Author Topic: ahh jeez, not another mortgage vs investment topic!?  (Read 1069 times)

johndoe

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ahh jeez, not another mortgage vs investment topic!?
« on: May 17, 2020, 11:33:24 AM »
With the uncertainty of Covid, I'm coming back around to consider paying off more (or all?) of my mortgage.  I (33 years old) think the short version is:

assets:
~$25k in cash between CD, savings and checking accounts
~$95k in 401k (about half traditional funds (currently doing this), half Roth)
~$35k in Roth IRA
~$20k in brokerage -previously backed some of this into cash which did cost me some in April
~$10k in HSA

mortgage:
~$30k at 3.75%.  I've already recast it so the monthly payment is more insurance+tax than principle+interest.

My fear is that the market is not going to return 3.75% for who-knows-how-long, so I'm considering moving some extent of my brokerage funds as principle payments.  I could probably stand to do that with some of my cash too, as I have ~18 months of spending accounted for - and a job that I would consider stable (knocks on wood!).  If I did this, I will leave the 401k unchanged and adjust Roth IRA allocations so I'm overall ~30% bonds.

I don't know if my budget would impact your comments, but here that is just in case:


Does my line of thinking make sense: I'll keep ~$140k riding in the market, and "earn" 3.75% on ~30k to eliminate mortgage?

terran

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Re: ahh jeez, not another mortgage vs investment topic!?
« Reply #1 on: May 17, 2020, 11:39:42 AM »
Honestly? $30k isn't enough to make that big a difference. Do what makes you feel good.

zolotiyeruki

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Re: ahh jeez, not another mortgage vs investment topic!?
« Reply #2 on: May 18, 2020, 10:16:46 AM »
Honestly? $30k isn't enough to make that big a difference. Do what makes you feel good.
Agreed.  The difference in raw dollars between unpaid interest and market returns on $30k isn't going to be huge.  If the market is going up 7%/year, you're giving up 3.25% of 30k, or about $1000/year at most.

nereo

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Re: ahh jeez, not another mortgage vs investment topic!?
« Reply #3 on: May 18, 2020, 11:39:39 AM »
Honestly? $30k isn't enough to make that big a difference. Do what makes you feel good.

Yes, I agree with this sentiment as well, however...

Looking over your assets I'm struck by how little you have in non-retirement accounts relative to everything else.  If you paid off the $30k left on your mortgage you would be left with, what, $15k outside your "cash" (assuming this is your e-fund) and brokerage accounts.

That's not a huge amount, all things considered.  More to the point, how much of your NW would be tied to your home?

Therefore... I'd suggest leaving your assets alone, and (if you really want to nix your mortgage) using cash-flow to do it.  Don't get rid of your cash/brokerage cushion in order to have more money tied into your home... that could wind up biting you in the ass.

Just my 2Ę.  As others have said, it's not a huge amount regardless so you will **probably** be ok with whatever you choose.

SuperNintendo Chalmers

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Re: ahh jeez, not another mortgage vs investment topic!?
« Reply #4 on: May 18, 2020, 01:40:19 PM »
Whoa, stop -- first you really need to address your monthly cafeteria costs.  Think of what that adds up to at 7% return over the course of a decade!!! 

OK in all seriousness, I agree with nereo.  Probably OK either way, but personally I would build up more liquidity before killing the mortgage. 

And congrats on the barebones budget.  Even with a roommate, $35/month groceries is some next-level shit right there....

nereo

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Re: ahh jeez, not another mortgage vs investment topic!?
« Reply #5 on: May 18, 2020, 01:51:13 PM »
...yeah, I really didn't understand the "mandatory" 24Ę/mo cafeteria spending.  Maybe that's some sort of workplace due?  Won't even buy me a cup of coffee at my workplace (it's a 50Ę "on your honor" charge per mug).

johndoe

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Re: ahh jeez, not another mortgage vs investment topic!?
« Reply #6 on: May 18, 2020, 06:01:31 PM »
Thanks for the thoughts everyone!  Might I note that today s&p was up 3% so clearly my crystal ball on the market is great!  :) Regarding the cafeteria plan yeah it's just a mandatory charge for a plan where you can contribute tax free funds for certain expenses.  I just copied my paycheck so everything balanced out, wouldn't want to be off $2.88...and on the groceries I'm not someone to look up to, the roomie covers those costs as part of our arrangement.

@nereo good point about net worth in house.  The purchase price was $160k, the same as my current investments. (I've been working to increase investment percentage - it was a lot more fun pre Corona).  If it makes any difference, I have a HELOC just sitting at $0 for mega emergencies.  Is your concern that the retirement accounts can't fully be used now so it's important to have brokerage account?  I guess technically the Roth contributions could come out.  Or if there is really an emergency I could always sell the house, but I guess the argument is that it would take time to really get the money.  Maybe I just don't fully understand importance of non-retirement accounts...feel free to enlighten me!

nereo

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Re: ahh jeez, not another mortgage vs investment topic!?
« Reply #7 on: May 18, 2020, 07:40:38 PM »
Not quite...  you certainly could tap your retirement accounts in a true emergency.  But you really want to avoid that if at all possible.  THereís penalties of course, but the real loss is that you lose all those tax-free gains (and possible access to a Roth ladder later). So you donít want to unless you have to.

The broader point is that you donít want too much of your money tied up in one single asset... particularly when that asset is a house, which is immovable and hard to sell quickly. 

In general I recommend that a personís home is no more than 1/3 of their total assets.  That can be hard to do for some (particularly in places where home values and rent are sky-high) and for people early-on in their accumulation phase.  But itís especially important when you donít have enough savings (outside your retirement account) to cover a $15k emergency + several months without income.  Sometimes ďbad thingsĒ come in groups, and you have to survive all of them.

Dicey

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Re: ahh jeez, not another mortgage vs investment topic!?
« Reply #8 on: May 18, 2020, 07:49:02 PM »
Not quite...  you certainly could tap your retirement accounts in a true emergency.  But you really want to avoid that if at all possible.  THereís penalties of course, but the real loss is that you lose all those tax-free gains (and possible access to a Roth ladder later). So you donít want to unless you have to.

The broader point is that you donít want too much of your money tied up in one single asset... particularly when that asset is a house, which is immovable and hard to sell quickly. 

In general I recommend that a personís home is no more than 1/3 of their total assets.  That can be hard to do for some (particularly in places where home values and rent are sky-high) and for people early-on in their accumulation phase.  But itís especially important when you donít have enough savings (outside your retirement account) to cover a $15k emergency + several months without income.  Sometimes ďbad thingsĒ come in groups, and you have to survive all of them.
Per usual, what nereo said. Boom!

zolotiyeruki

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Re: ahh jeez, not another mortgage vs investment topic!?
« Reply #9 on: May 18, 2020, 08:33:17 PM »
One other point about taxable accounts:  This forum is all about retiring early, which means well before 59.5 years old, when IRAs and 401ks and the like become available penalty-free.  You need to have a plan to cover your living expenses until those withdrawals are available, and that usually means taxable accounts.

Gremlin

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Re: ahh jeez, not another mortgage vs investment topic!?
« Reply #10 on: May 18, 2020, 09:33:00 PM »
What's your deferred comp look like?  Is it real or is it only potentially real? 

johndoe

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Re: ahh jeez, not another mortgage vs investment topic!?
« Reply #11 on: May 19, 2020, 05:35:32 AM »
What's your deferred comp look like?  Is it real or is it only potentially real?
Sorry, I don't understand.  It's all contributions from me.  Separately I (potentially) get a pension, if that's what you're asking.

nereo

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Re: ahh jeez, not another mortgage vs investment topic!?
« Reply #12 on: May 19, 2020, 06:06:25 AM »
What's your deferred comp look like?  Is it real or is it only potentially real?
Sorry, I don't understand.  It's all contributions from me.  Separately I (potentially) get a pension, if that's what you're asking.

Different deferred compensation plans have different rules.  Some you can withdraw the money penalty free whenever you leave the job (e.g. 457 plans).  Others require you to work for several years before you are Ďvestedí.... which can be anywhere from a year to 20+ years.  Some wonít pay out until you are 62 or 67.  Some keep the money in a brokerage (e.g. index fund) while others pay it out from operating expenses... meaning if the company goes belly-up So might your compensation fund.

I think why Gremlin is asking is to know how reliable this def. comp. package is, and whether you can count on it for emergency and/or early-retirement expenses.

johndoe

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Re: ahh jeez, not another mortgage vs investment topic!?
« Reply #13 on: May 19, 2020, 03:56:17 PM »
Mine is a 457, and I can choose from their own target date funds or go to a self directed brokerage.

FatFI2025

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Re: ahh jeez, not another mortgage vs investment topic!?
« Reply #14 on: May 21, 2020, 01:04:58 PM »
My fear is that the market is not going to return 3.75% for who-knows-how-long, so I'm considering moving some extent of my brokerage funds as principle payments.  I could probably stand to do that with some of my cash too, as I have ~18 months of spending accounted for - and a job that I would consider stable (knocks on wood!).  If I did this, I will leave the 401k unchanged and adjust Roth IRA allocations so I'm overall ~30% bonds.

...

Does my line of thinking make sense: I'll keep ~$140k riding in the market, and "earn" 3.75% on ~30k to eliminate mortgage?

I agree with others that with $30K the difference is small, but I can't agree with your rationale. The "market" does typically return more than 3.75% over the long term so you're basing your decision on a short term market pricing call.

Go ahead and pay it off if you want, but realize that it's just for the emotional value, not financial.