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Which Is More Important: Paying Off the House or Investing in My 401(k)?

QUESTION: Gus in Miami is 50 years old with $500,000 in retirement accounts. He owes $144,000 on his house and makes about $140,000 a year. Should he stop putting money in retirement in order to pay off his house?

ANSWER: I tell folks not to put more than 15% of their income in retirement until they get their home paid off. I would limit it to that; set up your 15% and lock it in on that. That means about $15,000 or $20,000 a year, which means it will take you three more years to pay off your house if you keep doing 15% than if you don’t. I would take three more years to pay off your house.

I would not stop the 401(k). I would set your total retirement contributions at 15% of your total household income and no more. Then throw everything at the house and you’ll have it paid off in five or six years with the formula we just looked at.

You are doing very well on your 401(k), and you’ve got 15 or 20 years to keep adding. That three years and $45,000 of contribution is going to turn into an awful lot of money down the road. I do want your house paid off, but I always tell people to do a steady, reasonable amount of 15% of your income toward retirement while you’re paying off the house. That’s what we call Baby Step 4.