Author Topic: Is taking the penalty to pay house off with our 401k worth it for us?  (Read 4576 times)

jojoguy

  • Stubble
  • **
  • Posts: 204
We just about have enough in our 401K to pay our house off completely. If we withdraw we will be penalized with early withdraw fees and taxes at right under 20K. However, if we pay our house off we will save 35K in interest in the long run. Worth doing it?

former player

  • Magnum Stache
  • ******
  • Posts: 4593
  • Location: Avalon
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #1 on: December 20, 2018, 04:34:19 AM »
No.  Withdrawing from your 401k isn't just about the withdrawal fees and taxes, it is also about loss of dividends and stock growth compounding from now until you retire.  Add all that up and the maths is way against you.

Have you looked into refinancing to a lower interest rate?  Offset mortgage?  Overpaying on your existing mortgage?  Selling and moving to a cheaper purchase or renting?  There are so many better options if your mortgage is a burden, it's difficult to understand why you seem to have headed straight to the worst.

TheAnonOne

  • Handlebar Stache
  • *****
  • Posts: 1522
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #2 on: December 20, 2018, 07:41:25 AM »
The math is actually against you ever paying off your mortgage. . . You can find basically unlimited materials here to prove this.

Though it remains a near religious topic here, so its bound to get people going

tralfamadorian

  • Handlebar Stache
  • *****
  • Posts: 1213
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #3 on: December 20, 2018, 10:00:25 AM »
b42 is turning in his mmm forum grave right now.

Omy

  • Bristles
  • ***
  • Posts: 304
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #4 on: December 20, 2018, 10:04:02 AM »
I've paid off both mortgages, but I would never consider using 401k money to do so.

TexasRunner

  • Pencil Stache
  • ****
  • Posts: 927
  • Age: 28
  • Location: Somewhere in Tejas
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #5 on: December 20, 2018, 10:08:19 AM »
We just about have enough in our 401K to pay our house off completely. If we withdraw we will be penalized with early withdraw fees and taxes at right under 20K. However, if we pay our house off we will save 35K in interest in the long run. Worth doing it?

Whats the interest rate?

If you say anything below 6%, then absolutely not.

If you say anything above 6%, then absolutely not but you need to refinance the mortgage...  ;)

wbranch

  • Stubble
  • **
  • Posts: 154
  • Age: 31
  • Location: Some Mountain Ridge
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #6 on: December 20, 2018, 10:08:56 AM »
The only reason there aren't more replies is the number of people that fainted when reading this.

use2betrix

  • Handlebar Stache
  • *****
  • Posts: 1770
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #7 on: December 20, 2018, 10:12:32 AM »
The math is actually against you ever paying off your mortgage. . . You can find basically unlimited materials here to prove this.

Though it remains a near religious topic here, so its bound to get people going

At current rates, yes. We are still at pretty historically low rates. I think anyone would have a hard time arguing otherwise with some of the high past rates.

Boofinator

  • Handlebar Stache
  • *****
  • Posts: 1044
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #8 on: December 20, 2018, 10:15:52 AM »
Barring some extremely bizarro situation you may be in, no.

Boofinator

  • Handlebar Stache
  • *****
  • Posts: 1044
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #9 on: December 20, 2018, 10:18:25 AM »
The math is actually against you ever paying off your mortgage. . . You can find basically unlimited materials here to prove this.

Though it remains a near religious topic here, so its bound to get people going

At current rates, yes. We are still at pretty historically low rates. I think anyone would have a hard time arguing otherwise with some of the high past rates.

Even at current rates, there is a time and place where it makes financial sense to pay off the mortgage. But not if you're cashing out the 401k and paying the penalty.

thebrowze

  • 5 O'Clock Shadow
  • *
  • Posts: 14
  • Location: Northern CA
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #10 on: December 20, 2018, 11:22:32 AM »
Add me to the chorus of HELL NO.  The opportunity cost of lost tax advantage and future compounding FAR exceeds the actual penalties for the withdrawal.  I also disagree with the notion of paying off a mortgage early in the first place, but that has been hashed and re-hashed a thousand different ways in other posts.

bacchi

  • Magnum Stache
  • ******
  • Posts: 3922
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #11 on: December 20, 2018, 11:35:29 AM »
No.

No, no, no.


ReadySetMillionaire

  • Handlebar Stache
  • *****
  • Posts: 1154
  • Location: The Buckeye State
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #12 on: December 20, 2018, 01:09:33 PM »
I can quite confidently tell you that you absolutely should not do this, but if you post some numbers, we can very clearly tell you exactly why it would be such a colossal mathematical mistake.

robartsd

  • Handlebar Stache
  • *****
  • Posts: 2426
  • Location: Sacramento, CA
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #13 on: December 20, 2018, 03:11:42 PM »
At current rates, yes. We are still at pretty historically low rates. I think anyone would have a hard time arguing otherwise with some of the high past rates.

Even at current rates, there is a time and place where it makes financial sense to pay off the mortgage.
Sure, but can you give a scenario where that comes before FI?

Boofinator

  • Handlebar Stache
  • *****
  • Posts: 1044
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #14 on: December 20, 2018, 04:11:44 PM »
At current rates, yes. We are still at pretty historically low rates. I think anyone would have a hard time arguing otherwise with some of the high past rates.

Even at current rates, there is a time and place where it makes financial sense to pay off the mortgage.
Sure, but can you give a scenario where that comes before FI?

I was continuing the line of conversation that started as follows:

The math is actually against you ever paying off your mortgage. . . You can find basically unlimited materials here to prove this.

Though it remains a near religious topic here, so its bound to get people going

I agree that it generally makes more sense to hold your mortgage pre-FI given today's interest rates.

jojoguy

  • Stubble
  • **
  • Posts: 204
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #15 on: December 20, 2018, 05:10:10 PM »
Thanks guys. It is a definite no go.

DoNorth

  • Stubble
  • **
  • Posts: 226
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #16 on: December 21, 2018, 03:44:27 AM »
I do believe there are a few cases where it could work, but a lot of factors would have to line up nicely.  For example, if you removed $100K funds from the 401K back in August/September at market highs, you would pay the $10K early withdrawal penalty + the taxes and retire your $100K new mortgage at 5-6% for example.  If over the next 5 years the market experiences negative or near negative returns and you DCA new contributions back into your 401k as the market approaches the previous high at which you withdrew the funds, there's a reasonable chance the overall effect on your 401K won't be drastically significant.  In this very simplified example, you would save almost $30K in interest payments over those first 5 years effectively giving yourself a guaranteed 6% return and offsetting some of the penalties and taxes you paid at the point of withdrawal while the market does whatever.  And since we're talking about FIRE, opening up $600/mo of cashflow immediately could potentially move your FIRE date up quicker than expected even though you'd be forgoing some compounding/dividend reinvestment etc. down the road.  I did something similar this year to buy a unique property and basically didn't have any other options because of timing and circumstance.  It was a round about way of reallocating my portfolio, but it was a reallocation nonetheless and the funds at the point I sold them to buy the property were worth more then, than they are today.  With that said, yes, its generally not a good idea to take 401k funds to pay off mortgages.



Jan 2019   $599.55   $99.55   $500.00   $500.00   $99,900.45
Feb 2019   $599.55   $100.05   $499.50   $999.50   $99,800.40
Mar 2019   $599.55   $100.55   $499.00   $1,498.50   $99,699.85
Apr 2019   $599.55   $101.05   $498.50   $1,997.00   $99,598.80
May 2019   $599.55   $101.56   $497.99   $2,495.00   $99,497.24
Jun 2019   $599.55   $102.06   $497.49   $2,992.48   $99,395.18
Jul 2019   $599.55   $102.57   $496.98   $3,489.46   $99,292.61
Aug 2019   $599.55   $103.09   $496.46   $3,985.92   $99,189.52
Sep 2019   $599.55   $103.60   $495.95   $4,481.87   $99,085.92
Oct 2019   $599.55   $104.12   $495.43   $4,977.30   $98,981.79
Nov 2019   $599.55   $104.64   $494.91   $5,472.21   $98,877.15
Dec 2019   $599.55   $105.16   $494.39   $5,966.59   $98,771.99
Jan 2020   $599.55   $105.69   $493.86   $6,460.45   $98,666.30
Feb 2020   $599.55   $106.22   $493.33   $6,953.79   $98,560.08
Mar 2020   $599.55   $106.75   $492.80   $7,446.59   $98,453.33
Apr 2020   $599.55   $107.28   $492.27   $7,938.85   $98,346.04
May 2020   $599.55   $107.82   $491.73   $8,430.58   $98,238.22
Jun 2020   $599.55   $108.36   $491.19   $8,921.77   $98,129.86
Jul 2020   $599.55   $108.90   $490.65   $9,412.42   $98,020.96
Aug 2020   $599.55   $109.45   $490.10   $9,902.53   $97,911.52
Sep 2020   $599.55   $109.99   $489.56   $10,392.09   $97,801.53
Oct 2020   $599.55   $110.54   $489.01   $10,881.09   $97,690.98
Nov 2020   $599.55   $111.10   $488.45   $11,369.55   $97,579.89
Dec 2020   $599.55   $111.65   $487.90   $11,857.45   $97,468.24
Jan 2021   $599.55   $112.21   $487.34   $12,344.79   $97,356.03
Feb 2021   $599.55   $112.77   $486.78   $12,831.57   $97,243.26
Mar 2021   $599.55   $113.33   $486.22   $13,317.79   $97,129.92
Apr 2021   $599.55   $113.90   $485.65   $13,803.44   $97,016.02
May 2021   $599.55   $114.47   $485.08   $14,288.52   $96,901.55
Jun 2021   $599.55   $115.04   $484.51   $14,773.02   $96,786.51
Jul 2021   $599.55   $115.62   $483.93   $15,256.96   $96,670.89
Aug 2021   $599.55   $116.20   $483.35   $15,740.31   $96,554.69
Sep 2021   $599.55   $116.78   $482.77   $16,223.08   $96,437.92
Oct 2021   $599.55   $117.36   $482.19   $16,705.27   $96,320.56
Nov 2021   $599.55   $117.95   $481.60   $17,186.88   $96,202.61
Dec 2021   $599.55   $118.54   $481.01   $17,667.89   $96,084.07
Jan 2022   $599.55   $119.13   $480.42   $18,148.31   $95,964.94
Feb 2022   $599.55   $119.73   $479.82   $18,628.13   $95,845.21
Mar 2022   $599.55   $120.32   $479.23   $19,107.36   $95,724.89
Apr 2022   $599.55   $120.93   $478.62   $19,585.98   $95,603.96
May 2022   $599.55   $121.53   $478.02   $20,064.00   $95,482.43
Jun 2022   $599.55   $122.14   $477.41   $20,541.42   $95,360.29
Jul 2022   $599.55   $122.75   $476.80   $21,018.22   $95,237.55
Aug 2022   $599.55   $123.36   $476.19   $21,494.41   $95,114.18
Sep 2022   $599.55   $123.98   $475.57   $21,969.98   $94,990.20
Oct 2022   $599.55   $124.60   $474.95   $22,444.93   $94,865.60
Nov 2022   $599.55   $125.22   $474.33   $22,919.26   $94,740.38
Dec 2022   $599.55   $125.85   $473.70   $23,392.96   $94,614.53
Jan 2023   $599.55   $126.48   $473.07   $23,866.03   $94,488.05
Feb 2023   $599.55   $127.11   $472.44   $24,338.47   $94,360.94
Mar 2023   $599.55   $127.75   $471.80   $24,810.28   $94,233.20
Apr 2023   $599.55   $128.38   $471.17   $25,281.44   $94,104.81
May 2023   $599.55   $129.03   $470.52   $25,751.97   $93,975.79
Jun 2023   $599.55   $129.67   $469.88   $26,221.84   $93,846.12
Jul 2023   $599.55   $130.32   $469.23   $26,691.07   $93,715.80
Aug 2023   $599.55   $130.97   $468.58   $27,159.65   $93,584.82
Sep 2023   $599.55   $131.63   $467.92   $27,627.58   $93,453.20
Oct 2023   $599.55   $132.28   $467.27   $28,094.84   $93,320.91
Nov 2023   $599.55   $132.95   $466.60   $28,561.45   $93,187.97
Dec 2023   $599.55   $133.61   $465.94   $29,027.39   $93,054.36
Jan 2024   $599.55   $134.28   $465.27   $29,492.66   $92,920.08
Feb 2024   $599.55   $134.95   $464.60   $29,957.26   $92,785.13
Mar 2024   $599.55   $135.62   $463.93   $30,421.19   $92,649.50
Apr 2024   $599.55   $136.30   $463.25   $30,884.43   $92,513.20
May 2024   $599.55   $136.98   $462.57   $31,347.00   $92,376.22
Jun 2024   $599.55   $137.67   $461.88   $31,808.88   $92,238.55
Jul 2024   $599.55   $138.36   $461.19   $32,270.07   $92,100.19
Aug 2024   $599.55   $139.05   $460.50   $32,730.57   $91,961.14
Sep 2024   $599.55   $139.74   $459.81   $33,190.38   $91,821.39
Oct 2024   $599.55   $140.44   $459.11   $33,649.49   $91,680.95
Nov 2024   $599.55   $141.15   $458.40   $34,107.89   $91,539.80
Dec 2024   $599.55   $141.85   $457.70   $34,565.59   $91,397.95
Jan 2025   $599.55   $142.56   $456.99   $35,022.58   $91,255.39
Feb 2025   $599.55   $143.27   $456.28   $35,478.86   $91,112.12
Mar 2025   $599.55   $143.99   $455.56   $35,934.42   $90,968.13
Apr 2025   $599.55   $144.71   $454.84   $36,389.26   $90,823.42
May 2025   $599.55   $145.43   $454.12   $36,843.38   $90,677.99
Jun 2025   $599.55   $146.16   $453.39   $37,296.77   $90,531.82
Jul 2025   $599.55   $146.89   $452.66   $37,749.42   $90,384.93
Aug 2025   $599.55   $147.63   $451.92   $38,201.35   $90,237.31
Sep 2025   $599.55   $148.36   $451.19   $38,652.54   $90,088.94
Oct 2025   $599.55   $149.11   $450.44   $39,102.98   $89,939.84
Nov 2025   $599.55   $149.85   $449.70   $39,552.68   $89,789.99
Dec 2025   $599.55   $150.60   $448.95   $40,001.63   $89,639.39
Jan 2026   $599.55   $151.35   $448.20   $40,449.83   $89,488.03
Feb 2026   $599.55   $152.11   $447.44   $40,897.27   $89,335.92
Mar 2026   $599.55   $152.87   $446.68   $41,343.95   $89,183.05
Apr 2026   $599.55   $153.64   $445.92   $41,789.86   $89,029.42
May 2026   $599.55   $154.40   $445.15   $42,235.01   $88,875.01
Jun 2026   $599.55   $155.18   $444.38   $42,679.38   $88,719.84
Jul 2026   $599.55   $155.95   $443.60   $43,122.98   $88,563.89
Aug 2026   $599.55   $156.73   $442.82   $43,565.80   $88,407.15
Sep 2026   $599.55   $157.51   $442.04   $44,007.84   $88,249.64
Oct 2026   $599.55   $158.30   $441.25   $44,449.09   $88,091.34
Nov 2026   $599.55   $159.09   $440.46   $44,889.54   $87,932.24
Dec 2026   $599.55   $159.89   $439.66   $45,329.20   $87,772.35
Jan 2027   $599.55   $160.69   $438.86   $45,768.07   $87,611.67
Feb 2027   $599.55   $161.49   $438.06   $46,206.12   $87,450.17
Mar 2027   $599.55   $162.30   $437.25   $46,643.38   $87,287.87
Apr 2027   $599.55   $163.11   $436.44   $47,079.81   $87,124.76
May 2027   $599.55   $163.93   $435.62   $47,515.44   $86,960.84
Jun 2027   $599.55   $164.75   $434.80   $47,950.24   $86,796.09
Jul 2027   $599.55   $165.57   $433.98   $48,384.22   $86,630.52
Aug 2027   $599.55   $166.40   $433.15   $48,817.38   $86,464.12
Sep 2027   $599.55   $167.23   $432.32   $49,249.70   $86,296.89
Oct 2027   $599.55   $168.07   $431.48   $49,681.18   $86,128.83
Nov 2027   $599.55   $168.91   $430.64   $50,111.83   $85,959.92
Dec 2027   $599.55   $169.75   $429.80   $50,541.62   $85,790.17
Jan 2028   $599.55   $170.60   $428.95   $50,970.58   $85,619.57
Feb 2028   $599.55   $171.45   $428.10   $51,398.67   $85,448.12
Mar 2028   $599.55   $172.31   $427.24   $51,825.91   $85,275.81
Apr 2028   $599.55   $173.17   $426.38   $52,252.29   $85,102.63
May 2028   $599.55   $174.04   $425.51   $52,677.81   $84,928.60
Jun 2028   $599.55   $174.91   $424.64   $53,102.45   $84,753.69
Jul 2028   $599.55   $175.78   $423.77   $53,526.22   $84,577.91
Aug 2028   $599.55   $176.66   $422.89   $53,949.11   $84,401.25
Sep 2028   $599.55   $177.54   $422.01   $54,371.11   $84,223.70
Oct 2028   $599.55   $178.43   $421.12   $54,792.23   $84,045.27
Nov 2028   $599.55   $179.32   $420.23   $55,212.46   $83,865.95
Dec 2028   $599.55   $180.22   $419.33   $55,631.79   $83,685.72
Jan 2029   $599.55   $181.12   $418.43   $56,050.22   $83,504.60
Feb 2029   $599.55   $182.03   $417.52   $56,467.74   $83,322.58
Mar 2029   $599.55   $182.94   $416.61   $56,884.35   $83,139.64
Apr 2029   $599.55   $183.85   $415.70   $57,300.05   $82,955.79
May 2029   $599.55   $184.77   $414.78   $57,714.83   $82,771.01
Jun 2029   $599.55   $185.70   $413.86   $58,128.68   $82,585.32
Jul 2029   $599.55   $186.62   $412.93   $58,541.61   $82,398.69
Aug 2029   $599.55   $187.56   $411.99   $58,953.60   $82,211.14
Sep 2029   $599.55   $188.49   $411.06   $59,364.66   $82,022.64
Oct 2029   $599.55   $189.44   $410.11   $59,774.77   $81,833.21
Nov 2029   $599.55   $190.38   $409.17   $60,183.94   $81,642.82
Dec 2029   $599.55   $191.34   $408.21   $60,592.15   $81,451.48
Jan 2030   $599.55   $192.29   $407.26   $60,999.41   $81,259.19
Feb 2030   $599.55   $193.25   $406.30   $61,405.71   $81,065.94
Mar 2030   $599.55   $194.22   $405.33   $61,811.04   $80,871.72
Apr 2030   $599.55   $195.19   $404.36   $62,215.40   $80,676.52
May 2030   $599.55   $196.17   $403.38   $62,618.78   $80,480.36
Jun 2030   $599.55   $197.15   $402.40   $63,021.18   $80,283.21
Jul 2030   $599.55   $198.13   $401.42   $63,422.60   $80,085.07
Aug 2030   $599.55   $199.13   $400.43   $63,823.02   $79,885.95
Sep 2030   $599.55   $200.12   $399.43   $64,222.45   $79,685.83
Oct 2030   $599.55   $201.12   $398.43   $64,620.88   $79,484.71
Nov 2030   $599.55   $202.13   $397.42   $65,018.30   $79,282.58
Dec 2030   $599.55   $203.14   $396.41   $65,414.72   $79,079.44
Jan 2031   $599.55   $204.15   $395.40   $65,810.11   $78,875.29
Feb 2031   $599.55   $205.17   $394.38   $66,204.49   $78,670.11
Mar 2031   $599.55   $206.20   $393.35   $66,597.84   $78,463.91
Apr 2031   $599.55   $207.23   $392.32   $66,990.16   $78,256.68
May 2031   $599.55   $208.27   $391.28   $67,381.44   $78,048.42
Jun 2031   $599.55   $209.31   $390.24   $67,771.69   $77,839.11
Jul 2031   $599.55   $210.35   $389.20   $68,160.88   $77,628.75
Aug 2031   $599.55   $211.41   $388.14   $68,549.03   $77,417.35
Sep 2031   $599.55   $212.46   $387.09   $68,936.11   $77,204.88
Oct 2031   $599.55   $213.53   $386.02   $69,322.14   $76,991.36
Nov 2031   $599.55   $214.59   $384.96   $69,707.09   $76,776.76
Dec 2031   $599.55   $215.67   $383.88   $70,090.98   $76,561.09
Jan 2032   $599.55   $216.75   $382.81   $70,473.78   $76,344.35
Feb 2032   $599.55   $217.83   $381.72   $70,855.50   $76,126.52
Mar 2032   $599.55   $218.92   $380.63   $71,236.14   $75,907.60
Apr 2032   $599.55   $220.01   $379.54   $71,615.67   $75,687.59
May 2032   $599.55   $221.11   $378.44   $71,994.11   $75,466.48
Jun 2032   $599.55   $222.22   $377.33   $72,371.44   $75,244.26
Jul 2032   $599.55   $223.33   $376.22   $72,747.67   $75,020.93
Aug 2032   $599.55   $224.45   $375.10   $73,122.77   $74,796.48
Sep 2032   $599.55   $225.57   $373.98   $73,496.75   $74,570.92
Oct 2032   $599.55   $226.70   $372.85   $73,869.61   $74,344.22
Nov 2032   $599.55   $227.83   $371.72   $74,241.33   $74,116.39
Dec 2032   $599.55   $228.97   $370.58   $74,611.91   $73,887.42
Jan 2033   $599.55   $230.11   $369.44   $74,981.35   $73,657.31
Feb 2033   $599.55   $231.26   $368.29   $75,349.63   $73,426.05
Mar 2033   $599.55   $232.42   $367.13   $75,716.76   $73,193.63
Apr 2033   $599.55   $233.58   $365.97   $76,082.73   $72,960.04
May 2033   $599.55   $234.75   $364.80   $76,447.53   $72,725.29
Jun 2033   $599.55   $235.92   $363.63   $76,811.16   $72,489.37
Jul 2033   $599.55   $237.10   $362.45   $77,173.61   $72,252.26
Aug 2033   $599.55   $238.29   $361.26   $77,534.87   $72,013.98
Sep 2033   $599.55   $239.48   $360.07   $77,894.94   $71,774.49
Oct 2033   $599.55   $240.68   $358.87   $78,253.81   $71,533.82
Nov 2033   $599.55   $241.88   $357.67   $78,611.48   $71,291.94
Dec 2033   $599.55   $243.09   $356.46   $78,967.94   $71,048.84
Jan 2034   $599.55   $244.31   $355.24   $79,323.18   $70,804.54
Feb 2034   $599.55   $245.53   $354.02   $79,677.21   $70,559.01
Mar 2034   $599.55   $246.76   $352.80   $80,030.00   $70,312.25
Apr 2034   $599.55   $247.99   $351.56   $80,381.56   $70,064.27
May 2034   $599.55   $249.23   $350.32   $80,731.88   $69,815.04
Jun 2034   $599.55   $250.48   $349.08   $81,080.96   $69,564.56
Jul 2034   $599.55   $251.73   $347.82   $81,428.78   $69,312.83
Aug 2034   $599.55   $252.99   $346.56   $81,775.35   $69,059.85
Sep 2034   $599.55   $254.25   $345.30   $82,120.64   $68,805.60
Oct 2034   $599.55   $255.52   $344.03   $82,464.67   $68,550.07
Nov 2034   $599.55   $256.80   $342.75   $82,807.42   $68,293.27
Dec 2034   $599.55   $258.08   $341.47   $83,148.89   $68,035.19
Jan 2035   $599.55   $259.37   $340.18   $83,489.07   $67,775.81
Feb 2035   $599.55   $260.67   $338.88   $83,827.94   $67,515.14
Mar 2035   $599.55   $261.97   $337.58   $84,165.52   $67,253.17
Apr 2035   $599.55   $263.28   $336.27   $84,501.79   $66,989.88
May 2035   $599.55   $264.60   $334.95   $84,836.74   $66,725.28
Jun 2035   $599.55   $265.92   $333.63   $85,170.36   $66,459.36
Jul 2035   $599.55   $267.25   $332.30   $85,502.66   $66,192.10
Aug 2035   $599.55   $268.59   $330.96   $85,833.62   $65,923.51
Sep 2035   $599.55   $269.93   $329.62   $86,163.24   $65,653.58
Oct 2035   $599.55   $271.28   $328.27   $86,491.50   $65,382.30
Nov 2035   $599.55   $272.64   $326.91   $86,818.42   $65,109.66
Dec 2035   $599.55   $274.00   $325.55   $87,143.96   $64,835.66
Jan 2036   $599.55   $275.37   $324.18   $87,468.14   $64,560.29
Feb 2036   $599.55   $276.75   $322.80   $87,790.94   $64,283.54
Mar 2036   $599.55   $278.13   $321.42   $88,112.36   $64,005.40
Apr 2036   $599.55   $279.52   $320.03   $88,432.39   $63,725.88
May 2036   $599.55   $280.92   $318.63   $88,751.02   $63,444.96
Jun 2036   $599.55   $282.33   $317.22   $89,068.24   $63,162.63
Jul 2036   $599.55   $283.74   $315.81   $89,384.06   $62,878.90
Aug 2036   $599.55   $285.16   $314.39   $89,698.45   $62,593.74
Sep 2036   $599.55   $286.58   $312.97   $90,011.42   $62,307.16
Oct 2036   $599.55   $288.01   $311.54   $90,322.96   $62,019.14
Nov 2036   $599.55   $289.45   $310.10   $90,633.05   $61,729.69
Dec 2036   $599.55   $290.90   $308.65   $90,941.70   $61,438.79
Jan 2037   $599.55   $292.36   $307.19   $91,248.89   $61,146.43
Feb 2037   $599.55   $293.82   $305.73   $91,554.63   $60,852.61
Mar 2037   $599.55   $295.29   $304.26   $91,858.89   $60,557.32
Apr 2037   $599.55   $296.76   $302.79   $92,161.68   $60,260.56
May 2037   $599.55   $298.25   $301.30   $92,462.98   $59,962.31
Jun 2037   $599.55   $299.74   $299.81   $92,762.79   $59,662.57
Jul 2037   $599.55   $301.24   $298.31   $93,061.10   $59,361.34
Aug 2037   $599.55   $302.74   $296.81   $93,357.91   $59,058.59
Sep 2037   $599.55   $304.26   $295.29   $93,653.20   $58,754.33
Oct 2037   $599.55   $305.78   $293.77   $93,946.97   $58,448.56
Nov 2037   $599.55   $307.31   $292.24   $94,239.22   $58,141.25
Dec 2037   $599.55   $308.84   $290.71   $94,529.92   $57,832.40
Jan 2038   $599.55   $310.39   $289.16   $94,819.08   $57,522.01
Feb 2038   $599.55   $311.94   $287.61   $95,106.69   $57,210.07
Mar 2038   $599.55   $313.50   $286.05   $95,392.75   $56,896.57
Apr 2038   $599.55   $315.07   $284.48   $95,677.23   $56,581.51
May 2038   $599.55   $316.64   $282.91   $95,960.14   $56,264.86
Jun 2038   $599.55   $318.23   $281.32   $96,241.46   $55,946.64
Jul 2038   $599.55   $319.82   $279.73   $96,521.19   $55,626.82
Aug 2038   $599.55   $321.42   $278.13   $96,799.33   $55,305.40
Sep 2038   $599.55   $323.02   $276.53   $97,075.85   $54,982.38
Oct 2038   $599.55   $324.64   $274.91   $97,350.77   $54,657.74
Nov 2038   $599.55   $326.26   $273.29   $97,624.05   $54,331.48
Dec 2038   $599.55   $327.89   $271.66   $97,895.71   $54,003.59
Jan 2039   $599.55   $329.53   $270.02   $98,165.73   $53,674.05
Feb 2039   $599.55   $331.18   $268.37   $98,434.10   $53,342.87
Mar 2039   $599.55   $332.84   $266.71   $98,700.81   $53,010.04
Apr 2039   $599.55   $334.50   $265.05   $98,965.87   $52,675.54
May 2039   $599.55   $336.17   $263.38   $99,229.24   $52,339.36
Jun 2039   $599.55   $337.85   $261.70   $99,490.94   $52,001.51
Jul 2039   $599.55   $339.54   $260.01   $99,750.95   $51,661.97
Aug 2039   $599.55   $341.24   $258.31   $100,009.26   $51,320.73
Sep 2039   $599.55   $342.95   $256.60   $100,265.86   $50,977.78
Oct 2039   $599.55   $344.66   $254.89   $100,520.75   $50,633.12
Nov 2039   $599.55   $346.38   $253.17   $100,773.92   $50,286.73
Dec 2039   $599.55   $348.12   $251.43   $101,025.35   $49,938.62
Jan 2040   $599.55   $349.86   $249.69   $101,275.04   $49,588.76
Feb 2040   $599.55   $351.61   $247.94   $101,522.99   $49,237.15
Mar 2040   $599.55   $353.36   $246.19   $101,769.17   $48,883.79
Apr 2040   $599.55   $355.13   $244.42   $102,013.59   $48,528.66
May 2040   $599.55   $356.91   $242.64   $102,256.23   $48,171.75
Jun 2040   $599.55   $358.69   $240.86   $102,497.09   $47,813.06
Jul 2040   $599.55   $360.49   $239.07   $102,736.16   $47,452.57
Aug 2040   $599.55   $362.29   $237.26   $102,973.42   $47,090.28
Sep 2040   $599.55   $364.10   $235.45   $103,208.87   $46,726.18
Oct 2040   $599.55   $365.92   $233.63   $103,442.50   $46,360.27
Nov 2040   $599.55   $367.75   $231.80   $103,674.30   $45,992.52
Dec 2040   $599.55   $369.59   $229.96   $103,904.27   $45,622.93
Jan 2041   $599.55   $371.44   $228.11   $104,132.38   $45,251.49
Feb 2041   $599.55   $373.29   $226.26   $104,358.64   $44,878.20
Mar 2041   $599.55   $375.16   $224.39   $104,583.03   $44,503.04
Apr 2041   $599.55   $377.04   $222.52   $104,805.55   $44,126.00
May 2041   $599.55   $378.92   $220.63   $105,026.18   $43,747.08
Jun 2041   $599.55   $380.82   $218.74   $105,244.91   $43,366.27
Jul 2041   $599.55   $382.72   $216.83   $105,461.74   $42,983.55
Aug 2041   $599.55   $384.63   $214.92   $105,676.66   $42,598.92
Sep 2041   $599.55   $386.56   $212.99   $105,889.65   $42,212.36
Oct 2041   $599.55   $388.49   $211.06   $106,100.72   $41,823.87
Nov 2041   $599.55   $390.43   $209.12   $106,309.84   $41,433.44
Dec 2041   $599.55   $392.38   $207.17   $106,517.00   $41,041.06
Jan 2042   $599.55   $394.35   $205.21   $106,722.21   $40,646.71
Feb 2042   $599.55   $396.32   $203.23   $106,925.44   $40,250.40
Mar 2042   $599.55   $398.30   $201.25   $107,126.69   $39,852.10
Apr 2042   $599.55   $400.29   $199.26   $107,325.95   $39,451.81
May 2042   $599.55   $402.29   $197.26   $107,523.21   $39,049.52
Jun 2042   $599.55   $404.30   $195.25   $107,718.46   $38,645.21
Jul 2042   $599.55   $406.32   $193.23   $107,911.69   $38,238.89
Aug 2042   $599.55   $408.36   $191.19   $108,102.88   $37,830.53
Sep 2042   $599.55   $410.40   $189.15   $108,292.03   $37,420.13
Oct 2042   $599.55   $412.45   $187.10   $108,479.13   $37,007.68
Nov 2042   $599.55   $414.51   $185.04   $108,664.17   $36,593.17
Dec 2042   $599.55   $416.58   $182.97   $108,847.14   $36,176.59
Jan 2043   $599.55   $418.67   $180.88   $109,028.02   $35,757.92
Feb 2043   $599.55   $420.76   $178.79   $109,206.81   $35,337.16
Mar 2043   $599.55   $422.86   $176.69   $109,383.50   $34,914.29
Apr 2043   $599.55   $424.98   $174.57   $109,558.07   $34,489.31
May 2043   $599.55   $427.10   $172.45   $109,730.51   $34,062.21
Jun 2043   $599.55   $429.24   $170.31   $109,900.83   $33,632.97
Jul 2043   $599.55   $431.39   $168.16   $110,068.99   $33,201.59
Aug 2043   $599.55   $433.54   $166.01   $110,235.00   $32,768.04
Sep 2043   $599.55   $435.71   $163.84   $110,398.84   $32,332.33
Oct 2043   $599.55   $437.89   $161.66   $110,560.50   $31,894.44
Nov 2043   $599.55   $440.08   $159.47   $110,719.97   $31,454.37
Dec 2043   $599.55   $442.28   $157.27   $110,877.24   $31,012.09
Jan 2044   $599.55   $444.49   $155.06   $111,032.31   $30,567.60
Feb 2044   $599.55   $446.71   $152.84   $111,185.14   $30,120.88
Mar 2044   $599.55   $448.95   $150.60   $111,335.75   $29,671.94
Apr 2044   $599.55   $451.19   $148.36   $111,484.11   $29,220.75
May 2044   $599.55   $453.45   $146.10   $111,630.21   $28,767.30
Jun 2044   $599.55   $455.71   $143.84   $111,774.05   $28,311.59
Jul 2044   $599.55   $457.99   $141.56   $111,915.61   $27,853.59
Aug 2044   $599.55   $460.28   $139.27   $112,054.87   $27,393.31
Sep 2044   $599.55   $462.58   $136.97   $112,191.84   $26,930.73
Oct 2044   $599.55   $464.90   $134.65   $112,326.49   $26,465.83
Nov 2044   $599.55   $467.22   $132.33   $112,458.82   $25,998.61
Dec 2044   $599.55   $469.56   $129.99   $112,588.82   $25,529.05
Jan 2045   $599.55   $471.91   $127.65   $112,716.46   $25,057.15
Feb 2045   $599.55   $474.26   $125.29   $112,841.75   $24,582.88
Mar 2045   $599.55   $476.64   $122.91   $112,964.66   $24,106.25
Apr 2045   $599.55   $479.02   $120.53   $113,085.19   $23,627.23
May 2045   $599.55   $481.41   $118.14   $113,203.33   $23,145.81
Jun 2045   $599.55   $483.82   $115.73   $113,319.06   $22,661.99
Jul 2045   $599.55   $486.24   $113.31   $113,432.37   $22,175.75
Aug 2045   $599.55   $488.67   $110.88   $113,543.25   $21,687.08
Sep 2045   $599.55   $491.12   $108.44   $113,651.68   $21,195.96
Oct 2045   $599.55   $493.57   $105.98   $113,757.66   $20,702.39
Nov 2045   $599.55   $496.04   $103.51   $113,861.17   $20,206.35
Dec 2045   $599.55   $498.52   $101.03   $113,962.21   $19,707.84
Jan 2046   $599.55   $501.01   $98.54   $114,060.74   $19,206.82
Feb 2046   $599.55   $503.52   $96.03   $114,156.78   $18,703.31
Mar 2046   $599.55   $506.03   $93.52   $114,250.30   $18,197.27
Apr 2046   $599.55   $508.56   $90.99   $114,341.28   $17,688.71
May 2046   $599.55   $511.11   $88.44   $114,429.72   $17,177.60
Jun 2046   $599.55   $513.66   $85.89   $114,515.61   $16,663.94
Jul 2046   $599.55   $516.23   $83.32   $114,598.93   $16,147.71
Aug 2046   $599.55   $518.81   $80.74   $114,679.67   $15,628.90
Sep 2046   $599.55   $521.41   $78.14   $114,757.82   $15,107.49
Oct 2046   $599.55   $524.01   $75.54   $114,833.35   $14,583.48
Nov 2046   $599.55   $526.63   $72.92   $114,906.27   $14,056.84
Dec 2046   $599.55   $529.27   $70.28   $114,976.55   $13,527.58
Jan 2047   $599.55   $531.91   $67.64   $115,044.19   $12,995.67
Feb 2047   $599.55   $534.57   $64.98   $115,109.17   $12,461.09
Mar 2047   $599.55   $537.25   $62.31   $115,171.48   $11,923.85
Apr 2047   $599.55   $539.93   $59.62   $115,231.10   $11,383.92
May 2047   $599.55   $542.63   $56.92   $115,288.02   $10,841.29
Jun 2047   $599.55   $545.34   $54.21   $115,342.22   $10,295.94
Jul 2047   $599.55   $548.07   $51.48   $115,393.70   $9,747.87
Aug 2047   $599.55   $550.81   $48.74   $115,442.44   $9,197.06
Sep 2047   $599.55   $553.57   $45.99   $115,488.43   $8,643.49
Oct 2047   $599.55   $556.33   $43.22   $115,531.64   $8,087.16
Nov 2047   $599.55   $559.11   $40.44   $115,572.08   $7,528.05
Dec 2047   $599.55   $561.91   $37.64   $115,609.72   $6,966.14
Jan 2048   $599.55   $564.72   $34.83   $115,644.55   $6,401.42
Feb 2048   $599.55   $567.54   $32.01   $115,676.56   $5,833.87
Mar 2048   $599.55   $570.38   $29.17   $115,705.73   $5,263.49
Apr 2048   $599.55   $573.23   $26.32   $115,732.04   $4,690.26
May 2048   $599.55   $576.10   $23.45   $115,755.50   $4,114.16
Jun 2048   $599.55   $578.98   $20.57   $115,776.07   $3,535.18
Jul 2048   $599.55   $581.87   $17.68   $115,793.74   $2,953.31
Aug 2048   $599.55   $584.78   $14.77   $115,808.51   $2,368.52
Sep 2048   $599.55   $587.71   $11.84   $115,820.35   $1,780.81
Oct 2048   $599.55   $590.65   $8.90   $115,829.26   $1,190.17
Nov 2048   $599.55   $593.60   $5.95   $115,835.21   $596.57
Dec 2048   $599.55   $596.57   $2.98   $115,838.19   $0.00

jojoguy

  • Stubble
  • **
  • Posts: 204
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #17 on: December 21, 2018, 03:55:16 AM »
We just about have enough in our 401K to pay our house off completely. If we withdraw we will be penalized with early withdraw fees and taxes at right under 20K. However, if we pay our house off we will save 35K in interest in the long run. Worth doing it?

Whats the interest rate?

If you say anything below 6%, then absolutely not.

If you say anything above 6%, then absolutely not but you need to refinance the mortgage...  ;)

I bought at a good time. 4.25% in 2012 :) I do make extra payments on it. Considering upping my game a little though. I`d like to have it paid off in the next 5 years or so. Just a few hundred dollars extra a month will make that happen.

One thing I am really digging about this forum is the advice I could probably get know where else. I may be a little na´ve about some things, but you guys have been awesome, knowledgeable, and prompt whenever I am in need of some advice.
« Last Edit: December 21, 2018, 04:04:48 AM by jojoguy »

TexasRunner

  • Pencil Stache
  • ****
  • Posts: 927
  • Age: 28
  • Location: Somewhere in Tejas
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #18 on: December 21, 2018, 08:36:23 AM »
We just about have enough in our 401K to pay our house off completely. If we withdraw we will be penalized with early withdraw fees and taxes at right under 20K. However, if we pay our house off we will save 35K in interest in the long run. Worth doing it?

Whats the interest rate?

If you say anything below 6%, then absolutely not.

If you say anything above 6%, then absolutely not but you need to refinance the mortgage...  ;)

I bought at a good time. 4.25% in 2012 :) I do make extra payments on it. Considering upping my game a little though. I`d like to have it paid off in the next 5 years or so. Just a few hundred dollars extra a month will make that happen.

One thing I am really digging about this forum is the advice I could probably get know where else. I may be a little na´ve about some things, but you guys have been awesome, knowledgeable, and prompt whenever I am in need of some advice.

At 4.25% on a 65,000 loan balance started in 2012 at 95,000 (Assuming), you will LOSE at least $174,000 in final Net Worth just over the life of the loan for paying off early.  Those extra few hundred dollars just aren't efficiently used on a fixed rate low interest loan... ESPECIALLY if you are not maxing out tax-advantaged accounts.

For me, thats about 13-15 months worth of work before/to-get-to FIRE...  Or another year my kids get older without me having 'full' time to commit to them.  Its not a small number by any means.

If you post up your exact loan numbers, I can run the math for your exact situation...  But don't pay early.  Put that into your tax-advantaged accounts instead.


I do believe there are a few cases where it could work, but a lot of factors would have to line up nicely.  For example, if you removed $100K funds from the 401K back in August/September at market highs, you would pay the $10K early withdrawal penalty + the taxes and retire your $100K new mortgage at 5-6% for example.  If over the next 5 years the market experiences negative or near negative returns and you DCA new contributions back into your 401k as the market approaches the previous high at which you withdrew the funds, there's a reasonable chance the overall effect on your 401K won't be drastically significant.

Except to do this you would have to know when that peak was, and what the future holds for the market.  If the only way it makes sense is for market timing, then it doesn't make sense.

No one here knew the 'top' was August/September of this year...  AND we don't have any idea where the 'bottom' is.  Market timing is not a winning strategy.

partdopy

  • Stubble
  • **
  • Posts: 126
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #19 on: December 21, 2018, 11:42:29 AM »

Boofinator

  • Handlebar Stache
  • *****
  • Posts: 1044
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #20 on: December 21, 2018, 01:19:51 PM »

At 4.25% on a 65,000 loan balance started in 2012 at 95,000 (Assuming), you will LOSE at least $174,000 in final Net Worth just over the life of the loan for paying off early.  Those extra few hundred dollars just aren't efficiently used on a fixed rate low interest loan... ESPECIALLY if you are not maxing out tax-advantaged accounts.


Your market timing and tax-advantaged advice has been spot on, but I feel it is a disservice to guarantee any kind of return from equities. Yes, history has served equities well, and especially investors over the last 10 years, however this does not equate to a guarantee of future returns.

An equally persuasive argument might read, "Nobody in the history of the U.S. stock market would have ever done better paying off the mortgage versus investing in equities at that interest rate over a 30-year time period. In fact, in the historically worst case an investor would have only been $174,000 richer by investing that money in equities over the 30-year time period." (Assuming this statement to be true.)

TexasRunner

  • Pencil Stache
  • ****
  • Posts: 927
  • Age: 28
  • Location: Somewhere in Tejas
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #21 on: December 21, 2018, 01:50:33 PM »
Your market timing and tax-advantaged advice has been spot on, but I feel it is a disservice to guarantee any kind of return from equities. Yes, history has served equities well, and especially investors over the last 10 years, however this does not equate to a guarantee of future returns.

An equally persuasive argument might read, "Nobody in the history of the U.S. stock market would have ever done better paying off the mortgage versus investing in equities at that interest rate over a 30-year time period. In fact, in the historically worst case an investor would have only been $174,000 richer by investing that money in equities over the 30-year time period." (Assuming this statement to be true.)

Except EVERYTHING we do in the FI world is based on averages.  The Trinity Study and the 4% rule is based on averages.  If you ever plan on FI, then you have to trust the averages.  However, you are correct.  I should have said "based on average returns you will come out $174,000 behind.  Best case scenario you would come out (about) $35,000 behind and worst case scenario you would have come out over $600,000 behind." 

It has become relevant to point out that the market has never lost to a 4.25% 30-year rate.  See the following graph:



Note how 30-Year rolling returns never gets below about 8%.

Boofinator

  • Handlebar Stache
  • *****
  • Posts: 1044
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #22 on: December 21, 2018, 04:03:08 PM »

Except EVERYTHING we do in the FI world is based on averages.  The Trinity Study and the 4% rule is based on averages.  If you ever plan on FI, then you have to trust the averages.


Safe withdrawal rates are not based on averages, but percentiles (typically 5th percentile).

Boofinator

  • Handlebar Stache
  • *****
  • Posts: 1044
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #23 on: December 21, 2018, 04:16:59 PM »

Except EVERYTHING we do in the FI world is based on averages.  The Trinity Study and the 4% rule is based on averages.  If you ever plan on FI, then you have to trust the averages.  However, you are correct.  I should have said "based on average returns you will come out $174,000 behind.  Best case scenario you would come out (about) $35,000 behind and worst case scenario you would have come out over $600,000 behind." 

It has become relevant to point out that the market has never lost to a 4.25% 30-year rate.  See the following graph:



Note how 30-Year rolling returns never gets below about 8%.

I'd be curious how you did your calculations. By my calculations, if you paid off the 4.25% mortgage with a lump sum versus investing in equities over the 30-year time period, best case you'd be 375,659 ahead, and worst case you'd be $817,855 behind. I used cFIREsim with default settings except 100% equities and a mortgage amortization calculator.

TexasRunner

  • Pencil Stache
  • ****
  • Posts: 927
  • Age: 28
  • Location: Somewhere in Tejas
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #24 on: December 21, 2018, 04:30:36 PM »
I'd be curious how you did your calculations. By my calculations, if you paid off the 4.25% mortgage with a lump sum versus investing in equities over the 30-year time period, best case you'd be 375,659 ahead, and worst case you'd be $817,855 behind. I used cFIREsim with default settings except 100% equities and a mortgage amortization calculator.

95000 Principle
4.25% rate
Ignoring PMI for now

CFireism Only on 30 year timeline with 95,000 Instant Deposit.
Best Investment = 1,596,247.00
Worst Investment = 207,776.00

Amort on 30 Year Timeline =
Best (Instant Payoff, Lost to interest) = 0$
Worst (Full Term Length Lost to Interest) =  $73,243.00

Best possible scenario with riding out the full mortgage = $1,596,247.00 MINUS $73,243.00 Interest = $1,523,004.00 better off not paying early
Worst possible scenario with riding out the full mortgage = $207,776.00 MINUS $73,243.00 Interest = $134,533.00 better off not paying early.

There is no historical example on a 30-year fixed rate loan where he would be better off paying it off in one lump sum over investing.  If there is, then give me the year...

Also cFireism's default includes spending...  Which doesn't apply here.  It is one form of gains vs another.

TexasRunner

  • Pencil Stache
  • ****
  • Posts: 927
  • Age: 28
  • Location: Somewhere in Tejas
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #25 on: December 21, 2018, 04:38:08 PM »
Safe withdrawal rates are not based on averages, but percentiles (typically 5th percentile).

Quote
The authors backtested a number of stock/bond mixes and withdrawal rates against market data compiled by Ibbotson Associates covering the period from 1925 to 1995. They examined payout periods from 15 to 30 years, and withdrawals that stayed level or increased with inflation. For level payouts, they stated that "If history is any guide for the future, then withdrawal rates of 3% and 4% are extremely unlikely to exhaust any portfolio of stocks and bonds during any of the payout periods shown in Table 1. In those cases, portfolio success seems close to being assured." For payouts increasing to keep pace with inflation, they stated that "withdrawal rates of 3% to 4% continue to produce high portfolio success rates for stock-dominated portfolios."

The 4% rule is based on average market returns which are defined by the likelyhood of failure as outlined by their study.  Nit-pick my sentax all you want but the point remains the same.  You need to trust market average returns in order to trust the 4% rule.

jojoguy

  • Stubble
  • **
  • Posts: 204
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #26 on: December 21, 2018, 04:46:58 PM »


At 4.25% on a 65,000 loan balance started in 2012 at 95,000 (Assuming), you will LOSE at least $174,000 in final Net Worth just over the life of the loan for paying off early.  Those extra few hundred dollars just aren't efficiently used on a fixed rate low interest loan... ESPECIALLY if you are not maxing out tax-advantaged accounts.

For me, thats about 13-15 months worth of work before/to-get-to FIRE...  Or another year my kids get older without me having 'full' time to commit to them.  Its not a small number by any means.

If you post up your exact loan numbers, I can run the math for your exact situation...  But don't pay early.  Put that into your tax-advantaged accounts instead.





Well, I was wrong my interest rate is 3.75% for a 30 year loan. The house price was 87,000 principal. We have it down to 70,000 principal now. We bought it in 2012. Is that all you need to know?

Brother Esau

  • Bristles
  • ***
  • Posts: 471
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #27 on: December 22, 2018, 07:05:21 AM »


At 4.25% on a 65,000 loan balance started in 2012 at 95,000 (Assuming), you will LOSE at least $174,000 in final Net Worth just over the life of the loan for paying off early.  Those extra few hundred dollars just aren't efficiently used on a fixed rate low interest loan... ESPECIALLY if you are not maxing out tax-advantaged accounts.

For me, thats about 13-15 months worth of work before/to-get-to FIRE...  Or another year my kids get older without me having 'full' time to commit to them.  Its not a small number by any means.

If you post up your exact loan numbers, I can run the math for your exact situation...  But don't pay early.  Put that into your tax-advantaged accounts instead.





Well, I was wrong my interest rate is 3.75% for a 30 year loan. The house price was 87,000 principal. We have it down to 70,000 principal now. We bought it in 2012. Is that all you need to know?

I would max out all tax deferred accounts (401k, HSA, 457b, etc) before sending another extra penny to the mortgage.

Dicey

  • Senior Mustachian
  • ********
  • Posts: 10851
  • Age: 61
  • Location: NorCal
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #28 on: December 22, 2018, 08:16:49 AM »
At 4.25% on a 65,000 loan balance started in 2012 at 95,000 (Assuming), you will LOSE at least $174,000 in final Net Worth just over the life of the loan for paying off early.  Those extra few hundred dollars just aren't efficiently used on a fixed rate low interest loan... ESPECIALLY if you are not maxing out tax-advantaged accounts.

For me, thats about 13-15 months worth of work before/to-get-to FIRE...  Or another year my kids get older without me having 'full' time to commit to them.  Its not a small number by any means.

If you post up your exact loan numbers, I can run the math for your exact situation...  But don't pay early.  Put that into your tax-advantaged accounts instead.
Well, I was wrong my interest rate is 3.75% for a 30 year loan. The house price was 87,000 principal. We have it down to 70,000 principal now. We bought it in 2012. Is that all you need to know?
My answer is still going to be HELL NO!, but just for grins and since you asked, how much do you have in all other investments? From the sound of it, you might be way behind, mortgage or no. You could be asking the completely wrong question.

Boofinator

  • Handlebar Stache
  • *****
  • Posts: 1044
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #29 on: December 22, 2018, 12:06:11 PM »
Safe withdrawal rates are not based on averages, but percentiles (typically 5th percentile).

Quote
The authors backtested a number of stock/bond mixes and withdrawal rates against market data compiled by Ibbotson Associates covering the period from 1925 to 1995. They examined payout periods from 15 to 30 years, and withdrawals that stayed level or increased with inflation. For level payouts, they stated that "If history is any guide for the future, then withdrawal rates of 3% and 4% are extremely unlikely to exhaust any portfolio of stocks and bonds during any of the payout periods shown in Table 1. In those cases, portfolio success seems close to being assured." For payouts increasing to keep pace with inflation, they stated that "withdrawal rates of 3% to 4% continue to produce high portfolio success rates for stock-dominated portfolios."

The 4% rule is based on average market returns which are defined by the likelyhood of failure as outlined by their study.  Nit-pick my sentax all you want but the point remains the same.  You need to trust market average returns in order to trust the 4% rule.

Sorry to be pedantic, but the 4% rule is not in any way based on average returns, unless you would like to redefine the word "average". This is a fundamental concept in understanding the 4% rule. If it was based on the average, it would be called something like the 9% rule (depending on stock/bond percentages).

https://en.wikipedia.org/wiki/Average
https://en.wikipedia.org/wiki/Percentile

jojoguy

  • Stubble
  • **
  • Posts: 204
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #30 on: December 22, 2018, 12:28:11 PM »
At 4.25% on a 65,000 loan balance started in 2012 at 95,000 (Assuming), you will LOSE at least $174,000 in final Net Worth just over the life of the loan for paying off early.  Those extra few hundred dollars just aren't efficiently used on a fixed rate low interest loan... ESPECIALLY if you are not maxing out tax-advantaged accounts.

For me, thats about 13-15 months worth of work before/to-get-to FIRE...  Or another year my kids get older without me having 'full' time to commit to them.  Its not a small number by any means.

If you post up your exact loan numbers, I can run the math for your exact situation...  But don't pay early.  Put that into your tax-advantaged accounts instead.
Well, I was wrong my interest rate is 3.75% for a 30 year loan. The house price was 87,000 principal. We have it down to 70,000 principal now. We bought it in 2012. Is that all you need to know?
My answer is still going to be HELL NO!, but just for grins and since you asked, how much do you have in all other investments? From the sound of it, you might be way behind, mortgage or no. You could be asking the completely wrong question.

I`m actually doing very well recently. I`m saving around 65-70% of our net pay and our monthly budget is around $1750 for all expenses. I was just curious after looking at a pay off your mortgage early calculator and saw how much less interest I would pay if paying it early. You guys(especially TexasRunner) are very convincing. Actually, I wasn`t sure about anything. Just more curious about asking about it.

Boofinator

  • Handlebar Stache
  • *****
  • Posts: 1044
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #31 on: December 22, 2018, 01:17:31 PM »
I'd be curious how you did your calculations. By my calculations, if you paid off the 4.25% mortgage with a lump sum versus investing in equities over the 30-year time period, best case you'd be 375,659 ahead, and worst case you'd be $817,855 behind. I used cFIREsim with default settings except 100% equities and a mortgage amortization calculator.

95000 Principle
4.25% rate
Ignoring PMI for now

CFireism Only on 30 year timeline with 95,000 Instant Deposit.
Best Investment = 1,596,247.00
Worst Investment = 207,776.00

Amort on 30 Year Timeline =
Best (Instant Payoff, Lost to interest) = 0$
Worst (Full Term Length Lost to Interest) =  $73,243.00

Best possible scenario with riding out the full mortgage = $1,596,247.00 MINUS $73,243.00 Interest = $1,523,004.00 better off not paying early
Worst possible scenario with riding out the full mortgage = $207,776.00 MINUS $73,243.00 Interest = $134,533.00 better off not paying early.

There is no historical example on a 30-year fixed rate loan where he would be better off paying it off in one lump sum over investing.  If there is, then give me the year...

Also cFireism's default includes spending...  Which doesn't apply here.  It is one form of gains vs another.

I don't think your math is on target. Mortgage spending occurs over time, so you can't just compare the amount of money at the end to the total mortgage interest spent.

Try this instead: For a $95k mortgage, you have an annual payment of roughly $5,608 (4.25% rate). Plug this into annual non-inflation adjusted spending. Now put in a starting portfolio value of $95k. This will be compared to zero portfolio and no payments (ending portfolio value = 0). As mentioned, I chose 100% equities portfolio. Doing this, worst-case with investing you're down $357k (cycle start year 1929) and best case you're up by $777k (cycle start year 1942). (My previous numbers were for a $100k mortgage, hence the slight difference.)

Dicey

  • Senior Mustachian
  • ********
  • Posts: 10851
  • Age: 61
  • Location: NorCal
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #32 on: December 22, 2018, 03:02:14 PM »
At 4.25% on a 65,000 loan balance started in 2012 at 95,000 (Assuming), you will LOSE at least $174,000 in final Net Worth just over the life of the loan for paying off early.  Those extra few hundred dollars just aren't efficiently used on a fixed rate low interest loan... ESPECIALLY if you are not maxing out tax-advantaged accounts.

For me, thats about 13-15 months worth of work before/to-get-to FIRE...  Or another year my kids get older without me having 'full' time to commit to them.  Its not a small number by any means.

If you post up your exact loan numbers, I can run the math for your exact situation...  But don't pay early.  Put that into your tax-advantaged accounts instead.
Well, I was wrong my interest rate is 3.75% for a 30 year loan. The house price was 87,000 principal. We have it down to 70,000 principal now. We bought it in 2012. Is that all you need to know?
My answer is still going to be HELL NO!, but just for grins and since you asked, how much do you have in all other investments? From the sound of it, you might be way behind, mortgage or no. You could be asking the completely wrong question.

I`m actually doing very well recently. I`m saving around 65-70% of our net pay and our monthly budget is around $1750 for all expenses. I was just curious after looking at a pay off your mortgage early calculator and saw how much less interest I would pay if paying it early. You guys(especially TexasRunner) are very convincing. Actually, I wasn`t sure about anything. Just more curious about asking about it.
I wasn't looking for percentages, i was looking for actual dollar amounts, because that's how we roll here. Specifically, how much you have in investments vs. the mortgage balance. Although I can tell you right now, my answer won't change. I'm more concerned that you have undersaved for your age bracket.

jojoguy

  • Stubble
  • **
  • Posts: 204
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #33 on: December 23, 2018, 03:09:59 AM »
Oh, I`m sure I under saved(Age 38), and I wasn`t questioning you changing your opinion. I`ve already said that I was asking out of curiousity and/or whatif and took all of your advice. I just wanted to know what would be the opinion of the board.


Anyway, I`ve only been on this path for a few months now. We have 70K in our 401k and just about 15K in other savings. Mortgage is $70,300 in principle at 3.75%. What bugs me is how I never upped my amount(company matches 6%) in 401k until the last two years, and I have been with my company for 19 years.

libertarian4321

  • Handlebar Stache
  • *****
  • Posts: 1372
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #34 on: December 23, 2018, 03:43:35 AM »
The math is actually against you ever paying off your mortgage. . . You can find basically unlimited materials here to prove this.

Though it remains a near religious topic here, so its bound to get people going

I don't agree that "the math" is against "ever paying off the mortgage."  And as an engineer/MBA type, I'm better than most at math.

It varies a lot depending on the individual's circumstances.  This is one of those issues where people get all worked up over an issue that is unlikely to make a big difference in their financial future, one way or the other.

I paid off my mortgage very early and came out ahead because of it (though my gain was a trivial percentage of my net worth- it was effectively a non-factor).

If people ask my advice, I tell them to do whatever makes them feel better, because their choice is unlikely to have a major effect on their wealth either way.

That said, I would NEVER cash out a 401K or 403B just to pay off a house.

TomTX

  • Magnum Stache
  • ******
  • Posts: 3585
  • Location: Texas
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #35 on: December 23, 2018, 07:53:59 AM »
We just about have enough in our 401K to pay our house off completely. If we withdraw we will be penalized with early withdraw fees and taxes at right under 20K. However, if we pay our house off we will save 35K in interest in the long run. Worth doing it?

Hell no.

If your interest rate is shitty enough, refinance.

TomTX

  • Magnum Stache
  • ******
  • Posts: 3585
  • Location: Texas
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #36 on: December 23, 2018, 08:08:10 AM »
The 4% rule is based on average market returns which are defined by the likelyhood of failure as outlined by their study.  Nit-pick my sentax all you want but the point remains the same.  You need to trust market average returns in order to trust the 4% rule.

You have a fundamental misunderstanding of the 4% rule. If it depended on average market returns, it would be something like the 9% rule.

The 4% rule already factors in the likelihood of significantly below-average returns. Depending on how you set it up, typically there would be around a 5% chance of portfolio failure if you mechanically took your 4% + inflation adjustment.

If you're willing to recognize the super obvious signs the portfolio is failing (Hey, the market crashed 50% last year and didn't recover at all! I should do something!) and within the next few years take some mild action like cutting expenses or taking a part time job, you can eliminate that 5% chance of failure.

For some reason, a lot of people seem to prefer to work an additional 4-5 years to get down to a 3% SWR instead of going with 4% SWR and taking a small risk of needing to do part-time work for 2-3 years.

SnackDog

  • Handlebar Stache
  • *****
  • Posts: 1284
  • Location: Latin America
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #37 on: December 23, 2018, 02:04:35 PM »
Mortgages can be emotional things for some people. For certain people it can be better to pay it off, even if it is not financially the optimal solution. If one can afford the hit and the tradeoff lets you sleep better, then go for it.

I rarely see those who proclaim the financial benefits of paying it slowly later remortgage to max borrowing for investing.

TomTX

  • Magnum Stache
  • ******
  • Posts: 3585
  • Location: Texas
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #38 on: December 23, 2018, 04:50:54 PM »
I rarely see those who proclaim the financial benefits of paying it slowly later remortgage to max borrowing for investing.

Fair point. I do note that there is some upfront cost to getting a new 30 year mortgage.

If we get a significant market drop (40-50% range, still discussing a firm number with MrsTX) and rates are reasonable, I plan to take out some equity to put it in the market.

jojoguy

  • Stubble
  • **
  • Posts: 204
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #39 on: December 23, 2018, 05:28:24 PM »
Mortgages can be emotional things for some people. For certain people it can be better to pay it off, even if it is not financially the optimal solution. If one can afford the hit and the tradeoff lets you sleep better, then go for it.

I rarely see those who proclaim the financial benefits of paying it slowly later remortgage to max borrowing for investing.


Ah, thankyou. Definitely can be emotional. Seeing that bill every month makes you ponder the "what if" scenarios. As I said earlier, our expenses every month is roughly around $1750. Seeing those expenses drop a third creates the emotional temptation of just paying it all off at once. Because of all of the good advice, I won`t be doing it. In fact, I may lower the expense to bare minimum.

TexasRunner

  • Pencil Stache
  • ****
  • Posts: 927
  • Age: 28
  • Location: Somewhere in Tejas
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #40 on: December 26, 2018, 08:21:21 AM »

I don't think your math is on target. Mortgage spending occurs over time, so you can't just compare the amount of money at the end to the total mortgage interest spent.

Try this instead: For a $95k mortgage, you have an annual payment of roughly $5,608 (4.25% rate). Plug this into annual non-inflation adjusted spending. Now put in a starting portfolio value of $95k. This will be compared to zero portfolio and no payments (ending portfolio value = 0). As mentioned, I chose 100% equities portfolio. Doing this, worst-case with investing you're down $357k (cycle start year 1929) and best case you're up by $777k (cycle start year 1942). (My previous numbers were for a $100k mortgage, hence the slight difference.)

This should be inflation-adjusted...  Why on earth are you not running it inflation adjusted?  Mortgage payment dollar amounts do not increase when inflation increases.  Also, you should be running this as a 30-year timeline.

I did lump-sum amounts because the comparison here would be paying it off in full vs keeping that full amount invested and paying the mortgage off slowly.

Attached is a month-by-month calculator.  I have updated it with his exact numbers from reply #26 above.



Well, I was wrong my interest rate is 3.75% for a 30 year loan. The house price was 87,000 principal. We have it down to 70,000 principal now. We bought it in 2012. Is that all you need to know?

Yes.  I am assuming a worst-case PMI of 1.5% in my calcs.  See attached sheet.

Considering you bought in 2012, and are at 70k now, I have adjusted the spreadsheet to show you reducing your investments and paying it off in one lump in the 72nd month.

To get here, you have averaged an extra $80.00 per month (if it were each and every month).  I have the investment interest at 11.18% per dqydj.com, marginal tax rate at 12%, mortgage interest at 3.75%, PMI at $109.00 per month, Term length at 30-years, and your typical extra payment at 80.

You would lose 561,960.00 not including the 401k 10% tax, by lump sum paying it now vs investing (based on average market returns).  Feel free to manipulate the calculator however you want, but you can see it is simply running a side-by-side timeline of paying it off early vs investing and how much each catagory ends up with in contribution to net worth.



seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4979
  • Age: 34
  • Location: Seattle, WA
    • My blog
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #41 on: December 26, 2018, 09:13:34 AM »
I rarely see those who proclaim the financial benefits of paying it slowly later remortgage to max borrowing for investing.

*raises hand*

We aggressively paid off the mortgage on our first house. After getting into the forum and running some numbers, we discovered that we would have come out ahead by over $100k if we had invested in VTSAX instead of extra mortgage payments. When we upgraded to a bigger house to raise our family, we took half the equity from our old house and put it into the market, using the rest as a down payment for a pretty sizable mortgage at 4.25%. No regrets so far. We're getting to the point where zero-risk savings bonds are earning an appreciable percentage of our mortgage rate, and interest rates are still rising. The stock market hit a brief bump in the road but I don't expect it to flatline forever.

Boofinator

  • Handlebar Stache
  • *****
  • Posts: 1044
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #42 on: December 26, 2018, 02:38:41 PM »

I don't think your math is on target. Mortgage spending occurs over time, so you can't just compare the amount of money at the end to the total mortgage interest spent.

Try this instead: For a $95k mortgage, you have an annual payment of roughly $5,608 (4.25% rate). Plug this into annual non-inflation adjusted spending. Now put in a starting portfolio value of $95k. This will be compared to zero portfolio and no payments (ending portfolio value = 0). As mentioned, I chose 100% equities portfolio. Doing this, worst-case with investing you're down $357k (cycle start year 1929) and best case you're up by $777k (cycle start year 1942). (My previous numbers were for a $100k mortgage, hence the slight difference.)

This should be inflation-adjusted...  Why on earth are you not running it inflation adjusted?  Mortgage payment dollar amounts do not increase when inflation increases.  Also, you should be running this as a 30-year timeline.

I did lump-sum amounts because the comparison here would be paying it off in full vs keeping that full amount invested and paying the mortgage off slowly.

Attached is a month-by-month calculator.  I have updated it with his exact numbers from reply #26 above.

I think you have it backwards regarding inflation-adjusted vs. non-inflation-adjusted payments. Mortgage payments are not adjusted for inflation, unlike a lot of other spending categories. This is one of the touted "benefits" for holding your mortgage (though I somewhat disagree (it depends on circumstances), but that is for another thread).

There is nothing inherently wrong with your spreadsheet math, except that it completely ignores any variance in market returns. When you look at the variance (say, using cFIREsim), it is clearly possible to lose money by investing rather than paying off the mortgage. This is not to say that "expected returns" aren't going to be higher, it is to say that you are not guaranteed to make money by investing rather than paying off the mortgage. (I place "expected returns" in quotes, because it is based off the assumption that future average returns will match historical average returns.)

TexasRunner

  • Pencil Stache
  • ****
  • Posts: 927
  • Age: 28
  • Location: Somewhere in Tejas
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #43 on: December 26, 2018, 03:28:01 PM »
There is nothing inherently wrong with your spreadsheet math, except that it completely ignores any variance in market returns. When you look at the variance (say, using cFIREsim), it is clearly possible to lose money by investing rather than paying off the mortgage. This is not to say that "expected returns" aren't going to be higher, it is to say that you are not guaranteed to make money by investing rather than paying off the mortgage. (I place "expected returns" in quotes, because it is based off the assumption that future average returns will match historical average returns.)

So you know what the market is going to do for the next year?  What about the next five?  What about the next thirty?

We know basically nothing about the next year, and likely very little about longer ranges.  It isn't until we look at twenty five years or more that we can confidently say that it is going to be 'up' and not 'down'.  The spreadsheet is there.  Feel free to change the average stock market returns (with dividends reinvested mind you) to whatever magical crystal ball number you know we are going to get as a return over the life of jojoguy's remaining mortgage, and let him know what to do.  UNTIL you can do that, stick with the long-proven average returns and see if the math makes sense one way or another, or is near break-even.

Personally, if it was near break even (like within .5% or so) then I would say max out tax-free accounts and then pay down the mortgage but it isn't break even.  It isn't even close to break even.  And, the original question was to pull out of a tax-free account (that he can't put back in to once those tax-years are gone), paying a 10% penalty on the top, to reduce his long-term tax free earnings in order to pay off a safe, fixed, non-callable, low interest, collaterally secured and insured loan.  The fact that he asked the question of whether this is a good idea or not (sorry jojoguy) is proof that this forum is not doing a good enough job to educate about the value of fixed low-rate mortgages and that they are not an evil to be avoided at any costs.  This shouldn't even be a discussion, but here we are having it because the "No-mortgage-at-any-cost Zombies" don't do a good enough job policing their own ranks.  That is the reason this is the 42nd reply on what should have been a two or three reply thread, because not enough of us are willing to present the math based evidence against paying off a low rate fixed interest mortgage early, and too many are willing to credit the "feel-good" side of the equation without acknowledging that it has a cost in the hundreds of thousands to millions of dollars range.  Had he done this and not asked (or even worse simply posted that he was going to 'kill the mortgage' and been congratulated for it), he literally could have wiped years off of his FIRE date that he can't fix because you can't put the 401k dollars back into pandora's box.

tl:dr-  Market timing is bullshit.  If you are going to base your choice to pay off the mortgage on it, why even be on this forum.

TexasRunner

  • Pencil Stache
  • ****
  • Posts: 927
  • Age: 28
  • Location: Somewhere in Tejas
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #44 on: December 26, 2018, 03:45:17 PM »
Commenting to add:  @jojoguy - I'm really glad you asked this and didn't go through with it.  Please don't take any of this as offense to you, because none is intended.  You are here trying to learn (as we all are) and had I heard better voices a few years ago, I could have lost 30 grand in the most recent downturn instead of 8 grand....  :)   Thats one reason I care quite a bit about it, I made the mistake of putting as much as I could into our mortgage and as a result have a risky financial situation despite 45k of net worth (and growing).  It can take months to years to 'fix' a mistake like pulling out of tax-free accounts (which I have done) while also paying extra on a low-rate mortgage (which I have also done).  I'm very glad you asked, If I had asked more (and better) questions, I would have been better off today for it.

As such, please note that any discussion on here is in search of accurate truth, not OP-shaming or anything like that.

Kuddos to you for knowing what to ask and when.

Dicey

  • Senior Mustachian
  • ********
  • Posts: 10851
  • Age: 61
  • Location: NorCal
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #45 on: December 26, 2018, 08:26:02 PM »
OMG, @TexasRunner...What you said! Thank you! I am so sick of being villianized by certsin smug people because all I want folks to do is learn before they leap.

jojoguy

  • Stubble
  • **
  • Posts: 204
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #46 on: December 28, 2018, 04:29:08 AM »
Commenting to add:  @jojoguy - I'm really glad you asked this and didn't go through with it.  Please don't take any of this as offense to you, because none is intended.  You are here trying to learn (as we all are) and had I heard better voices a few years ago, I could have lost 30 grand in the most recent downturn instead of 8 grand....  :)   Thats one reason I care quite a bit about it, I made the mistake of putting as much as I could into our mortgage and as a result have a risky financial situation despite 45k of net worth (and growing).  It can take months to years to 'fix' a mistake like pulling out of tax-free accounts (which I have done) while also paying extra on a low-rate mortgage (which I have also done).  I'm very glad you asked, If I had asked more (and better) questions, I would have been better off today for it.

As such, please note that any discussion on here is in search of accurate truth, not OP-shaming or anything like that.

Kuddos to you for knowing what to ask and when.


Dude, you are awesome! I`m glad that you guys haven`t been giving me a simple yes or no on the reasons why. I have learned a lot by what you have posted. I know you have said put more in 401k, HSA, and other nontaxable accounts, but should I just up the extra into our brokerage/index funds instead? Reason being that our company does matching 6% for our 401k and we already do that. Would more in that be better or would index funds be better? Haven`t opened an HSA account yet. My company won`t do openings for that for another year I think. I know I could open one elsewhere, but I would rather deal with it directly from our paychecks for the simplicity.

TomTX

  • Magnum Stache
  • ******
  • Posts: 3585
  • Location: Texas
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #47 on: December 28, 2018, 05:16:59 AM »
Commenting to add:  @jojoguy - I'm really glad you asked this and didn't go through with it.  Please don't take any of this as offense to you, because none is intended.  You are here trying to learn (as we all are) and had I heard better voices a few years ago, I could have lost 30 grand in the most recent downturn instead of 8 grand....  :)   Thats one reason I care quite a bit about it, I made the mistake of putting as much as I could into our mortgage and as a result have a risky financial situation despite 45k of net worth (and growing).  It can take months to years to 'fix' a mistake like pulling out of tax-free accounts (which I have done) while also paying extra on a low-rate mortgage (which I have also done).  I'm very glad you asked, If I had asked more (and better) questions, I would have been better off today for it.

As such, please note that any discussion on here is in search of accurate truth, not OP-shaming or anything like that.

Kuddos to you for knowing what to ask and when.


Dude, you are awesome! I`m glad that you guys haven`t been giving me a simple yes or no on the reasons why. I have learned a lot by what you have posted. I know you have said put more in 401k, HSA, and other nontaxable accounts, but should I just up the extra into our brokerage/index funds instead? Reason being that our company does matching 6% for our 401k and we already do that. Would more in that be better or would index funds be better? Haven`t opened an HSA account yet. My company won`t do openings for that for another year I think. I know I could open one elsewhere, but I would rather deal with it directly from our paychecks for the simplicity.

You would rather pay a couple thousand dollars in taxes for "simplicity" of not opening an account somewhere else for your HSA?

We've got other threads where people are thrilled to open a bank account and wrangle direct deposits for a couple hundred.

TexasRunner

  • Pencil Stache
  • ****
  • Posts: 927
  • Age: 28
  • Location: Somewhere in Tejas
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #48 on: December 28, 2018, 12:47:30 PM »
Commenting to add:  @jojoguy - I'm really glad you asked this and didn't go through with it.  Please don't take any of this as offense to you, because none is intended.  You are here trying to learn (as we all are) and had I heard better voices a few years ago, I could have lost 30 grand in the most recent downturn instead of 8 grand....  :)   Thats one reason I care quite a bit about it, I made the mistake of putting as much as I could into our mortgage and as a result have a risky financial situation despite 45k of net worth (and growing).  It can take months to years to 'fix' a mistake like pulling out of tax-free accounts (which I have done) while also paying extra on a low-rate mortgage (which I have also done).  I'm very glad you asked, If I had asked more (and better) questions, I would have been better off today for it.

As such, please note that any discussion on here is in search of accurate truth, not OP-shaming or anything like that.

Kuddos to you for knowing what to ask and when.


Dude, you are awesome! I`m glad that you guys haven`t been giving me a simple yes or no on the reasons why. I have learned a lot by what you have posted. I know you have said put more in 401k, HSA, and other nontaxable accounts, but should I just up the extra into our brokerage/index funds instead? Reason being that our company does matching 6% for our 401k and we already do that. Would more in that be better or would index funds be better? Haven`t opened an HSA account yet. My company won`t do openings for that for another year I think. I know I could open one elsewhere, but I would rather deal with it directly from our paychecks for the simplicity.

I would say unless the fees for your employer 401k are above (about) 1.5% or so (most everyone has some sort of index), max that out up to the 18k a year maximum.  (Also, I believe the max has just increased, I'll have to check).  Your employer will take care of it, just increase your 401k percentage to whatever amount will make you hit (or near) 18k a year.

Its because you get tax free growth in a 401k, making it more powerful than low fee funds in a taxable account (typically).  However, once you have hit the company match, you could open and fund a IRA for you and the spouse at Vanguard to get more tax free dollars with low cost funds (admiral shares typically run 0.05% as opposed to 1.00% in crappy 401ks (like mine) ).  Once you max that out for you and the spouse (if you have one), then you can go back to filling up the 401k to the max.  All of that needs to happen before you pay extra on the house.  Once you have maxed out IRAs ($11,000 if you're married, $5,500 if you're single) and 401k ($19,000 yourself), you have permission to pay extra on the house (lol).  Even then its not optimal but understandable.

You may want to do a case study, but if I were you my investment order would be as follows:

0. Establish at least a 6 month emergency fund (invest in CD's or a high interest yeild checking account so you get something for it)     
0b. Pay off any debts with interest rates ~12% or more above the current 10-year Treasury note yield (aka high-interest hair on fire debt)     
1. Contribute to your 401k up to any company match (as you said, 6% of your annual earnings)         
2. Pay off any debts with interest rates ~5% or more above the current 10-year Treasury note yield (currently 2.736%, so effectively 7.75% or so).           
3. Max Health Savings Account (HSA) if eligible.
4. Max Traditional IRA for your (and the spouse if you have one).  I would recommend Vanguard.
5. Max 401k (if 401k fees are lower than about 1.5%)                 
6. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield (as in 5.75% or higher, your mortgage is still under this).
6b. OPTIONAL bu not OPTIMAL - Pay off mortgage at 3.75% as long as you have a 12-month emergency fund and are ok with the cost of prepaying.           
7. Invest in a taxable account and/or fund a 529 with any extra.   

The reason I am ok with 6b above is that (usually) by the time someone gets to that point, they aren't throwing thousands of dollars extra into the mortgage.  When people put the mortgage in number 1 to 3, they have thousands of dollars worth of savings (literally a firehouse of cash) that they are spraying onto a campfire-mortgage instead of the massive burning inferno of investment opportunity.  As you can see from the calculators above, throwing an extra $100 a month towards the mortgage only gets you 100k or so "behind" after thirty years.  If you have been maxing out tax-free accounts before the mortgage, then the 100k really doesn't matter in the grand scheme of things.  But if you are prepaying that 19,000 worth of 401k and the 11,000 worth of IRA into the mortgage instead of tax-free accounts, you will lose out on hundreds of thousands of dollars by the time you reach FIRE.  AND FIRE will have been delayed by years.  By maximizing investing in (at least) the tax free accounts first, you set yourself up for successfully FIRE'ing long before you give yourself a 'loss' for prepaying the mortgage.

For example:  Only maximizing the tax-free accounts (401k and IRAs) each year is $30,000 per year (and likely to go up with new tax laws).  After 15 years, $30,000 each year becomes well over a cool 1 million.  Congrats! At a typical spending level, you FIRE'd just off the tax-advantaged accounts over 15 years. If you spend 6 years "killing the mortgage" first, now you are looking to FIRE in 22 years or so, because you lost out on that long-term compounding up front.

Hope that makes sense.


(Edit to correct 401k limits)
« Last Edit: December 28, 2018, 02:56:40 PM by TexasRunner »

TexasRunner

  • Pencil Stache
  • ****
  • Posts: 927
  • Age: 28
  • Location: Somewhere in Tejas
Re: Is taking the penalty to pay house off with our 401k worth it for us?
« Reply #49 on: December 28, 2018, 12:53:14 PM »
Also, I would recommend you read the following links as they help explain the math on why some things are better than others (typically):

Why 401k even with poor funds is better than taxable: https://forum.mrmoneymustache.com/investor-alley/using-a-high-fee-401k/msg670156/#msg670156

Why tIRA instead of Roth IRA (depends on your current tax level, you may need to flip):  https://www.madfientist.com/traditional-ira-vs-roth-ira/

Why you should tax-optimize vs just invest in a taxable account:  https://www.madfientist.com/guinea-pig-year-1/
(pay attention to the 401k match and 401k max bit).