Author Topic: Advice for my 5 year plan?  (Read 3265 times)

milton

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Advice for my 5 year plan?
« on: August 31, 2015, 12:19:23 PM »
Hello everyone! I recently wrote a short post about my progress on my quest for financial independence. I was wondering if a few of you smart people might take a look and offer any input/advice which may occur to you? In particular, considering that I'll have a fair amount of excess income over the next 5 years, does it make sense to pay off the house? I have no other debts. Are there any other millennials here who have already paid off the mortgage? Thank you in advance! -Milton

Full article on Medium: https://medium.com/@MiltonIsRetired/my-financial-genesis-c982f3e97387

Axecleaver

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Re: Advice for my 5 year plan?
« Reply #1 on: August 31, 2015, 01:07:14 PM »
Hi Milton, reading your Medium article, it sounds like you're saving about 15% of your income in a tax-deferred retirement account, saving about 50%, and trying to decide what to do with the 50% you're saving. There are a lot of articles here that look at paying off a mortgage early vs. investing the money. This comes down to the math: it makes a lot of sense to invest it for an average of 8% ROI if you have a 30 year mortgage at 3.25%. At this early point in your career, savings mean more because it will have more time to grow. On the flip side, it's emotionally satisfying to live debt-free. Decide if that's worth 4-5% to you.

The other thing I'd recommend you take a look at is maximizing your tax deferred retirement savings to improve your tax losses. It sounded like you are an independent developer and probably have access to SEP plans. A SEP IRA or Solo 401k retirement maxes out in 2015 at $53k. If you're making 350k a year and saving 53k already, great! But if you're saving less than that, I think you'll see maximum value in reducing your taxes first, saving second, and paying off your mortgage last.


milton

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Re: Advice for my 5 year plan?
« Reply #2 on: August 31, 2015, 02:08:32 PM »
Thanks for the reply/advice, Axecleaver. I do have a personal SEP IRA which I utilized for one year, but my employment status changed the next year (I receive a w2 now plus some SK1 income) and so now I'm back to the drawing board for the best way to invest tax-deferred. I think I'll need to look into setting up a company 401k, which I'm planning on doing soon. I also max out a Roth IRA every year. My napkin math says I could probably up my retirement savings *in addition* to paying the mortgage early, which would look like an extra $30k/year on the mortgage and another $30k to the 401k.

As for the house, you're right... I guess I need to decide if it's emotionally worth it to be debt free (it's pretty important to me). Also, I'm still a relatively inexperienced investor, so it's really appealing to me to have a guaranteed ROI of 4.25% (my interest rate) vs. making a mistake in the stock market. The investing I have done so far has been in Vanguard mutual funds (managed target retirement mainly, but I'm also planning to buy some index funds). My thought is that I can still do some gradual investing (of my retirement savings) over the next 5 years until I'm comfortable enough to really start shoveling money into investments. Is that stupid?

It will probably help to know for frame of reference that I am currently 30 and have around $65k in my retirement accounts so far (I mentioned it took me a while to get my act together..).

milton

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Re: Advice for my 5 year plan?
« Reply #3 on: August 31, 2015, 09:02:38 PM »
I'd love to hear what the evening Mustachians think. Is there anyone who paid off the mortgage first, and found that to be a more rewarding choice than listening to the numbers?

MDM

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Re: Advice for my 5 year plan?
« Reply #4 on: August 31, 2015, 09:24:37 PM »
Is there anyone who paid off the mortgage first, and found that to be a more rewarding choice than listening to the numbers?
Such people likely exist, but we're not among them. 

No need to be dogmatic about it though.  If there is only a short time left on the loan, or there is only a few tenths of a percent difference in interest rates, etc., then do whatever seems best.

One reason to suggest buy and hold investing of index funds is that, left to their own devices, people trying to time the market with individual stocks usually don't fare well.  One reason they don't fare well is they let emotion override financial reality.

Money, however, can't buy happiness, so if having no mortgage is "worth" however many thousand dollars in lost opportunity, go for it.

bo_knows

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Re: Advice for my 5 year plan?
« Reply #5 on: September 01, 2015, 07:01:06 AM »
I'd love to hear what the evening Mustachians think. Is there anyone who paid off the mortgage first, and found that to be a more rewarding choice than listening to the numbers?

Milton, this is an often debated topic, and it usually boils down to personal preference and what makes you sleep better at night.  A lot of people also tend to think that it is a win-win scenario no matter what you do (invest vs. pay down mortgage).

eyePod

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Re: Advice for my 5 year plan?
« Reply #6 on: September 01, 2015, 07:37:22 AM »
I find the best avenue is to do both. We pay off some principal and invest more too. It doesn't have to be all or nothing. The fact that you're not just spending your money on stuff is the big difference.

milton

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Re: Advice for my 5 year plan?
« Reply #7 on: September 01, 2015, 10:54:35 AM »
Thanks, @bo_knows and @eyePod. I admit I spent a few hours stressing over it, but I think the "both" answer is a good one me. I can still pay off the house relatively quickly (hopefully 5 years) while maximizing retirement tax/savings.

In general I'm on the fence but leaning towards the "pay the mortgage first" camp of this discussion. As I was thinking about this it occurred to me that I wouldn't take out a loan at 3-4% and invest the money in the stock market as a sole investment strategy, so why would I treat my mortgage that way? While the "numbers" might work, there is still significant risk which I'd rather not take with someone else's money. That said, since I do have a mortgage and a limited window to invest I see the sense of doing both.

Clean Shaven

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Re: Advice for my 5 year plan?
« Reply #8 on: September 01, 2015, 11:16:51 AM »
As I was thinking about this it occurred to me that I wouldn't take out a loan at 3-4% and invest the money in the stock market as a sole investment strategy, so why would I treat my mortgage that way?

This is the analysis that led me to go the route of paying off the mortgage quickly (3.5% fixed 30-yr).  I wouldn't mortgage a paid-off house in order to leverage $ into investments.  YMMV, as you can tell from the comments so far in the thread, and surely more to come.

Also:  we are also saving a lot in retirement funds (maxing out all possible tax-advantaged accounts).  Personally, I wouldn't opt for paying off a low interest rate mortgage in lieu of contributing to retirement accounts.