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Should I use additional income to pay off debt or invest it for retirement?

I am 35 years old and my wife is 38 years old. Currently, her income is free to be used as we see fit. I pay all the bills and expenses and really want us to think about our future, specifically retirement. My question is, would it be wise to use her income to pay off our mortgage, which can be paid off in 6 years using her income (principal only payments of $25K/year)? Or, should we use it to invest? My thinking is paying off our mortgage first will give us more money to invest after it's paid off.

Debt, Investing, Retirement Plans
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May 2017

Hi!  This is very impressive - you and your wife are doing so well in living so within your means that you only need one income and that you have a house that even could be paid off in 6 years….way to go!

First thought: I wonder if you are both employed at places that have 401(k) plans. If so, before making additional payments to the house and/or investing, I would advise you both to fully max out the amount you can contribute to those plans. In 2017 that would be $18,000 each of you could contribute to you your plans (assuming you both make at least $18,000) for a total of $36,000 that is tax-deferred each year for your family and builds toward your retirement. Plus many companies match a part of their employee contributions. You get the benefit of paying fewer taxes now and contributing toward your retirement.

You also want to make sure you have an emergency fund of 3 – 6 months of expenses.

If you are both maxing out the 401(k) and have an emergency fund, then you might want to split the difference in the plan you mention above to get the benefit of your non-tax-deferred investments growing while also paying off your mortgage faster. You probably have an awesomely low interest rate on your house mortgage and rates are likely to go up, so if you’ll be staying in that house it would be nice if theoretically you could make more money on your investments than you are paying in interest on your mortgage.  But since there is no guarantee that you WILL make a certain return on your investments but you know you will pay that amount on your mortgage, you are taking a risk in investing. People have found it to be a worthwhile risk and a good way to grow the amount you earn, but you want to be aware of that risk in making your decisions!

Finally, if you have or are planning to have children, you may also want to contribute to a 529 plan for their college education.

Best wishes to both of you!

June 2017
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