I have a 30 year mortgage (chosen so i had flexibility to pay off early or invest depending on circumstances as they evolve) at 3.75%. My worst case scenario is to retire in 15 years, so all my calculations are based on where i will be financially in 15 years. Using a compound interest calculator and predicting a 5.5% rate for VTSMX over that 15 year period, here are the scenarios i came up with:
1. Put $5083/month into 401k/457b/403b/IRA's and 0 extra towards mortgage principal = $1, 507, 966 with a remaining mortgage balance of $256, 635
2. Put 3083/month into 401k/457b/403b/IRA's and $2000 extra towards mortgage principal = $1, 225, 997* with a remaining mortgage balance of $0
Minimum monthly payment for a $400K, 30 year, 3.75% mortgage is $1852.46.
If one has $5083/mo available pre-tax, beyond what is need for the mortgage, and we assume a 22% tax rate, that's a total of $1852.46/(1-22%) + $5083 = $7457.95/mo available pre-tax.
1. If all $5083 goes into a 401k, after 180 months the 401k will have $1,416,864 and the mortgage balance will be $254,731 (based on Excel's FV function).
2. If $3083 goes into a 401k, $1560 is available for extra loan payments. After 180 months the 401k will have $1,018,882 and the mortgage balance will be $0. There is a small mortgage payment in month 147, leaving a $0 mortgage balance. Months 148 through 180 have the full $7457.95 going to the 401k.
Following scenario 1, if one then withdraws $1852.46 / (1-22%) = $2374.95 each month from the $1,416,864, after 180 more months the mortgage will be paid and the account will have $2,565,019.
Following scenario 2, after 180 more months (of course the mortgage has already been paid) the account will have $2,320,589.
The assumption of 22% tax on withdrawal - the same as the tax assumed while accumulating - is the most conservative for pre-tax saving. If one expects to pay a higher rate on withdrawal, Roth should instead be used.
It really does boil down to the assumed investment return vs. the mortgage rate. Money should be directed at whichever is higher.
Does that make sense?