I hadn't thought about the opportunity cost on not maxing out retirement accounts and still paying down the house.
My brother's in this situation, he emotionally wants to pay off his house quickly and probably will <_<.
Im to lazy to do the math but im sure 4% return vs a upfront(trad ira/401k) 15~% + index fund growth would absolutely crush the 4% over almost any time scale.
yes the tax savings are emense. and really this should only be discussed as a "debate" in what to do with after tax dollars. if you have tax advantaged space and are prepaying a 4% mortgage you're making an extremely poor math decision that could add 3-4 years to your FIRE timeline.
You really are a fan of the sweeping statement.
The correct answer may be a little more nuanced, although we agree on the general point that 401(k) money is even more mathematically favorable compared to pre-paying the mortgage.
First, if the 15% tax rate is the marginal tax rate of the person, it's questionable whether that person should be putting money in pre-tax at all. That person is a good candidate for a Roth, so the tax savings (at least up front) aren't there.
Second, the 401(k) is not tax-free forever. Indeed, when it comes out, it will come out as ordinary income, which if markets go the way you generally expect, could end up being a relatively high tax bracket, even for retirees, once distributions are required.
The real advantage of the 401(k) (pre-tax) is that the portion of the money that you get to invest that would have otherwise been paid in taxes (let's say 25% for a 25% tax bracket) gets to continue to grow and get market returns until you withdraw the money. That's like having an additional 25% of your money to invest (or 1/3 more, depending on how you want to look at it).
(There is also the classic tax advantage of avoiding the presumably higher marginal tax rate at the time you're working compared to the presumably lower tax bracket in retirement at the time you withdraw the money, but assuming the normal market growth that we're discussing, that's actually not likely to be much of an advantage to us. There's a very good chance that the portfolios will have grown to multi-million dollars by the time mandatory distributions are required, to be withdrawn at ordinary income tax rates, in addition to whatever income you're generating from other sources--pre-tax accounts, social security, etc.)
