Author Topic: Pay Down Your Mortgage or Max Out Retirement: Personal Choice?  (Read 9271 times)

Fomerly known as something

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Re: Pay Down Your Mortgage or Max Out Retirement: Personal Choice?
« Reply #50 on: June 02, 2018, 05:19:13 AM »
The OP can use a loan from his TSP (401k) account for a primary residence downpayment:
https://www.tsp.gov/PlanParticipation/LoansAndWithdrawals/loans/index.html

The OP may be confused about FERS pensions.  The minimum retirement age for most people is 57. 

Read the madfientists posts about tax savings for 401ks.  The OP would be leaving a lot of money on the table by not maxing out the 401k.  Fact that its the TSP would make it even more of a shame.

@afox you are wrong, OP has said he is a FERS LEO.  This is a Special Employee Category and the rules are different.  His contribution to the FERS is also different due to this.  (He pays more than a regular employee).  He can collect his pension at 50 years old with 20 years of service or with 25 years of service at any age.  Additionally, as of last year he can access his TSP at age 50 without penalty due to a law passed by congress in regards to this.

Buy I do agree with you he should be maxing out thrift.

ETA:  OP you said you can only save $100 if you max out TSP, you have also give your salary as $125,000.  You need to look at your budget, you should be able to save more than this.
« Last Edit: June 02, 2018, 05:27:05 AM by Fomerly known as something »

afox

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Re: Pay Down Your Mortgage or Max Out Retirement: Personal Choice?
« Reply #51 on: June 04, 2018, 10:03:25 AM »
Okay, I am wrong, I missed the LEO part. 

The TSP down payment loans are a great way to save for a down payment.

If OP is making $125k the tax savings on the TSP contributions are going to be enormous and if OP can withdraw from TSP at 50 this seems like a no brainer. 

DebtFreeinPhilly

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Re: Pay Down Your Mortgage or Max Out Retirement: Personal Choice?
« Reply #52 on: June 05, 2018, 10:18:20 AM »
@Kay-Ell, thank you for the simple insight. It is really helpful. @Bird In Hand, your breakdown make sit easier to understand. Also, I agree leaving out inflation to make it easier to understand was helpful.

Buy I do agree with you he should be maxing out thrift.

ETA:  OP you said you can only save $100 if you max out TSP, you have also give your salary as $125,000.  You need to look at your budget, you should be able to save more than this.

As soon as we have the down payment for the house, I will be maxing out the ROth TSP option. Also, I will look at the budget again to see where I can save money on a monthly basis. I'm sure there are places I can cut back.

Okay, I am wrong, I missed the LEO part. 

The TSP down payment loans are a great way to save for a down payment.

I am trying to avoid using the TSP Loan as a down payment. I am not opposed to it, more of I just would rather not touch it if all possible.

boarder42

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Re: Pay Down Your Mortgage or Max Out Retirement: Personal Choice?
« Reply #53 on: June 05, 2018, 11:08:59 AM »
why Roth TSP

DebtFreeinPhilly

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Re: Pay Down Your Mortgage or Max Out Retirement: Personal Choice?
« Reply #54 on: June 06, 2018, 08:21:48 AM »
why Roth TSP

I posted this question (Roth vs. Traditional) over on the Boggleheads forum. I researched on here too. Here is the link to the discussion. https://www.bogleheads.org/forum/viewtopic.php?f=1&t=243148&p=3819976#p3809490

I think that my current Traditional TSP will grow sufficiently to cover my expenses until I can tap my Roth TSP 9 years after retirement.

Fomerly known as something

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Re: Pay Down Your Mortgage or Max Out Retirement: Personal Choice?
« Reply #55 on: June 06, 2018, 10:14:05 AM »
Are you using the ROTH now or Traditional.  I would continue maxing out the Traditional if you can at this time.  This should be pretty equal to what you'd be doing at 10% in the ROTH.

I kind of agree with you on going to the Roth with the new rules.  I just switched myself now that we don't have to follow the proportional rule. 

Boarder42:  While not the OP my reason for the switch are as follows. 
  1)  I can still max out in the Roth.
  2)  As a single person or even a Married Filing Jointly with our Pension the OP and I will use     almost all of the 22% tax bracket with our pension so we will be paying 24% in taxes on withdrawals or conversions. 
  3)  Personally I also have after tax investments I will tap before my TSP.
  4)  If I keep adding to the traditional I will likely have to take large RMDs starting at 70.5.  Putting money into the Roth option makes me not have to look at that.
  5)  Running the numbers I will still have a huge amount in the traditional in 7 years (at retirement) with compounding plus the match.

 


DebtFreeinPhilly

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Re: Pay Down Your Mortgage or Max Out Retirement: Personal Choice?
« Reply #56 on: June 06, 2018, 01:55:45 PM »
I am currently in the Traditional while we save for the down payment.

Boarder42:  While not the OP my reason for the switch are as follows. 
  1)  I can still max out in the Roth.
  2)  As a single person or even a Married Filing Jointly with our Pension the OP and I will use     almost all of the 22% tax bracket with our pension so we will be paying 24% in taxes on withdrawals or conversions. 
  3)  Personally I also have after tax investments I will tap before my TSP.
  4)  If I keep adding to the traditional I will likely have to take large RMDs starting at 70.5.  Putting money into the Roth option makes me not have to look at that.
  5)  Running the numbers I will still have a huge amount in the traditional in 7 years (at retirement) with compounding plus the match.

Your #2, #4, & #5 reasons are why I am switching to the Roth. Even after all of the tax calculations and trying to utilize every option, I still will be solidly in the 22% tax bracket for most of retirement due to pensions and other income. Also, I don't plan on not generating some sort of income in retirement (i.e. rentals, home based business, consulting, etc.) so having more in the Roth account will allow me to dictate how much to withdraw or not withdraw. Finally, my current $317k Traditional TSP should (in theory) grow to almost $900k in the next 15 years. Keep in mind, the gov't will only match into the Traditional TSP. So even if I contribute to the Roth money is still going into the Traditional. Ideally, my plan is to have all of my expenses & day-to-day living covered by my pension and only withdraw from retirement accounts as needed.

Your #3 reason is what I would like to build up later in my career but there is only so much income coming in each month.

Fomerly known as something

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Re: Pay Down Your Mortgage or Max Out Retirement: Personal Choice?
« Reply #57 on: June 06, 2018, 05:00:37 PM »
Philly, I've got about 5 years on you but the vast majority of my after tax have come in the last 5 years are so.  In part because things really got rolling but in part because I made mistakes earlier on.

ETA:  50% of my taxable account is directly from electing to keep a mortgage and instead funnel the extra into the taxable.  In fact, I could have bought my current home for cash 9 months ago, instead I have a mortgage on it.
« Last Edit: June 06, 2018, 05:21:10 PM by Fomerly known as something »

GetItRight

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Re: Pay Down Your Mortgage or Max Out Retirement: Personal Choice?
« Reply #58 on: June 06, 2018, 07:07:40 PM »
The future is uncertain. I am very debt averse, likely a product of six figure student loan debt and not truly understanding the sunk cost fallacy. Max employer match and any similar perks, everything else towards the debt. Max tax advantaged contributions afterward. I know how to live on virtually nothing, but can't do that while paying thousands per month toward debts.

BFGirl

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Re: Pay Down Your Mortgage or Max Out Retirement: Personal Choice?
« Reply #59 on: June 08, 2018, 08:02:53 AM »
I understand that financially it is smarter to invest the money instead of paying down your mortgage. My left brain agrees with you. My right brain says lower your expenses/debt sucks before retirement and pay that crap off. Thus my dilemma... Also, we are free from debt.

I think you may have answered your own question right there. There is a "correct" answer mathematically (assuming returns for the next X amount of years yield their historical averages), but that may not be the "correct" answer for you. If paying your mortgage opens other opportunities or gives you peace of mind, that might be a good choice.

I wouldn't pay extra every month, though. I'd save the lump sum and pay it at once. That way, you're still liquid if a buying opportunity arises in the stock market. Plus if you run into trouble, having paid extra a while ago isn't going to save you from foreclosure.

Either way, it's not like you're blowing the money on a Porsche.

+1

DebtFreeinPhilly

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Re: Pay Down Your Mortgage or Max Out Retirement: Personal Choice?
« Reply #60 on: June 08, 2018, 02:37:48 PM »
Philly, I've got about 5 years on you but the vast majority of my after tax have come in the last 5 years are so.  In part because things really got rolling but in part because I made mistakes earlier on.

ETA:  50% of my taxable account is directly from electing to keep a mortgage and instead funnel the extra into the taxable.  In fact, I could have bought my current home for cash 9 months ago, instead I have a mortgage on it.

Good to know. As soon as we get the down payment squared away, its on to maxing the TSP, HSA, DW Roth IRA, 529s...and then any and all extra cash goes towards investment account with the purpose of eventually paying off the mortgage early when the account balance is high enough.

effigy98

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Re: Pay Down Your Mortgage or Max Out Retirement: Personal Choice?
« Reply #61 on: June 08, 2018, 02:53:49 PM »
My order of operations for the bulk of extra income.
1. Max out 401k and Roth
2. Max out HSA
3. Max out 529
4. Pay off house
5. Taxable investments (once house is paid off)

If I were young again, I would get as much low interest credit I could and do something like 70% DGRO, 30% MUB in my taxable and 60% DGRO, 20% FREL, 20% TLT in tax sheltered. I have learned that my maximum risk tolerance is about a 30% total draw down before I start to freak out and do something irrational, hence the bonds. My portfolio choices keep up with the S&P but have much lower draw-downs in both 2002 and 2008 when I did some stupid emotional stuff with my portfolio.

For paying off the house in a lump sum after you have been saving ahwile... If you have a tendency to blow money when you see a bunch of it sitting idle or the economy tanks, paying off the house locks it up so you cannot easily get at it. I have learned that making withdrawals as hard as possible has probably been the best investment decisions I have made over the years and has the highest returns. Protect your investments from yourself first, then worry about the other things. Fidelity research says that dead people and people who forgot their password had the best returns...
« Last Edit: June 08, 2018, 03:00:45 PM by effigy98 »

Dicey

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Re: Pay Down Your Mortgage or Max Out Retirement: Personal Choice?
« Reply #62 on: June 09, 2018, 07:15:34 AM »
)
I have learned that my maximum risk tolerance is about a 30% total draw down before I start to freak out and do something irrational, hence the bonds. My portfolio choices keep up with the S&P but have much lower draw-downs in both 2002 and 2008 when I did some stupid emotional stuff with my portfolio.

For paying off the house in a lump sum after you have been saving ahwile... If you have a tendency to blow money when you see a bunch of it sitting idle or the economy tanks, paying off the house locks it up so you cannot easily get at it. I have learned that making withdrawals as hard as possible has probably been the best investment decisions I have made over the years and has the highest returns. Protect your investments from yourself first, then worry about the other things. Fidelity research says that dead people and people who forgot their password had the best returns...
I suspect you don't mean draw down, but drop in market value. Two totally different things.

The rest of your post makes me glad you've found this site. The whole point of being mustachian is to learn the skills to help you keep from making the kind of expensive mistakes you have described. And Fidelity's "reasearch" is more of an observation. It's just something they noticed. Had they conducted actual studies, surely they would have included black-belt mustachians in the group.
« Last Edit: June 09, 2018, 08:58:29 PM by Dicey »

Bateaux

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Re: Pay Down Your Mortgage or Max Out Retirement: Personal Choice?
« Reply #63 on: June 09, 2018, 08:42:45 PM »
I'm going to be signing a brand new mortage within the next month.  The interest rate is 4.00%  Not rock bottom but historically low by comparison to our original 8.5% in 1992 for our current home.  I'm thinking of goimg to the Border42 dark side and not paying down the mortgage when we sell the current home.   It would give us a nice big cash bubble for taxable investing.  We have nearly 2MM in retirement funds combined.  We don't have a lot of taxable accounts.   Much of our cash will be going to pay the downpayment on the new house and make some updates.  Rather than be cash poor right after FIRE we may just make notes for a while.

boarder42

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Re: Pay Down Your Mortgage or Max Out Retirement: Personal Choice?
« Reply #64 on: June 09, 2018, 08:45:56 PM »
I'm going to be signing a brand new mortage within the next month.  The interest rate is 4.00%  Not rock bottom but historically low by comparison to our original 8.5% in 1992 for our current home.  I'm thinking of goimg to the Border42 dark side and not paying down the mortgage when we sell the current home.   It would give us a nice big cash bubble for taxable investing.  We have nearly 2MM in retirement funds combined.  We don't have a lot of taxable accounts.   Much of our cash will be going to pay the downpayment on the new house and make some updates.  Rather than be cash poor right after FIRE we may just make notes for a while.

Welcome but it's not the dark side. Your using the force for good!