Money Watch: Save more for retirement or pay down mortgage?

— -- Money Watch, a personal finance column that runs every Saturday, features a financial planner from the National Association of Personal Financial Advisorsanswering reader questions about saving, protecting and growing your money. To submit a question, e-mail USA TODAY personal finance reporter Christine Dugas at: cdugas@usatoday.com.

Q: I plan to retire in about two years when I'll be 68. I already receive Social Security benefits. For now should I use it to increase my monthly home mortgage payments or put it into my retirement account?

A: I would not unequivocally say that you should make additional payments to your mortgage.

However, I am reluctant to suggest putting additional funds to an illiquid asset that cannot be easily sold, such as your primary residence. And by making additional payments to your mortgage you are locking up funds in an asset that does not provide any type of income.

Typically, making additional payments helps shorten the time until your mortgage is paid off but does nothing to lower your monthly mortgage obligation. It will not ease the monthly cash-flow issues that many people have in retirement while trying to live on a fixed income.

I would suggest you review your current mortgage interest rate and consider refinancing while you are employed to secure a better rate. This would potentially lower your monthly mortgage payment and/or help you pay off the loan earlier, which would result in savings of future interest charges.

In the meantime save those monthly Social Security payments in your IRA between now and your actual retirement. While we understand the allure of being "debt free" in retirement, this is only half of the balance sheet, and while it is important, often the more important side of the balance sheet is your asset base, specifically what assets you have that can produce income. So, saving extra cash for retirement is a very good idea.

Many investors are nervous about the markets and what impact another significant drop would have on their ability to achieve their goals. For your specific situation, the 15 months or so of Social Security benefits could provide a meaningful increase to your savings, but you should do it carefully.

There are no guarantees, but there are ways to mitigate risk. Consider an appropriate diversified strategy such as a target-date mutual fund. It gears its investment mix to your estimated retirement date, moving money from stocks to bonds as retirement approaches. Some target-date funds will make automatic monthly investments from your Social Security benefits at no cost.

Choose target-date funds from well-rated fund families that are no more expensive than the average fund (of course cheaper is better). Look at its expense ratio, which is a fee expressed as a percentage of each dollar invested. You can find much of this valuable information through Lipper or Morningstar's websites.

If you would like to be more hands-on, consider a couple of broad-based stock and bond Exchange Traded Funds (ETFs) that you can buy or sell at any time during the day. Discount brokerages offer many commission-free ETFs. Again, stick with the types of investments that are most aligned with your time frame and risk appetite, such as dividend-yielding ETFs, with blue-chip stocks. Dividend income is not guaranteed, but it is a safer bet than high-risk growth ETFs.

Susan Fulton, NAPFA-registered financial adviser

FBB Capital Partners, Bethesda, Md.

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