Hi All! I Have been pondering this for a long time: Soon I will be in a position where my cash balances will equal my mortgage balance (approximately November 2016). I have been pondering the risk/return of paying the mortgage off at that point and opening up a heloc to serve as cash reserves (at least until my cash levels are comfortable).
Age: 57, single man
401K: Discontinued in 2010, rolled over to Vanguard. I max a roth every year and throw some extra in a non-retirement Vanguard account. There’s plenty of “basis” in the roth to use without any penalties, plus I will be 59.5 in a bit over 2 years anyway (though I would hate to touch any of this, especially in a down market). I am planning to work to age 70 (as long as possible). I am super fit and in excellent health (no meds!).
Debt, other than mortgage: $0
Mortgage: $64K, paying off about $1100 in principle per month (thus $57ish soon).
Cash maintained: $57,500. This is based on the following:
One year’s expenses ($3,000 X12 (single income with difficult to replace job) = $36,000), the cost of buying a decent car if needed (I work and live in a dense urban area where I rely on a bike, transit, uber, and taxis). This could easily happen if I had to replace my job quickly and needed to take a suburban gig (it happened to a guy I worked with…he had to work suburban for a while, then found work in the city…). Roth contribution for 2017 ($6500).
Summary of $57,500 figure: 1 year’s expenses: $36,000 (it would be $27,600 with no mortgage)
Car if needed in a pinch: $15,000
2017 Roth: $6500 (I “save up” for Jan 1 Roth contributions).
$36K + $15K + 6.5K=$57.5K (this is my current comfort level).
Yield on the $57.5: About 2.5% pre-tax, 1.75% after tax (high yield checking accounts/jumping through hoops…).
Mortgage Rate: 4.0 (no longer deductible as it’s too small…)
Difference: 2.25% after tax
Scenario in question:
•Around November 2016, destroy the mortgage and simultaneously take out a heloc (cash $0/heloc for comfort). I will be able to build cash at the rate of $15,340 (590 per paycheck times 26 or approximately 1278 per month) per year.
•Defer my usual process of Jan 1 roth contribution on Jan 1 2017 to April of 2018.
•Defer my usual process of Jan 1 roth contribulton for 2018 to April 2019.
Projected cash Balances:
Nov. 2016: $0
Nov. 2017: $15, 340 (6.7 months expenses)
April 2018: $23010 - $6500 (IRA) = $16,510 (7.18 months expenses)
April 2019: $31,850 - $7000 (IRA (I’m thinking contribution limits will go up))= $24,850 (10.8 months expenses).
Ugly Scenario:
Lose my job somewhere between Nov. 2016 and April 2019 and need a car so I can take a suburban gig. If it took a year to land a job, I could be in the hole $32,400 (on a variable rate) plus whatever I spend on a car.
I know what Dave Ramsey would say…