Newbie Q: How to start cash flow before retirement?

[Stachebound]

Hi guys!

This may be a silly question, but I'm trying to figure out how to start the passive income before retirement? The only thing I can see is rental property once the mortgage is paid down or index funds.

Right now, we have $250k in our 401k with 17.5% invested annually and we are paying down a $368k mortgage ($750-800k market value). We are 42 and 45.

We won't be receiving any income before 59 1/2 from the 401k and we live in our house, which we don't plan on moving for 15-20 yrs.

I am a new reader, so haven't made it through all the posts yet.  Is our best course of action to buy a rental property? Do we invest in index funds as well? Since we are trying to pay off our mortgage in the next 7-10 yrs, we are throwing all extra money there. Our savings rate is about 50-55%.

Sorry if this sounds like an obvious question, but I am having difficulty with this next (first?) step.

Thanks!

[unpolloloco]

Look into 72(t) distributions from the 401(k)

[The Bearded Bank Builder]

Generally, you want to first max out your retirement accounts since they are tax-advantaged, then make outside investments. This could include index funds, rental property, Lending Club (here is the first post from MMM on this: http://www.mrmoneymustache.com/2012/09/24/the-lending-club-experiment/ ), REITS. Of course paying down your mortgage early is an investment too. With low interest rates it isn't necessarily the best return you could get on your money, but still is certainly still a good use of your extra cash.

[Johnny Aloha]

If you have $400k equity, you should consider downsizing the house and investing in some assets that produce income.  Rental property, index funds, dividend stocks, lending club, whatever. 

Or stop aggressive mortgage paydown and divert that money for cash flow investments.