A Suze Orman exclusive

Let’s do a 180. Instead of thinking about all the money you need to save to be able to afford to retire, what if you instead focus on reducing what you will need income-wise in retirement?

Just think about it for a minute: reducing how much cash you need to pay the bills in retirement is just like putting the amount of the savings away in your retirement account.

And for almost everyone the single biggest ongoing cost you can have is your mortgage. That’s why I think one of the smartest retirement planning moves is to get your mortgage paid off before you retire. Of course, this only makes sense if you are within 15 or so years of retirement and you intend to stay in the home you are in now after you stop working.

If that’s your situation, I would make paying off the mortgage one of your main retirement savings goals. I ran through this theory in a previous column, but let’s do the numbers one more time:

Let’s say that right now you are 50 years old and plan to retire in 15 years. You recently bought a new home, or refinanced, and you have a $300,000 30-year fixed-rate mortgage at 6 percent. So your monthly mortgage bill is $1,799. That means you’re looking at paying $1,799 a month until you are 80.

By my calculations, you’ll need to have at least $600,000 in your retirement kitty to be able to generate enough income just to make the mortgage payment. To keep this example simple, I am assuming you don’t have a company pension, and let’s also agree to leave Social Security out of the equation for now, since it is unclear what benefits any of us will receive down the line. So basically we’re looking at needing $600,000 in your 401(k) and IRAs to generate the income needed simply to pay the mortgage.

Here’s how I got that $600,000 figure: In retirement you need to invest more conservatively than when you are young, so let’s say your money will grow at an average rate of 5 percent. A $600,000 pot earning 5 percent will generate $2,500 a month in income. Before you remind me that you only need $1,799 for the mortgage, let me remind you that Uncle Sam takes a huge cut out of all the money you withdraw from a 401(k) or a traditional IRA. The withdrawals are taxed as ordinary income; you don’t even get to pay any of it at the lower capital gains rates. So let’s pick a reasonable tax rate, say 28 percent. That reduces your $2,500 in income to…drum roll, please…$1,800 after tax.

Yep, you need a huge $600,000 pot just to be able to make the basic mortgage payment. So that’s why your best retirement move today can be to pay off that mortgage. And please don’t yelp about losing the tax deduction on the mortgage interest payments. Remember, we’re worrying about your retirement. In 15 or 20 years the majority of your mortgage payment is going to be principal, not interest. So just when your income goes down (in retirement) you are not going to be getting much pop from the deduction. Besides, you do realize that in return for the supposedly great deduction the reality is that you are forking over tens of thousands of dollars in interest payments? I’d rather reduce my total interest payments by paying off the loan fast.