Author Topic: Pay Off House or Invest- With a Guaranteed Pension  (Read 1611 times)

Brewslit

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Pay Off House or Invest- With a Guaranteed Pension
« on: April 06, 2017, 05:58:00 AM »
Hello All,
I know this question has been hashed and rehashed a million times, but I'm a snowflake and my situation is unique.  At least I think so!  Current situation: I am in the military as an active duty guardsman in my hometown- kind of the best of both worlds as I get a lot of the benefits of being active duty without the moving around, i.e. "PCS."  My wife and I bought a new (to us) home this past summer but fortunately got it at foreclosure so I have about 75K in equity and a mortgage balance of about 195K.  My wife stays home, but has the ability to significantly raise her income whenever she wants as she's a registered dental hygienist.  I am probably going to retire in about 2023 (6 years from now) and my goal is to have the option NOT TO HAVE TO GO BACK TO WORK if I don't want to.  I will be 48 at that point.  We are pretty frugal, though not quite Mustachian yet, just not big spenders by nature.  So I'm not submitting for a case study, but am wondering about one specific area.  I currently contribute the max to the TSP and my wife has a small 401K.  I don't plan on touching either of them until I'm at least 59.5 at which point there should be around 750K.  I don't have any outside IRAs or Taxable accounts at this point.  My anticipated pension should be somewhere around 30-40K/year.  So hypothetically let's say I have an extra 2 grand per month with which to either invest or pay off the mortgage, or a combination of both.  If investing I would fully fund Vanguard Roth IRA's for both of us and then put the extra 900 per month into VTSX as a taxable account.  The mortgage is at 3.5% and costs about $900/month. I know the math says to invest as I should get more than a 3.5% return, but I also keep hearing how overvalued the market is right now and also struggle with the "peace of mind" aspect.  More income in retirement, or less expenses, which is better?  Let me know if any additional details would be helpful.  Thank you all in advance.

boarder42

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Re: Pay Off House or Invest- With a Guaranteed Pension
« Reply #1 on: April 06, 2017, 07:33:21 AM »
you should invest it.  The market is at all time highs more often than its not, don't try to time the markets.  In the very least all tax advantaged accounts should be maxed before you consider paying down the mortgage at all. 

frugaliknowit

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Re: Pay Off House or Invest- With a Guaranteed Pension
« Reply #2 on: April 06, 2017, 07:57:57 AM »
At 36, I would normally say, "...the mortgage, fagetaboudit!", however, you did say:  "... I am probably going to retire in about 2023 (6 years from now) and my goal is to have the option NOT TO HAVE TO GO BACK TO WORK if I don't want to.  I will be 48 at that point..."   If you are sure of this, then I think you need to be more conservative in your investing, as the likelihood of getting whipsawed over a 6 year period is high.  If you are retiring in 6 years from now you are a "pre-retiree" and shouldn't be "putting the pedal to the medal..." 

At the same time, if you are prepaying the mortgage and don't finish burying it in 6 years, your cashflow position will not improve (you'll still have to make payments...).

Maybe the money you were thinking of "throwing at the house" should be invested conservatively, as in a balaced fund.  In six years, you then have your options open (you could throw the balaned fund at the house, or use the income to subsidize your pension...).  You should be able to earn ~6% in a balanced fund.

The problem with throwing 2 grand per month at VTSX or similar is that in 6 years, it may be (temporarily) tanked...

Maybe re-think this idea of "having the option to not work at 48..."?

boarder42

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Re: Pay Off House or Invest- With a Guaranteed Pension
« Reply #3 on: April 06, 2017, 08:02:13 AM »
nords should weigh in here really. 

but your reasoning for not investing is a poor reason and not something you should really ever think about b/c its market timing.


Nords

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Re: Pay Off House or Invest- With a Guaranteed Pension
« Reply #4 on: April 08, 2017, 07:05:03 PM »
Hello All,
I know this question has been hashed and rehashed a million times, but I'm a snowflake and my situation is unique.  At least I think so!  Current situation: I am in the military as an active duty guardsman in my hometown- kind of the best of both worlds as I get a lot of the benefits of being active duty without the moving around, i.e. "PCS."  My wife and I bought a new (to us) home this past summer but fortunately got it at foreclosure so I have about 75K in equity and a mortgage balance of about 195K.  My wife stays home, but has the ability to significantly raise her income whenever she wants as she's a registered dental hygienist.  I am probably going to retire in about 2023 (6 years from now) and my goal is to have the option NOT TO HAVE TO GO BACK TO WORK if I don't want to.  I will be 48 at that point.  We are pretty frugal, though not quite Mustachian yet, just not big spenders by nature.  So I'm not submitting for a case study, but am wondering about one specific area.  I currently contribute the max to the TSP and my wife has a small 401K.  I don't plan on touching either of them until I'm at least 59.5 at which point there should be around 750K.  I don't have any outside IRAs or Taxable accounts at this point.  My anticipated pension should be somewhere around 30-40K/year.  So hypothetically let's say I have an extra 2 grand per month with which to either invest or pay off the mortgage, or a combination of both.  If investing I would fully fund Vanguard Roth IRA's for both of us and then put the extra 900 per month into VTSX as a taxable account.  The mortgage is at 3.5% and costs about $900/month. I know the math says to invest as I should get more than a 3.5% return, but I also keep hearing how overvalued the market is right now and also struggle with the "peace of mind" aspect.  More income in retirement, or less expenses, which is better?  Let me know if any additional details would be helpful.  Thank you all in advance.
I don't know about unique, but this is the "personal" part of personal finance.

The simple answer, with no further analysis required:  if you have an extra $2000/month then put $1000 toward the mortgage and $1000 to investments.  Either way you win.

The behavioral financial psychology of sleeping soundly at night is a valid basis for deciding to pay off the mortgage.  Many homeowners abhor debt and are passionate about paying it off.  However you can also get more comfortable with "good" debt by educating yourself about investing (not about the stock markets but rather about investing in them), about asset allocation, about having a plan, and about knowing that you're going to win in the long term.

The stock market has been overvalued since WWII ended.  Even in 1973-74, 2001-02, and 2008-09 there was plenty of hysterical reporting that the market was going to drop another 20%. 

Yet in the 30-year rolling periods of the last 75 years, the stock market has always outperformed a 3.5% mortgage.  Even today you can invest in a exchange-traded fund (iShares Select Dividend, DVY) that pays a dividend of at least 3.5%.  (Now you don't have to care about the stock market's value.)  Better yet, your military pension is an inflation-fighting annuity from the world's most reliable source that's helping you pay off a loan which is being eroded by inflation.

The best answer for questions about an overvalued stock market is to figure out your asset allocation and then put the appropriate amount of long-term funds into your mortgage or into your IRAs/taxable accounts.  How much money do you want to have in the stock markets?  How much equity do you want to have in your home?  If you haven't already read the Bogleheads Wiki, then start here and browse until you see something you haven't already learned:
https://www.bogleheads.org/wiki/Main_Page

For a quick & easy estimate of your military pension in today's dollars, take your retirement rank (at 20 years of service) in today's pay tables.  Multiply that monthly base pay by about 95% to conservatively determine the approximate value of your High Three pension.
https://www.dfas.mil/militarymembers/payentitlements/military-pay-charts.html
Then compare that to your current expenses and figure out what you'd like to do with the extra money. 

I have an active-duty pension and I've decided to keep a mortgage for the rest of my life.  Since 2004 I've compared a 5.375% 30-year mortgage to our investments in a small-cap value ETF.  Despite the Great Recession, after nearly 13 years we're earning an after-tax compound average of over 8%/year.  We "lost money" from Sep 2009 - Sep 2011 (average annual yields of 2%-5%) but that's recovered and should stay around 8% for the next 17 years.

Better yet, this month we're refinancing our home in a new 30-year loan at 3.25%.  We'll invest the cash into our asset allocation in the stock market and know that we'll handily outperform over 30 years.  We might even outperform again within 13 years.