Author Topic: More $ towards mortgage pay off or retirment?  (Read 5110 times)

jscott2135

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More $ towards mortgage pay off or retirment?
« on: February 26, 2014, 12:57:26 PM »
Hey guys I have a question for you financially minded folks and I would like a financial wellness checkup.  Would be curious how you all would change our plan, or any suggestions to improve our current plan.  We are not Mustachians yet but we are working towards it.

DH 39, Me 32, step daughter is 13 – we pay 950/mo in child support for her, and two sons under 3.
Retirement Savings (118k in IRA, and 14k in 401k, 4k in an index fund) We are now putting (with company contributions) 21% towards our retirement starting next month.
We have no debt other than our home (bought for 296k in Jan 2013 and currently owe 232k...with the current plan it will be paid off in 19 years)

Each month we have $700 dollars left over in our budget and I am uncertain of if we should be throwing that money at our home because its debt or if it would be much better utilized by putting it in an index fund or some sort of retirement fund.

I feel like dh has a great paying job, and a secure position. And I think we are short on retirement savings and should build that up as quickly as possible.  In 6 years child support will stop and we can throw that $945/mo at our mortgage and kill it off in a few years.  DH has no plans to retire until he hits 58.  He actually really enjoys his job and we live in the perfect area for us (the North West) so we spend all our down time enjoying the natural beauty of the area. I currently stay at home with the kids and we are generally very happy.  But I hate debt, I hate it like it’s a cancer so I am torn …where should we be throwing our money?
« Last Edit: February 26, 2014, 07:25:32 PM by jscott2135 »

jscott2135

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Re: More $ towards mortgage pay off or retirment?
« Reply #1 on: February 26, 2014, 01:08:47 PM »
Here is our monthly budget if it helps shed some light

Mortgage    $1,678.00
Mortgage Principal/Retirement??? - $700.00
HOA Fee   $29.50
Auto billed to Credit Card  (Netflix 7.99/Internet 29.99/Cell Phone 45.00/Garbage 34.30)   $117.28
Natural Gas – Equal Pay Program - $58.00
Auto Ins  for 2 vehicles - $108.79
Sewer/Water/Elec) – Equal Pay Program   $146.00
Sinking Fund - Annual Meat Purchase   $75.00
Sinking Fund - Health Ins Deductible   $127.00
Sinking Fund - Annual 6 months of Co-op - $55.00
Sinking Fund - Gifts   $50.00
Sinking Fund - Furniture - $50.00
Sinking Fund - Home Maintenance - $100.00
Sinking Fund – 3 annual trips to see step daughter   $170.00
Sinking Fund - Vehicle Maintenance - $150.00
Sinking Fund – Clothes (I shop at thrift stores for me and the kids but dh dresses nice for work and works out a lot) - $110.00
Destiny's 529 - $55.00
Ash's 529   - $30.00
Cannon's 529 - $30.00
Misc Savings (Braces/Swimming Lessons/Spanish Immersion classes for the kids) - $210.00
Entertainment (Date Night/DH Fishing/etc) - $76.00
Hair Cut- $27.00
Food/Toiletries/Dog Food- $678.00
Gas- $286.00

Gin1984

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Re: More $ towards mortgage pay off or retirment?
« Reply #2 on: February 26, 2014, 01:26:15 PM »
I'd stop all 529 savings until your 401ks are funded. 

irononmaiden

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Re: More $ towards mortgage pay off or retirment?
« Reply #3 on: February 26, 2014, 02:44:29 PM »
What kind of mortgage do you have? What's the interest rate?

frugaldrummer

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Re: More $ towards mortgage pay off or retirment?
« Reply #4 on: February 26, 2014, 02:59:43 PM »
What does your emergency fund look like?

Since you have just one breadwinner, I'd suggest saving enough money to cover 6 months of living expenses before you pay down the mortgage.  That money could be saved mostly in investments, or if your income is low enough to qualify, put it in ROTH IRAs.   H's job may be stable but there's always the possibility of illness or accident (or, god forbid, affairs) or his company could go under - whatever.  It's just a very good idea to have that cushion saved somewhere that you can access it - if you put it into your mortgage, you can't get at it easily.

nereo

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Re: More $ towards mortgage pay off or retirment?
« Reply #5 on: February 26, 2014, 03:03:37 PM »
It depends on what your mortgage rate. 
If you have a good mortgage rate (which I'd say is anything under 5%.  Certainly anything under 4.5%) I'd put all of your extra savings towards funding your 401(k) right now.  You'll get the tax bonus (probably a 15-20% "instant return") and you're very likely to earn more than you'd save paying down your house sooner.
As it is you said you were paying down your mortgage at an accelerated rate.

I'd even go so far as to say transfer the extra mortgage payments you are making into 401(k) and savings contributions. 


jscott2135

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Re: More $ towards mortgage pay off or retirment?
« Reply #6 on: February 26, 2014, 07:29:32 PM »
Oh geeze, I didn't even realize there were responses to this post, I'm just learning how to navigate this forum.  We have a 30 yr fixed mortgage at 3.5%.  DH makes 120k a year. We also have 3-4 months (20k) expenses stashed away as an a emergency fund.

bikebum

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Re: More $ towards mortgage pay off or retirment?
« Reply #7 on: February 26, 2014, 07:47:37 PM »
I think the standard advice is to max out tax-advantaged accounts first, then either put more towards mortgage or a taxable account. There is a great debate about paying off a low rate mortgage or investing more in a taxable account, which makes me think one is not better than the other. Do what makes you feel good.

I have a 30-year fixed rate mortgage @ 3.375% and I decided to stay at minimum payments and invest more, after maxing out my tax-advantaged options.

jscott2135

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Re: More $ towards mortgage pay off or retirment?
« Reply #8 on: February 26, 2014, 09:17:51 PM »
bikebum - I don't want to sound like a total tool, but what do you mean by tax advantaged accounts?  401k? IRA etc?

Cheddar Stacker

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Re: More $ towards mortgage pay off or retirment?
« Reply #9 on: February 26, 2014, 10:11:45 PM »
bikebum - I don't want to sound like a total tool, but what do you mean by tax advantaged accounts?  401k? IRA etc?

Yes, 401K, Traditional IRA (TIRA), Roth IRA, HSA, 529's etc. As bukebum said, there is a great debate about this. I am in the camp that says invest, invest, invest. Mathematically it makes sense at 3.5% mortgage interest to pay it as slowly as you possibly can and invest any extra funds since most people believe in the long run you will earn at least 5% on average with investments (historical returns have been 8% ish going back a long, long way).

The main argument for paying the mortgage is pshycological. Since you stated you hate debt you might lean that way, and that's fine, just know that chances are you will likely end up with a lower net worth in 20-30 years if you pay the mortgage instead of investing.

Based on the data you provided I think you should max out your husband's 401K ($17,500, but it will really only cost about $12-13K due to tax savings), then max a TIRA for you ($6,500, which is $4,500-5,000 net of taxes). If you still have monthly savings after that keep doing the 529's. Your husband can't do a TIRA, and neither of you can do a ROTH unless you do the backdoor Roth. If you still have savings after all that, either buy index funds, pay extra on the mortgage, or maybe 50/50 at that point.

Here are a few other threads where this is discussed at great length:
http://www.mrmoneymustache.com/forum/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/msg171953/#msg171953
http://www.mrmoneymustache.com/forum/welcome-to-the-forum/argument-against-paying-of-mortgage/
http://www.mrmoneymustache.com/forum/throw-down-the-gauntlet/mortgage-payoff-club!!/msg228667/#msg228667

bikebum

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Re: More $ towards mortgage pay off or retirment?
« Reply #10 on: February 26, 2014, 10:21:55 PM »
bikebum - I don't want to sound like a total tool, but what do you mean by tax advantaged accounts?  401k? IRA etc?

Yes, that's right. I think they're called tax-advantaged because they reduce your taxable income.

Here's a resource that may help with your original question: http://www.bogleheads.org/wiki/Paying_down_loans_versus_investing

I learned a ton from the Bogleheads Wiki.                                                                                                                                                                                                                                                                                                                   

jscott2135

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Re: More $ towards mortgage pay off or retirment?
« Reply #11 on: February 27, 2014, 10:47:27 AM »
Cheddar Stacker  - That makes absolute sense.  And while I do hate debt, I'm too much of a numbers person to pass up on good math.  The long term outcome/net worth will trump any debt dislike I have.  And since I feel like we screwed up by not investing much early on I think its the smart thing to focus on that.  One final question.  I know there is a cap on 401k contributions...but that doesn't include employer contributions correct?  We could contribute the max 17,500 and dh's employer could still pony up their 6% on top of that?

Cheddar Stacker

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Re: More $ towards mortgage pay off or retirment?
« Reply #12 on: February 27, 2014, 10:53:10 AM »
Cheddar Stacker  - That makes absolute sense.  And while I do hate debt, I'm too much of a numbers person to pass up on good math.  The long term outcome/net worth will trump any debt dislike I have.  And since I feel like we screwed up by not investing much early on I think its the smart thing to focus on that.  One final question.  I know there is a cap on 401k contributions...but that doesn't include employer contributions correct?  We could contribute the max 17,500 and dh's employer could still pony up their 6% on top of that?

Correct. Any employer contribution is on top of the individual limit.

If you didn't already, read the link bikebum posted, particularly the "non-financial" argument section. There's some good stuff in there. The only other warning I'll add about investing instead of paying down the mortgage is the interest savings is a guaranteed return, while the investment return is completely unknown. If you can get over that variable and just follow the hypothetical math argument, you should come out ahead.

Good luck!

Weedy Acres

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Re: More $ towards mortgage pay off or retirment?
« Reply #13 on: February 27, 2014, 11:50:01 AM »
Since you hate debt, there's certainly a case for paying off your house more quickly than 20 years.  My sister and her husband took a middle-ground approach:  after maxing out all pre-tax savings vehicles available, they put 50% of their extra into investments and 50% towards the mortgage.

That approach might be a good one for your ambivalence.

Cheddar Stacker

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Re: More $ towards mortgage pay off or retirment?
« Reply #14 on: February 27, 2014, 03:10:52 PM »
Since you hate debt, there's certainly a case for paying off your house more quickly than 20 years.  My sister and her husband took a middle-ground approach:  after maxing out all pre-tax savings vehicles available, they put 50% of their extra into investments and 50% towards the mortgage.

That approach might be a good one for your ambivalence.

What Weedy recommends is much like a 50/50 stock/bond allocation, and it's a smart middle ground. One fixed rate return and one variable (hopefully higher) return on your money. Certainly an approach worth considering. If you want to be more aggressive, consider 60/40 or 75/25 with the higher % going to the investments and the lower going to the mortgage (Bonds).

CompoundingRocks

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how about a tactic to both cut mortgage AND save for rainy day?
« Reply #15 on: February 28, 2014, 03:52:08 AM »
In australia, you can get loans with a "redraw" or "offset" facility

so ie you still put money to "pay off the mortgage" but unlike a normal loan where that money is irretrievable
 - with the above facilities, you can take your money out for whatever you need

of course you still have to pay the interest

hope that helps

Gray Matter

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Re: More $ towards mortgage pay off or retirment?
« Reply #16 on: February 28, 2014, 04:36:33 AM »
I agree that what makes the most financial sense is to put the extra money in tax-advantaged retirement accounts rather than pay off the mortgage.  If psychologically, you hate having debt, you could consider doing some "mental accounting" using buckets.  For example, you could put the money into a Roth IRA and earmark it your "mortgage payoff account," knowing that at some point you could take the amount you contributed to it out and pay off the mortgage.  Chances are, just having that account there and watching the balance grow to cover the mortgage would be enough.

(There is no immediate tax savings on money put into a Roth IRA, as the contributions are made with post-tax dollars.  The distributions, however, are tax-free if used for retirement.  But one nice feature of a Roth is you can take out the money you contributed prior to retirement without penalty.)

MustachianAccountant

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Re: how about a tactic to both cut mortgage AND save for rainy day?
« Reply #17 on: February 28, 2014, 07:58:09 AM »
In australia, you can get loans with a "redraw" or "offset" facility

so ie you still put money to "pay off the mortgage" but unlike a normal loan where that money is irretrievable
 - with the above facilities, you can take your money out for whatever you need

of course you still have to pay the interest

hope that helps

This sounds a lot like a Home Equity Loan or a Home Equity Line of Credit.

Cheddar Stacker

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Re: how about a tactic to both cut mortgage AND save for rainy day?
« Reply #18 on: February 28, 2014, 08:28:16 AM »
In australia, you can get loans with a "redraw" or "offset" facility

so ie you still put money to "pay off the mortgage" but unlike a normal loan where that money is irretrievable
 - with the above facilities, you can take your money out for whatever you need

of course you still have to pay the interest

hope that helps

This sounds a lot like a Home Equity Loan or a Home Equity Line of Credit.

I attended a group sales pitch about 6-7 years ago where someone was introducing a product like this into the U.S. They said the product was popular internationally, and it essentially linked your checking account with your mortgage. The net liability at the end of each day was charged the interest rate on your mortgage, so your cash float from your paycheck saved you interest expense prior to you spending it on groceries or whatever. I'm not sure if they sold many of these mortgages or if they're even still in business, but it seemed like a great idea to me.