Author Topic: Am I FI Now? Roth IRA vs. Paying off mortgage?  (Read 767 times)

FI-in-no-time

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Am I FI Now? Roth IRA vs. Paying off mortgage?
« on: October 09, 2017, 09:47:36 AM »
Life Situation:
Married Filing Jointly.  I live in a LCOL area with relatively high taxes (property and income).  Im 50 and my DW is 51.  I would like to retire in 2022 the year I turn 55.

Gross Salary/Wages:
Salary:  8,790
Military Retirement:  3,392 (Indexed for inflation)
Total: 12,182

Individual amounts of each Pre-tax deductions:
401K: 1,500
401K Catch Up Contributions: 167
Survivor Benefit Plan (Military Ret - Insurance): 220
Life Insurance: 51
Dental Insurance: 41
Vision Insurance: 18
Flexible Spending Account (FSA): 42
Healthcare (Tricare): 47
Total: 2,086

Adjusted Gross Income:
Total: 10,096

Taxes:
Federal: 1,686
State: 484
FICA: 539
Medicare: 126
Property: 508
Vehicle / Personal Property: 27
Total: 3,370

Current expenses:
Roth IRA: 542
Spousal Roth IRA: 542
Mortgage P&I (15 Year @3% w/~10 yrs remaining): 1,195
Homeowners Insurance: 100
Cable: 103
Internet: 68
Land Line: 11
Cell Phone X 2: $30 (Republic Wireless)
Netflix: 10
Car Insurance: 60 for both cars
Car Maintenance: 80 for both cars
Auto Gas: 120 for both cars
Electric: 110 (average/month)
Gas Heat: 60 (average/month)
Water/sewer: 100 (average/month this is mostly taxes/fees/infrastructure replacement costs)
Pets (food/vet): 150 (average/month)
Home/General Maintenance: 100 (average/month)
Groceries: 800
Restaurants: 150
Donations: 200
Savings: 1,462
Miscellaneous: 733 - not any one thing (gifts/vacations/hobbies etc.)
Total: 6,726

Assets:
Emergency Fund: 30,000 (High yield savings)
EE Savings Bonds: ~10,000 (Current value)
Taxable Brokerage account: 46,000
Roth IRA: 180,000
DWs Roth IRA: 140,000
401K: 194,000
Home Equity: 175,000 (300K value w/125,000 remaining on loan @ 3%)
2015 Subaru Outback: 17,000 (Paid off)
2003 Honda Pilot: 2,000 (Paid off)
Total: 794,000

Liabilities:
Mortgage:
Original Loan Amount: 175,000
Rate: 3%
Length: 15 Years (10 remaining)
Payment: 1,195

Specific Question(s):
1) Am I FI?
2) Thoughts on redirecting contributions Im currently making to the Roth IRAs (1,084 / month) towards paying off the mortgage?  Im considering doing this to retire mortgage free in 2022.  Im familiar with the recommended investment order, but if I were to eliminate the mortgage, my military retirement would cover the bulk of my monthly expenses with little to no market risk.
3) Other recommendations / thoughts?

Laura33

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Re: Am I FI Now? Roth IRA vs. Paying off mortgage?
« Reply #1 on: October 09, 2017, 11:06:03 AM »
1.  Yes.  By my basic math, you have @5K/mo. in expenses (@$6700 listed expenses, minus @$2500/mo. savings listed under "expenses," plus various applicable taxes and pre-tax deductions for things like insurance that will presumably continue after you retire).  But you have @$3400 of that covered by your pension.  That means the delta that you need to fill is about $1600/mo, or on the order of $20K/yr.

Per the 4% rule, you'd need about $500K invested to be able to pull $20K/yr.  You have about $600K in invested assets, plus a lot of slack in various categories you could cut if you needed to.  So you are FI now -- and will definitely be in 5 years.

2.  No.  You have a ridiculously low mortgage rate, historically speaking.  You're my age -- you're old enough to remember when mortgage rates were 10%, 12%, 16%, right?  Heck, my first mortgage was 8 7/8% -- and I thought that was low!  But every single mortgage I've gotten since then has been lower than the one before.  So:  do you really think that the market is not going to average at least 3% returns over the next 3-4 decades? 

To put it another way, you are already very conservatively invested, because you already have over 2/3 of your monthly expenses covered by a pension.  That pension is the equivalent of having another $1M+ invested in a guaranteed asset that will pay out without fail.  That is a massively strong baseline to work from -- especially, as I mentioned above, because you have so much fluff you can cut if you need to. 

In addition, you currently have $40K in cash and bonds.  That is two years of the $1600/mo. delta right there, in cash, if you need it.  That means that if the market crashes the day after you retire, you can live on that for two full years, without cutting one dime and without touching your investments, while you wait for the market to recover.

So in short, you have not one but two massive safety nets already.  You can of course string up a third by paying off the house, but you do not need to to be more than adequately protected, and the odds are very strong that you would be giving up significant market growth if you were to do so.

3.  If you're determined to pay off the mortgage, then take it from the $1400 extra savings, not the Roths.  The Roths allow you to pull tax-free money in the future, while general savings/investments in non-protected accounts does not.  So why forfeit that tax protection?
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FI-in-no-time

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Re: Am I FI Now? Roth IRA vs. Paying off mortgage?
« Reply #2 on: October 09, 2017, 12:04:23 PM »
Thanks Laura33, everything you wrote makes perfect sense.  I do remember the much higher interest rates, the first house I bought in 1991 had an 8% interest rate.

I'm going to have a hard time transitioning from the accumulation to the draw down phase which deep down I think is why I was considering paying off the mortgage and also sticking with the job until 55.  If I can get past that then maybe I'll move my RE date up a bit.

Laura33

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Re: Am I FI Now? Roth IRA vs. Paying off mortgage?
« Reply #3 on: October 09, 2017, 02:03:27 PM »
Thanks Laura33, everything you wrote makes perfect sense.  I do remember the much higher interest rates, the first house I bought in 1991 had an 8% interest rate.

I'm going to have a hard time transitioning from the accumulation to the draw down phase which deep down I think is why I was considering paying off the mortgage and also sticking with the job until 55.  If I can get past that then maybe I'll move my RE date up a bit.

My work here is done.  ;-)

FYI, I actually plan to move toward something like what you have:  one bucket of "safe" things that covers 2-3 years expenses (so something like a 3-year bond or CD ladder, with 1/3 maturing annually); and then everything else in regular investments (currently VTSAX).  Then, every year, if it's a regular year or an "up" year, I'll use the money from the matured bonds to live on, and buy another set of bonds maturing in another 3 years.  But if there's a crash, I'll just hold onto my stocks and live on the bonds for up to three years while waiting for the market to turn around. 

That's only one way to do it, and I am not even claiming that it is the optimal way to maximize returns -- but for me, I really like the confidence of knowing I have enough "safe" money to coast on for long enough for the market to turn around, so I won't ever have to sell out at a low.
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bhleigh

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Re: Am I FI Now? Roth IRA vs. Paying off mortgage?
« Reply #4 on: October 11, 2017, 09:09:19 AM »
Do you have a car replacement fund going? Your 2003 Honda will be almost 20 years old when you retire. I have nothing with driving an old car, but I would factor in the possibility of you having to replace that car around your retirement date.

Also, any way you could trim some of your budget down? What do you plan to do in retirement? Will that generate any income? These things can help in reducing that "draw down phase" adjustment because it won't require you to draw so much initially.

Just food for thought...
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FI-in-no-time

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Re: Am I FI Now? Roth IRA vs. Paying off mortgage?
« Reply #5 on: October 11, 2017, 05:54:14 PM »
I don't have a fund specifically for car replacement.  When the Honda finally croaks I'll either go down to a single car which won't make my wife very happy or pay cash for a used fit/prius/elantra or something similar that gets good gas mileage.

I could easily trim the budget.  Cable, donations, groceries, misc., and gas are all areas where I'm fairly fat and could cut back if I needed to.  While I live well within my means and frugally by most standards, here I'm likely considered a spendy-pants :>)

What do I want to do in retirement?  That's really the question that I don't have an answer to and why deep down I'm not planning to retire sooner.  I don't think I would work after retirement - part time job or otherwise......but what would I do?  I need to reflect on that because I don't really know.  Up until now my answer has been "not go to work" :>)
« Last Edit: October 11, 2017, 05:57:26 PM by FI-in-no-time »

bhleigh

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Re: Am I FI Now? Roth IRA vs. Paying off mortgage?
« Reply #6 on: October 16, 2017, 08:45:25 AM »
What do I want to do in retirement?  That's really the question that I don't have an answer to and why deep down I'm not planning to retire sooner.  I don't think I would work after retirement - part time job or otherwise......but what would I do?  I need to reflect on that because I don't really know.  Up until now my answer has been "not go to work" :>)

This is probably the biggest question you will need to answer about your retirement. As you mentioned, "not go to work" is an answer but it really doesn't have an answer for you. Another way to look at the question is this: can you spend 8 hours every day with your spouse/children/etc.? If not, what would you do instead?
There are no problems. Only solutions we haven't found yet.

My Journal: B-Leigh's Mid-Life Crisis Avoidance