HUNT VALLEY, Md. (TheStreet) -- There are many issues that could be listed among the biggest planning mistakes, such as improper investment allocation or loose cash flow management. The one not so often considered a mistake is poor debt management, and you may be surprised by what that means.

Everyone understands retirement is going to be tough to achieve when overloaded with debt, so it is a given that everyone serious about retirement must first and foremost eliminate consumer debt from cars, revolving credit or credit cards. These are the cancers of effective retirement planning.

Warning! You may be going about being debt free the wrong way.

Another form of poor debt management is the process of going about being debt free the wrong way. Many people in their highest-income-earning years have a false belief they need to focus all efforts on paying off a mortgage before they retire. The thinking goes something like this: "It is only obvious I cannot afford to pay $1,500 a month at age 65 once retired, so I'll send an extra $400 per month to the bank. This will assure that the mortgage is paid off at age 66."

It does seem logical, but without a full economics perspective. Assume you have a $280,000 mortgage for 30 years at 5% and your payment is $1,500 a month with principle and interest. Assume you add $400 a month after tax, which for a person or family making $100,000 a year is the equivalent of about $550 before tax (assuming a mere 25% tax bracket -- the higher the federal and state tax bracket, the higher before-tax amount). If you put that same $550 a month into a company retirement savings plan and earn 5%, you would have $85,000 as opposed to having paid an extra $62,000 against your mortgage. If you are already maxing out your retirement savings for you and your spouse, paying off the mortgage is a highly beneficial savings approach. But most of the time mortgage payoffs are being made at the sacrifice of a retirement plan's maximum contribution rate.

Another very similar mistake is going to a 15-year mortgage so you force a payoff in 15 years, around the date of retirement. Let's assume you have a 15-year mortgage for $200,000 at 5% with a payment of $1,582 a month. That same mortgage over 30 years at 5.25% would be a payment of $1,104 a month. The after-tax monthly difference is $478 a month, the equivalent to $637 a month before tax in a 25% tax bracket (again, the higher the federal and state tax bracket, the higher before tax amount). At the end of 15 years you'll have paid off the mortgage; but if you keep the 30-year mortgage you owe $138,000 but have $170,000 in your company savings plan.

In summary, maximize your company savings plans first; if you have funds left to pay down the mortgage, go for it -- even using a 15-year mortgage if you are confident about long-term cash flow. If not, save everything you can in your company savings plan and use a long-term mortgage with the lowest fixed rate you can get to maximize cash flow.


Andrew Tignanelli, CFP, CPA, is president of Financial Consulate, based in Hunt Valley, Md., and a member of NAPFA, the National Association of Personal Financial Advisors.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.