AIBU to be more concerned about saving for retirement than paying off the mortgage?

[Mickeysmonkey]

I am 38 with 3 small children aged 7, 4 and 1. DH is late forties. We've been married for 10 years and own a house. Both of us spent our twenties having fun - building our careers, yes, but not saving much and spending what we had. I don't regret this at all!

I have taken a few years out of work and recently returned to full time employment. I earn a decent amount - although I won't be retiring to a yacht any time soon! - and DH has a business that's doing well enough to support us.

Since we've been living on DH's salary, I wanted to be sure that we did something productive with my salary and didn't fritter it away (which I know from past experience we'd be likely to do.) So we made the decision to invest in my company's pension scheme and I save the maximum that the IRS allows (I'm in the US).

We have a massive mortgage that won't be paid off for another 12 years. A couple of friends of ours (same age) have expressed surprise that we are not overpaying our mortgage to pay it off sooner. One even thought it was "a mug's game" to save in a pension scheme. I've seen that attitude here on MN too. I really don't understand it. I see the mortgage payment as giving us somewhere to live, obviously, then the house should allow for some inheritance for the children, hopefully. I've never considered it a nest egg. I don't think for a second that there'll be a state pension when I retire and I would hate to be financially dependent on my children.

How do other people think to allocate their savings and think about retirement? AIBU to think that this should be the priority?

MrsK

www.gov.uk/find-lost-pension

You can transfer pension policies between providers, it is easier to have them in one place. It isn't always the best advice though - you need to check for any exit penalties, guaranteed rates etc so you'd need to speak to an adviser.

OP, I'd hedge my bets. You sound like you're in a good position but no harm in overpaying by a bit, and saving the rest. I'm not sure on the tax advantages of pension savings in the US.

It really depends on your mortgage multiples, time left to run and interest rate.

If you are paying a high rate of interest then the saving made by overpaying can be significant. It can literally cut tens of thousands of pounds off your mortgage payments which is tens of thousands of pounds to then stick in your pension etc.

On the other hand pensions are about long term investing. The sooner you get the money in the better it can work for you.

Its therefore a balance which will be different for each of us.

The advice I was given was pension for us was more important than mortgage but then we are early 40s with high incomes and an outstanding mortgage balance of circa 1.5 x joint annual income. (However I am ignoring that and still overpaying the mortgage because psychologically it matters to me to own our home without an enormous debt and our income isn't particularly stable and secure.)

Thanks so much nottheop. I have filled it in for 2 of my old jobs. But I don't hold out much hope as I can't remember the names of the companies, (neither exist anymore) or the dates I worked at them, or the addresses.

Prepperpig, I can't remember the exact amount but the last time I received a statement it was around £2K which doesn't seem a lot to me. I couldn't continue paying into it because it was a company pension scheme and I left the company. I was advised not to transfer it into a private pension because the costs were too high. Perhaps pensions are only any good if you intend to stay with the same employer which is rare these days.

Dh has a much better pension than I do (his employer puts in loads). Looking at the projected figure it still isn't really enough to live on and that's assuming that he will stay with the same organisation, if he leaves I guess he will be in a similar situation to me.

If you had five lots of £2k pensions though due to frequent job changes that would be a decent pension income. Combined with the state pension that's £18kish in pension income

As I said upthread my pot is £180k and thats circa £15k pa (when combined with the state pension)

Prepper £15k pa isn't bad if you own your own house (no rent/mortgage) and don't have any childcare costs etc...enough to not have to worry about where your next meal is coming from.
The problem with pensions is they were/are unfair...no encouragement to save into them, why they keep changing the rules...to try and make it fairer.
And with the new regulations everyone (earning above £10k) will be paying in for a basic one anyway now.
An eg is my DM (70s), who was a SAHM then had a poorly paid part time/then full time public sector job. She paid extra into her pension. She is £5 a week better off for doing so, less than she put in. £5 a week better off than someone who paid nothing in. You can understand why that might annoy her.
Similar for my great aunt, worked hard all her life, lived frugally, saved for her old age - she paid many many thousands of pounds for her place in a care home - she got exactly the same level of care as someone sat next to her who the state paid for and had frittered their money away....

But unless we allow people without pensions - who in theory should be the poorest of society - to really suffer in their old age there will always be a level of unfairness. Maybe we need a tiered system, looking at lifetime earnings - you should have had more so therefore you get less than people who have little but have worked in low paying jobs. Can't see that happening any time soon, or even being workable.
In the UK unless you have a fixed rate mortgage I would pay off the mortgage. Interest rates at the moment are low, so you won't save as much as when rates are higher but rates are going up.
Your yearly mortgage payments pay the interest and some capital. At the beginning of a mortgage you owe a lot so most of the money you pay in a year will be interest, only a small amount of capital. The next year you pay slightly less interest, because of the capital you paid off in the first year. Anything extra you pay on your mortgage comes straight off the capital, you owe less and pay less interest on it. Therefore even just your normal yearly payments pay off more of the capital. When rates go up you will be paying interest on a smaller amount.
When you have paid your mortgage off you can then pay the whole lot plus your mortgage payment into a pension/savings.

Thehumanjam re your DH's good pension, as I said earlier I put into a pension at my old employer, and my employer matched my contributions.

That money is mine.

I could have left it and claimed it at retirement but instead I chose to move it and its now earning more money and being managed better elsewhere. What I mean is you don't lose your pension if you leave your work.

unlucky no it is certainly better if the mortgage is all paid off (hence I also overpay)

I need to have a look at my pension pots, it's been on my list of things to do for a while. I can't afford to pay anything extra at the moment which is why I haven't treated it as a priority. I think my £2K pension pot is a total pot of £2K it's not £2K per annum and I think my public sector pot is a total pot of £6K. So I have a total of £8K to be spread over how ever many years they work it out over.

I've buried my head in the sand over it because I find the subject of money particularly pensions stressful and depressing.

surely the pensions system in the us and uk are so different that a discussion where the two are treated as similar is useless?

In the uk i am about to face this dilemma in that i will soon start working for an employer with a 'good' pension scheme (local authority who make big contributions). However im unsure as to whether ill sign up (would mean paying c. £200 pcm into it) as my mortgage is only interest only and we need to move to a bigger house in the next couple of years so i think the £200 now would be better spent on reducing the credit card debt that will stop me getting another mortgage atm (interest 19.9%) rather than on a pension.

I also dont think there will be a state pension by the time im 70 (what the age will be by then). There isnt one in australia afaik. also its a gamble if i live that long and im certainly not sure how my health will hold out (been disabled in the past but ok for ft work now).

dp & I are both mid/late 30s and neither of us have a penny on savings or a pension and only a small amount (max £20k) of equity in the flat.

we are the pensionless generation.

I too find the whole pensions 'area' very confusing. I found financial advice invaluable to be honest.

If your employer has a good pension though, then I really would consider getting into it. Its effectively 'free' money from your employer isn't it??

Iirc I was advised that my 2 tiny pots of £6-800 were not worth moving. I also have one from a job I did for 3 years which I think is about £2,500 and then another very small one from a job I did for 6 months - I doubt that's over £500. I cashed in one from another job ( my most well paid job) when I was made redundant and got about £2000. (I lost £1k iirc but I really needed the money).

In pension terms I'm totally screwed!

I'm self employed Jackiebrambles so no pension for me at the moment. I did look briefly at a stakeholder a while back and thought it was rubbish but maybe worth revisiting. I think at the time I chose not to go into a stakeholder because I was disillusioned with the private pension that I had where the pot is lower than the amount paid into it so I thought I may as well have a savings account as an alternative to a pension as it was less risky so I got an ISA. The problem with that approach is when you need a new boiler or a new cooker you dip into into your savings which you obviously can't do with pensions.

I'm thinking about changing career paths within the near future although I'm not sure exactly what I want to do. I think I would now like the security of a regular income and employer pension contributions.

I love sitting my cpa exams here in the us because I learned about all the pension saving vehicles. DH saves about $50k a year through the SEP IRA and traditional IRA that we convert to a ROTH as we can't deduct the IRA.

Saving for a pension is the #1 priority for my generation because there are zero employee plans anymore. My employer has a wealth builder fund but the provision is awful. I'm then hampered by independence rules making it very hard to properly invest. It's a huge factor in my decision to leave.

It shocks me that so many people here in the US are saving for college and are under funding their pensions. I fear many in the UK will do the same with the increased tuition fees.

People are talking about the chances of house price growth as a factor to consider but unless you're planning on investing in additional property (buy to let or whatever) it doesn't have any bearing on the question of where to put your money. Once you buy the house the equity's yours, the debt is fixed, you need to pay it off whether house prices go up or down.

If you're happy with the restrictions that a pension brings, the only thing to consider is, if you put the extra money into the pension, does it grow at a higher or lower rate of interest than you're being charged on your mortgage, taking into account any employer contribution and tax treatment on the pension side, and your expectations about mortgage interest rates on the mortgage side (unless you have a fix till the end of the mortgage).

Not entirely true though since house prices have historically increased at a much greater rate than anything else. Assuming (and its a big assumption) that this continues to be the case, the equity you release upon downsizing can effectively buy you more and more in terms of an income stream once you've purchased a smaller house.

Pensioners who own a house outright are in a much better position than renters.

Renters with small pensions will just have to spend their pensions on rent rather than claiming housing benefit. Homeowners have their full pension as 'spending money' (no ongoing housing costs). And if you own you can downsize. I have no desire to live in bigger than a 2 bed flat once the dcs have flown the nest.

The money is far better spent paying off the mortgage given the overall cost of a mortgage - go find one of those calculator things for how much you will save paying off mortgage first - make the house the pension pot as inevitably later on down the line you won't need one in such an expensive area or so large - so when you sell it money in house released etc. When you pay off early then redirect mortgage money to whatever instrument you want to use to save for retirement.

The people who live in the poorest housing in Britain, are pensioners who own their own house, and can't pay for maintenance. Age UK have a small fund to help out with dire situations such as 90 year olds living in houses with rain coming through the roof.

I think the OP is in America as she talks about contributing to her IRA. Mortgages are different here with the majority of people having either a 15 or 30 year fixed rate mortgage. The interest rate is fixed over the life of the mortgage not for a short period of time. The cost of selling a home here is about 6% of the value of the home so it's not a good investment to pay down the mortgage if you plan to downsize.

Also, for financial aid and bankruptcy, money in pensions is not included in the calculation of available assets while equity in your home is. Saving money into every single possible pension plan possible ahead of paying down the mortgage is very smart. The student loans are now linked to the treasury notes so rates are low. You can always use excess funds to repay student loans.

RB68 - that only really works if you have a large house in a nice area though doesn't it?

Ours is end terrace ex council. I like the idea of paying off the mortgage being the priority as we don't have pensions BUT I'm not sure we've got much we can downsize too ...

OP here! Wow, so many responses to my dull pension/mortgage question :-)

To answer a couple of questions, yes, I am in the US and my pension is a company-sponsored 401(k), so my employer matches my contributions to a certain point. Free money! The rules are broadly similar to pension schemes in the UK, I believe, in that I save tax-free money into it.

I think I was more interested in people's thoughts on the idea that for "our generation" there's no need to have a pension, or that you won't get much reward for having one. Once we've paid off the house we'll have about $950k in equity, but as someone up thread noted, even if we were to "cash in" we'd still have to find somewhere else to live. Our mortgage rate is less than 4% and fixed rate, thankfully.

It's overstating it to say that I lie awake worrying about it, but I would be very anxious if I had no private pension provision. I concede that the value of your pension can fall as well as rise, but it seems particularly foolhardy to rely on house equity to keep you going. Do you think the state pension will still exist and be enough to live on?

Other than our house equity and pension, I feel that we need to build our short- term "buffer", too. I think you're right, we need to get some financial advice.

Thanks for your comments so far!

prepper, (assuming you were replying to me) house prices may rise or fall but they don't make any difference to the decision about whether to pay down your mortgage or not because the mortgage is a debt with an interest rate not connected to house prices. Agree it could make sense to downsize on retirement.

The problem is that people tend to see bricks and mortar as guaranteed to grow in value

Which, incidentally, they are not. Ask anybody who owned a house or condo in California, Florida, or a bunch of other places during the subprime meltdown in 2008. I know people who lost money selling their homes because of this, and I know people who got nice deals on foreclosed real estate afterward.

I don't know if you had that correction in the real estate market in the UK, or if you had or have the kind of subprime loans that could let something similar happen, but we in the US got a lesson not too long ago that real estate is not guaranteed to go up in value.