAs. "By not investing more while they're young," says Sheffer, "Kim and Pat are missing valuable compounding."

Their assets

1. $68,500 in retirement plans

2. $15,000 in 529 college savings plans for the kids

3. $6,500 in cash earmarked for emergencies

The solution

1. Max out Roths. Champney and Minick are in the 15% tax bracket, and tax rates will likely be higher when they retire. So Sheffer says Roth IRAs make sense for them, as money going in is taxed upfront, while withdrawals are tax-free. (Also, Champney gets no 401(k) match.) They can boost savings to $833 a month, $10,000 a year, the max for two people their ages.

2. Then feed the 401(k). They will still have $317 a month to work with, of the $650 they'd been using to prepay the mortgage. They should first beef up their emergency fund by $1,000, and after that, redirect the cash to Champney's 401(k) for additional tax-deferred growth.

3. Cut investment costs. Their nest egg is in six funds, most with high fees and poor long-term returns. Philadelphia area planner John Sion suggests consolidating into a target-date fund. As conservative investors, they'll want one meant for those who'd retire sooner than they will: T. Rowe Price Retirement 2025 (TRRHX) is 77% in stocks.  To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed4.24%4.32%
15 yr fixed3.25%3.36%
5/1 ARM3.27%3.37%
30 yr refi4.28%4.31%
15 yr refi3.30%3.34%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 16,501.65 0.00 0.00%
Nasdaq 4,148.34 21.37 0.52%
S&P 500 1,878.61 3.22 0.17%
Treasuries 2.69 0.00 0.07%
Data as of 11:31pm ET
Company Price Change % Change
Facebook Inc 60.87 -0.49 -0.80%
Bank of America Corp... 16.34 -0.03 -0.18%
Microsoft Corp 39.86 0.17 0.43%
Verizon Communicatio... 46.28 -1.15 -2.42%
Micron Technology In... 26.16 -0.09 -0.34%
Data as of 4:01pm ET

Sections

Officials recommend that states allow Tesla to sell cars directly to consumers and argue that banning those sales stifles competition. More

Hundreds of postal workers nationwide protested outside Staples' stores on Thursday. More

Federal regulators are poised to lay down new rules of the road for how Americans access the Internet. More

Schwinn, Trek and Cannondale are all iconic American bicycle brands. But none of them are made in the United States. More

Do you feel like you are overworked? Here are how other people deal with the stress and politics in their jobs. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.