I Earn $130,000 but Am Terrified of Layoffs. Should I Stop Funding My 401(K) to Pay off My Mortgage?
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When workers become concerned about their jobs, a common question follows: Should you pause retirement contributions to focus on more immediate needs, like housing security?
In a recent post in the subreddit r/PersonalFinance, a young worker shares that he is considering additional mortgage payments citing job loss fears.
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"I'm 28 years old and make $130,000 base + 10% annual bonus. My wife does not work," the post begins. "What I'm struggling with is that I have a somewhat reasonable fear that offshoring + AI will eliminate my position and others like it."
He wants to know: Should he pay down his $342,000 mortgage now while he has a steady paycheck? The move, he says, would require lowering his 401(k) contribution from the maximum annual amount.
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Expert advice: Keep saving and investing
While this homeowner's instincts are understandable, experts say his proposed course of action is not advisable.
When homeowners make extra 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 likely would not help his family afford essential needs in the event of a job loss.
"With such a long runway until retirement, I think that there are other areas to focus on to give him peace of mind," Hillary Stalker, executive vice president at CapWealth, writes in an email to Money. "It would be an opportunity cost to him to pay off the mortgage and give up saving for retirement."
Stalker, who is also a certified financial planner, suggests keeping an eye on mortgage rates and potentially refinancing to get a lower monthly payment when the opportunity arises.
It's common for people to see layoffs in the news or hear a rumor at work and enter a state of panic. But this can lead to financial overreactions.
Anyone worrying about job loss should take a deep breath, not immediately jump to making extra mortgage payments.
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"If someone is uncertain about their job, the most important thing is they have plenty of cash on hand — emergency cash that's liquid," says Timothy McGrath, a certified financial planner in Chicago. "Paying something off, to me, doesn't make sense … when there's uncertainty, liquidity matters most."
The Reddit thread references a concern about offshoring and the user's fear that he would have to accept a much lower-paying job in a different industry if he were to lose this job. In that case, McGrath says he may need an even larger emergency fund than is recommended. Rather than the standard three to six months of everyday expenses, he says, maybe put away enough to cover nine months to a year's worth of bills.
He should try to avoid big expenses and reduce fixed costs while continuing to save with brokerage and retirement accounts, McGrath adds. If he were to become unemployed, that cushion could help his family make mortgage payments and afford essentials until they figure out Plan B.