Author Topic: Early retirement and paying off mortgage  (Read 5284 times)

KBecks

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Early retirement and paying off mortgage
« on: January 20, 2014, 12:18:03 PM »
Hi guys,

I want to ask about paying off the mortgage.  My husband and I have a good net worth > $600k, but we have not yet figured out or optimized our annual expenses.  That's a big to do.

Our only debt is a mortgage, $129,000 at 3.5%.  I am an at home mom / part time worker and he has the big job.  I can't see him leaving the big job until our mortgage is paid off. 

Therefore, emotionally, it seems we should whack away at the mortgage and get that to zero.  But if we do, we are not investing as much.  But we will feel more free.

Does this make sense?  Where we are at, would you aggressively invest or aggressively pay down the mortgage?  We will do some of both, but where would you put the emphasis?   The mortgage payment is obviously our largest monthly expense right now.

Thanks, KBecks


AccidentalMiser

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Re: Early retirement and paying off mortgage
« Reply #1 on: January 20, 2014, 01:07:47 PM »
Well, it depends.  How soon do you want to retire?  What is your annual income?  It your mortgage fixed or variable?  How much longer do you have to pay on it?  Where is all that 600k?  Retirement accounts?  How old are you?  How old is your husband?  Do you intend to live in the house long-term?  How many children do you have, how old are they and do you plan to have more?  Do you itemize deductions?  What percentage of your income do you save?

Sorry for the laundry list, but more data is needed to make the proper calculation.

If you invest "aggressively", you can make quite a bit more that 3.5%, particularly since the interest you pay on your mortgage is tax deductible.  If you're investing in non-retirement accounts, you can invest the money you would be sending to your mortgage company and pay the house off when you have the cash from your investments. 


Tyler

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Re: Early retirement and paying off mortgage
« Reply #2 on: January 20, 2014, 01:34:28 PM »
IMHO, in your situation with a low interest rate you can afford to split the difference if you like.  Pay the mortgage with new earned money and time the mortgage payoff schedule so that the final payment coincides with your planned retirement date.  That way you're more invested in growth pre-retirement but will minimize expenses post-retirement.  And you'll have a well-planned ramped transition instead of a large money transfer that can have tax implications.

The first step is to really attack the expenses and understand what you truly need in order to plan the retirement schedule properly.  I'd spend my mental energy on that before I do anything else in your situation.


Psychstache

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Re: Early retirement and paying off mortgage
« Reply #3 on: January 20, 2014, 01:37:46 PM »
Does this make sense?  Where we are at, would you aggressively invest or aggressively pay down the mortgage?  We will do some of both, but where would you put the emphasis?   The mortgage payment is obviously our largest monthly expense right now.

To answer your question we would need a little more information like AM said above. In general, if I were you I would keep the mortgage and just pay it on time while I continued to invest my money. I say that because when it comes to my personal finances, I am a emotionless, cold, robot who does whatever math tells him. If your DH would never leave his job while you have a mortgage for emotional reasons, then I would consider chopping away at that.

Congrats on winning at life with a great NW and no consumer debt!

KBecks

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Re: Early retirement and paying off mortgage
« Reply #4 on: January 20, 2014, 02:28:19 PM »
Well, it depends.  How soon do you want to retire?  What is your annual income?  It your mortgage fixed or variable?  How much longer do you have to pay on it?  Where is all that 600k?  Retirement accounts?  How old are you?  How old is your husband?  Do you intend to live in the house long-term?  How many children do you have, how old are they and do you plan to have more?  Do you itemize deductions?  What percentage of your income do you save?

That's good. Here are the answers:
--Annual income varies, maybe $75-$125 (depends on bonuses), we've been over $100 for several years but it depends on sales.
--Fixed rate mortgage
--How many years left?  Hmmm… it matures at the end of 2025 (11 years left)
--Mid-40s, 3 elementary school kids, we've been here a long time and plan to stay unless we downsize after the kids are grown, or unless there is a big, big reason to move that comes up.
--We itemize deductions
--I don't know our savings rate.  This year is an experiment in figuring that stuff out in detail.  I'm guessing we have saved 15-20k / year historically.  This will be the first time really getting serious about maximizing our savings.
--Most savings is in retirement/deferred stuff. I do have 80kish in a taxable account.
--I don't know when my husband wants to retire.  He doesn't love his job and I would love for him to be financially free so working is optional and he can keep the job or leave or change.

Thanks!  Let me know if you have any further insights.

AccidentalMiser

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Re: Early retirement and paying off mortgage
« Reply #5 on: January 20, 2014, 02:50:46 PM »
Thank you.  Personally, I would max out every available tax-advantaged savings resource each year (401k, HSA if available, deductible IRA, Roth IRA/401k), then start paying off the house.  This is predicated on the assumption that your husband's job is secure and that he could find another, comparable job if something happened to his current job.

As you've already stated, it's time to make sure your spending is under control and your financial house is in order.  Make sure you have enough life insurance on both you and your husband (too many mid-40s people with children don't have enough life insurance.)

Also, I recommend both of you read this blog "cover to cover" and "Your Money or Your Life" (a book by by Joseph Dominguez).

Best of luck to you!!

KBecks

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Re: Early retirement and paying off mortgage
« Reply #6 on: January 20, 2014, 04:23:28 PM »
That sounds good, I have read YMOYL earlier in life, and that was good!  I am enjoying the blog very much and try to read a couple articles each day.  It's very useful.

Question:  I am concerned about locking up a lot of money in my husband's 401k, the plan isn't that great and then the money is mostly put away until 59.5.  But if we would like to get out early, then it's not as good.  That's one area where I would lean more taxable.  Am I missing something about that?  I have read about rolling from a 401k to a Roth and then seasoning the money. I like Roths because it's after tax.  But I am scared about the retirement plans and their rules, fines and limitations.

abhe8

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Re: Early retirement and paying off mortgage
« Reply #7 on: January 20, 2014, 04:33:47 PM »
fear and anxiety are normal reactions to the unknow. read all the fine print on the retirement accounts forwards and backwards, by yourself and with your husband. then call the companies with any further questions. know what you are dealing with. to maximize finanicial/net worth you need to make decisions based on facts and not emotions (even fear).

the important retirement question is, what are your annual expenses? so how much money will you need (or want)?
are you paying for childrens cars or college or weddings? and if so, is this amount accounted for in your expenses?

you can roll 401K funds over into the roth a little at a time, so i would not worry about that and maximize all tax deferred options before going for the taxable account.

KBecks

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Re: Early retirement and paying off mortgage
« Reply #8 on: January 20, 2014, 04:49:41 PM »
Thanks for that.  It is important to be rational.  :) 

AccidentalMiser

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Re: Early retirement and paying off mortgage
« Reply #9 on: January 20, 2014, 06:54:21 PM »
Also, you don't have to be 59.5 to take money from a 401k without penalty.  If you leave your job, you can draw it starting at 55.

http://www.forbes.com/sites/advisor/2012/05/09/did-you-know-you-can-access-your-401k-penalty-free-at-age-55/

KBecks

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Re: Early retirement and paying off mortgage
« Reply #10 on: January 21, 2014, 04:08:40 AM »
55 sounds a lot better than 59.5.  Thanks for the info. :)

tomsang

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Re: Early retirement and paying off mortgage
« Reply #11 on: January 21, 2014, 07:46:58 AM »
You can also take 2%+ out of your 401k/IRA without penalty using IRS code section 72t. Read up on 72t if you need to tap into your 401k early. The percent goes up with your age and increases in interest rates.

http://www.bankrate.com/calculators/retirement/72-t-calculator.aspx

Welcome,

Tom

SunshineGirl

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Re: Early retirement and paying off mortgage
« Reply #12 on: January 21, 2014, 08:43:04 AM »
What are the specifics of his 401K plan? Is there matching? If not, there's no reason to use it. You can open your own traditional IRAs, etc., and max out Roths.

I highly, highly suggest you try out YNAB. It's a great budgeting software and there's a free one-month trial.