Dear Dr. Don,
My wife and I hold a mortgage with a loan balance of $130,000 on a home valued at about $200,000. We have an investment account of $110,000 and plan to retire in four or five years. The stock market has been strong lately, but I still worry that we should capture what gains we've made and put $100,000 on the mortgage principal. We could then easily pay off the $30,000 balance in two years. Our original plan was to wait until the stock holdings equal the mortgage balance. What do you think?
-- R.S. Reduction

Dear R.S.,
Step back and take a look at the big picture first. Is the investment account all of your life savings or do you have retirement accounts as well? Will you have pension income(s) in retirement or just Social Security?

I think it's a great goal to have the house paid off prior to retirement. Raiding the retirement nest egg to do it isn't always the best idea. You want to preserve a measure of financial flexibility in retirement. Paying down the mortgage with your investment account won't count for much if you have to turn around and borrow against the equity in your home for some unexpected expense. I've heard from retirees who have had difficulty finding a willing mortgage lender in retirement because of their reduced income levels.

If you're four to five years away from retirement and you have a lot of your money invested in the stock market, you should consider changing your asset allocations. It won't beat a trip to a financial planner, but Bankrate's asset allocation calculator can give you a starting point for choosing an asset mix.

My rule of thumb is that you should prepay your mortgage when the effective interest rate on your mortgage is higher than the expected after-tax return on your investments. This assumes you can fully use the mortgage interest deduction on your taxes and the interest deduction isn't just replacing the standard deduction.