At the Margin Mortgage vs Retirement

First, I am not a financial planner (or panther) and I have no formal training in this so the below is for informational purposes only and does not constitute financial advice, seek a professional (preferably not someone named Ponzi or Madoff).

So my thinking through to pay above the minimum payments on my 30 year mortgage versus retirement savings. In short paying money to my mortgage provides roughly a 3% return (after accounting for the mortgage tax deduction).

These two articles provide the pros and the cons of making extra payments.

In short I agree if you have other debt at a higher interest rate, pay that before your mortgage. If you get a matching contribution from your employer for retirement savings then put more in retirement.

Assuming you have no other debts or matching to take advantage of it seems to me the question comes down to a bet on future returns in your retirement account.

If you are investing conservatively (like in say bonds and money market funds in your retirement) then it would seem paying off the mortgage makes sense.

Most people early in their mortgage instead invest in stocks. So in short putting more in retirement funds is a bet that stock market will beat 3% a year.   I could look up the average return to various funds but I’m not sure how informative past performance is.

One thought I have been having though if the stock market substantially outperforms 3% then putting money in your mortgage was the worse move. However, if the market substantially outperforms 3% adjusting for inflation than you will not have needed as much contribution in retirement. If on the other hand the market under performs than the mortgage contribution was a better deal.

What complicates this is if stock prices go up due to inflation say inflation for the years 2020-2030 was 8% and stock market returned 9% (or real inflation adjusted stock returns are 9 - 8 = 1% after inflation). The stock investment was better, but the real or post inflation return is really low so now under investment in retirement might sting more.

To me inflation seems as big a source of potential variation in this calculation then predicting returns. With treasury yields at 1.4% it seems that inflation expectations are really low.  I’m not worried about inflation now, but who knows in 10 or 20 years.

Unfortunately as someone once said economists are bad at predictions particularly about the future. So I’m not sure on the optimal choice.