Should You Ramp Up Your TSP Contributions or Pay Down Your Mortgage?

A couple of weeks ago I wrote an article about some of the big concerns that come with taking money out of your Thrift Savings Plan account to pay off your home. In response to that article, someone asked a great  question. They wondered, for those folks who are younger and not ready to retire, does it make sense to pay down a mortgage faster or invest more in the TSP? This is a great question. The answer can have a huge impact on your financial future. 

Here are some of the things to consider.

Don’t miss out on matching funds. The first thing you should do is contribute at least 5% of your salary to the TSP. This maxes out your agency’s matching contributions and doesn’t leave any money on the table. Once this is in place, I would move on to the next steps.

Create an emergency fund. One of the foundations of a strong financial life is to have something for a rainy day. Not a fund you would spend for vacations or Christmas, but something for true emergencies. Generally, this emergency fund should be fully funded and available before you consider paying off the house early or investing more in the TSP. The amount will depend on your personal circumstances but many people recommend enough to cover expenses for three to 12 months.

This emergency fund does two things. First, it gives you a financial buffer, which frankly, just feels really good to have. Second, when an emergency does come your way, you will be able to manage it without dipping into your investments or taking on high-interest debt. 

Think through your retirement needs. The next thing I would prioritize is retirement planning. This means giving serious thought to how much money you will need in retirement and contributing to your TSP accordingly. It can be very difficult to know exactly how much you will need in retirement and even harder to know how much you should save to get you there. There are a lot of unknowns. However, a great place to start is to figure out how much fixed income (pension income, social security, etc.) you’ll have in retirement and then how much income you’ll need from your investments every month to fill any gap. From there, it can be a lot easier to calculate how big your nest egg has to be to provide that amount of income over a retirement.  

Finally, pay down your mortgage. Once all these other things are taken care of, start paying down your mortgage early. I put this after retirement funding for a couple of reasons. First, it is often much easier to retire if you have retirement savings but still have a mortgage. It can be more difficult to retire if you have little savings, even if you have no mortgage. 

In real life, the best answer for you may be a little different. Some of the things that might make reality a little sticker is your mortgage interest rate, your return on your retirement investment, your tax bracket, your home value, and whether you are investing in the traditional or Roth TSP. Not to mention that tax laws will probably change over time. Right now, not too many people can take a deduction for their mortgage interest because the standard deduction is so high. But overtime, tax laws will change and the best solution for you will often change as well.

As a financial planner, I love it when clients are able to pay off their mortgages early. In general, it is a great thing. Just make sure you are not ignoring the rest of your financial situation just to get rid of a monthly mortgage payment. The best solution for you will take into account all the other details of your life, including your retirement goals. Since you are reading this article, you are planning for your future. That is the first step toward building an incredible retirement.

Dallen Haws is a financial planner and host of the “Plan Your Federal Benefits” YouTube channel as well as a podcast at PlanYourFederalBenefits.com.