Should I Stop Funding My 401(K) To Pay Off My Mortgage?
When employees worry about their jobs, a common question follows: Should you pause retirement contributions to focus on immediate needs, such as home security?
In a recent post on the r/PersonalFinance subreddit, a young worker shared that he was dealing with mortgage payments that meant he feared losing his job.
“I’m 28 years old and I make $130,000 base + 10% annual bonus. My wife is unemployed,” the post begins. “What I’m struggling with is that I have a reasonable fear that offshoring + AI will displace me and others like it.”
He wants to know: Should he pay off his $342,000 mortgage now while he’s still getting paid? The move, he says, will require reducing his 401(k) contribution from the annual maximum.
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While the homeowner’s instincts are understandable, experts say his proposed course is inappropriate.
When homeowners make additional mortgage payments, it does not lower their monthly obligation. Instead, it reduces the principal and shortens the length of the loan.
In the near term, the move probably wouldn’t help her family meet basic needs if she lost her job.
“With such a long road to retirement, I think there are other areas we should focus on to give him peace of mind,” Hillary Stalker, senior vice president at CapWealth, wrote in an email to Money. “It would be an opportunity cost for him to pay off the loan and stop saving for retirement.”
Stalker, who is also a certified financial planner, suggests looking at mortgage rates and the possibility of refinancing for a lower monthly payment if the opportunity arises.
It has become common for people to see layoffs on the news or hear rumors at work and panic. But this can lead to financial overreaction.
Anyone worried about losing their job should take a deep breath, not jump right into making extra mortgage payments.
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“If someone is uncertain about their career, the most important thing is to have a lot of cash on hand — a liquid emergency fund,” says Timothy McGrath, a certified financial planner in Chicago. “Paying something, to me, makes no sense … when there is uncertainty, paying money is more important.”
The Reddit thread refers to concerns about immigration and the user’s fear that he would have to accept a lower-paying job in a different industry if he were to lose that job. If that’s the case, McGrath says you may need a bigger emergency fund than recommended. Instead of the typical three to six months’ worth of daily expenses, he says, maybe set aside enough money to cover nine months’ to a year’s worth of expenses.
He should try to avoid capital expenditures and minimize fixed costs while continuing to save through brokerage and retirement accounts, McGrath adds. If he didn’t lose his job, that pillow would help his family pay the mortgage and cover essentials until he found a Plan B.
