Save more in 401k or payoff Variable interest Home Equity Loan

[gary]

Hello to all,
I have the following situation:

I'm 54 yrs old. Salary $92K.  My home's first mortgage is paid off, but 
I have a $90k Home Equity Loan at 4% variable interest.  The interest hasn't changed in years.
I'm on a schedule to pay it off in 38 months $2500/mo.  This is the most I can pay after many expense reductions.
I'm currently saving about $230/mo (3% of my salary)  towards my 401k. (our company doesn't match).

Since it's a variable loan, I'm worried the interest may go up. I'm fortunate it hasn't gone up in 3-4 years.
I choose not to refinance into a first mortgage because I would then have to pay $3600/year in wind insurance, which I'm not paying now.

My question:  Should I reduce the loan payment and save more in the 401k?

Any other ideas?

Thanks a great deal, Gary

[Cheddar Stacker]

Very tough to answer without a lot more detail. How much do you have saved for retirement? Are you married? When do you plan to retire?

I think my first step if I was in your situation would be to think about moving. If you are in an area that requires $3,600/year in wind insurance premiums, even if you aren't currently paying for this insurance, this implies you will very likely incur major damage to your home sometime soon. A move could also eliminate your Home Equity Loan if you decide to downsize, rent, or move to a lower cost of living area.

Without any more detail than what you gave, if I were you I would max my 401K at $17,500, then max my IRA at $5,500. These will both reduce your taxes, so instead of "losing" $23K of cash flow, you would lose $15-19K in annual cash for monthly expenses and debt payments (you can absorb this since you are currently paying $30K/year toward the loan). At worst your mortgage rate might jump to 6%, but that would take a crazy turnaround in the economy in which case your investments would likely be making more money anyway so you'll still come out ahead.

[gary]

Thanks Cheddar! I appreciate your ideas.  So what you're saying is, instead of paying $30k towards the Home Equity Loan, put $23k towards the 401k and IRA which is really about 17k after taxes.  With the difference (30k - 17k = 13k) pay down the Home equity?   

[Cheddar Stacker]

Yep. That would then take 7 years or so to pay off the loan, but at that point you would have contributions of $23K * 7 = $161K in your 401K/Ira, plus any balance you already have, plus investment gains during that time.

Oh, and also, consider moving in case you missed that last time. Where do you live that it requires that kind of wind coverage? Miami or somewhere in the middle of the hurricane sweet spot?

[gary]

Thx.. Yes, I live in Palm Beach county.  It would be difficult to move as I have nice job with which I'm very happy.  Since I have the 1st Mortgage paid off, I don't need to pay Wind (Hurricane) insurance.  I've owned the house 27 years and have been through several hurricanes and never have had damage (knock on wood).

I will definitely have to consider your idea. It makes good sense. .Regarding the IRA , that's a Roth IRA or a regular IRA in addition to the 401k?

Thanks again.

[Cheddar Stacker]

Regular = Traditional IRA, or T.I.R.A./TIRA. Without any other knowledge of your circumstances, I would advise TIRA, not Roth, but other facts might change my mind.

If you put it in a Roth, that $17K net number you mentioned would have to jump up to $18.5K since Roth is after tax.

[gary]

Thanks Cheddar. You've been a great help!! 

[gary]

Cheddar. Sorry to bother once again.. Since I'm 54, there'a catchup provision on the 401ks which allows 17,500 plus an additional 5,500 to be allowed for the 401k.  Did you include this in your recommendations?? Thanks so much.

[Cheddar Stacker]

Nope. If you can fit all the catch-up provisions into your budget it would give you the biggest tax benefit and allow you to save very quickly.

2013 401K = 17,500 + 5,500
2013 IRA = 5,500 + 1,000

A quick internet search will get you the 2014 limits, but I have a fact sheet here that says they're the same in 2014.

If you haven't already, read this: http://www.madfientist.com/retire-even-earlier/ and click around and read all the other links as well. This will give you a solid education and support the things I suggested.

[gary]

Thx Cheddar!!!