Author Topic: Save more or pay off house?  (Read 3207 times)

MoonLiteNite

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Save more or pay off house?
« on: July 18, 2016, 03:40:58 AM »
Short question:
What should i do first?
Pay off house, or add more into personal taxable retirement account?


Long question with details:
29 years old, no family, no kids, never will happen. Goal is to retire on around 20-30k/year  by age of 45, maybe sooner :)

gross 30-80k a year (thanks mr over and double time; but i would say average of just 45k)
20% - taxes/healthcare
20% - roth 401k
20% - into personal retirement account
~% - maxing out IRA
15% - ESPP (which when sold will be put into personal retirement account. This ESPP has already double in value averaging all my buyins)
So basically 80% of my income goes to retirement of sorts.
20% onto eating out and food (yeah i need to cut back on eating out....)
~% - house bill, utilities
No debt, other than the house.

I have a personal loan with my father with a 3.75% rate for 100k. I still owe around 60k. Loan has been active for 1 year with min payments of 1k a month. (figured it would be better to pay him a car's payment in interest than the bank!)
Should i just keep throwing money into my personal retirement account? Pay off my dad? Cut back on the 401k and IRA?

Currently i believe i should cut back on the 401k up to the matching point of my company, and then pay off my house.
But now that i have found this site and some others, i am wanting to ask rather than just wing this early retirement thing like i have been doing for 10 years on my own :)



nereo

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Re: Save more or pay off house?
« Reply #1 on: July 18, 2016, 05:50:43 AM »
Short questions:
Should i just keep throwing money into my personal retirement account? Pay off my dad? Cut back on the 401k and IRA?

Currently i believe i should cut back on the 401k up to the matching point of my company, and then pay off my house.

To start, I would definitely NOT cut back on the 401(k) unless you have a solid reason for doing so.  There are huge advantages to contributing to such tax-deferred accounts.

Regarding paying back your dad at an accelerated rate - that's a personal call and involves lots of unknowns, like family values, your father's financial stability, whether the loan is causing friction in your relationship, etc.

Whether to pay off a mortgage at sub 4% rates or invest more is a very hotly debated topic here.  Mathematically it's usually in your favor to hold the mortgage for several reasons, including the assumption that you will earn better returns in the market and that a mortgage can be a great inflation hedge (particularly over several decades).  But read through this thread and others to decide where you fall.

Final note:  with your current savings rate I see no reason why you shouldn't reach your goal of "FI" before you turn 45 (probably a good deal earlier).  More specifics are needed of course (like absolute $ amounts you have invested currently) but right now I think you are on a solid track.
« Last Edit: July 18, 2016, 12:19:48 PM by nereo »

Catbert

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Re: Save more or pay off house?
« Reply #2 on: July 18, 2016, 11:56:24 AM »
What's your Dad's situation?  Does he need/want the money back as soon as reasonable?  Is he just going to put it back in the bank earning less interest?  Do you have siblings or other family members where this loan may cause friction?  Does owing your Dad this money lead him to belief he has a say in your life?

I general paying back a bank for a mortgage would be relativity low on my priority list.  But owning money to family members would move it way up the list.

rugorak

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Re: Save more or pay off house?
« Reply #3 on: July 18, 2016, 01:32:23 PM »
Why are you doing a roth 401k instead of a traditional 401k?
See this - http://www.madfientist.com/how-to-access-retirement-funds-early/
As you can see the only time a Roth 401k makes sense is compared to a fully taxable account. Otherwise any of the other traditional solutions do better.

If you were doing a traditional 401k I would say max that out first. So $18k a year.

Then personally I would pay dad back first with any extra because family. Math wise it is hard to say since you didn't give the rate on the mortgage. But unless it is significantly higher I would still pay dad back myself. For all the reasons others listed.

MoonLiteNite

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Re: Save more or pay off house?
« Reply #4 on: July 18, 2016, 02:08:51 PM »
To start, I would definitely NOT cut back on the 401(k) unless you have a solid reason for doing so.  There are huge advantages to contributing to such tax-deferred accounts.

Regarding paying back your dad at an accelerated rate - that's a personal call and involves lots of unknowns, like family values, your father's financial stability, whether the loan is causing friction in your relationship, etc.

The reason to cut back on 401k is i could use that money for house/personal savings. Can't really retire early with all my money in a 401k.

My father is set, no money issues, he works for fun and earns more than myself and he personally does not invest due to tinfoil hat reasons.

What's your Dad's situation?  Does he need/want the money back as soon as reasonable?  Is he just going to put it back in the bank earning less interest?  Do you have siblings or other family members where this loan may cause friction?  Does owing your Dad this money lead him to belief he has a say in your life?

I general paying back a bank for a mortgage would be relativity low on my priority list.  But owning money to family members would move it way up the list.

As stated above, no issues with my dad. He is basically a bank, he  is more than happy to collect the money back over the 10 year agreed upon time.

Why are you doing a roth 401k instead of a traditional 401k?
See this - http://www.madfientist.com/how-to-access-retirement-funds-early/
As you can see the only time a Roth 401k makes sense is compared to a fully taxable account. Otherwise any of the other traditional solutions do better.

If you were doing a traditional 401k I would say max that out first. So $18k a year.

Then personally I would pay dad back first with any extra because family. Math wise it is hard to say since you didn't give the rate on the mortgage. But unless it is significantly higher I would still pay dad back myself. For all the reasons others listed.

I started doing this early retirement thing on my own and never really looked into it online. At the time i figured a roth would be better, since i was only making less then 20k a year in taxable income and had planned on retiring with around 40k a year. Clearly not being 16 years old anymore i see my math was off, and also since then i have doubled my income. I haven't really looked into switching things around. I will be checking out your link.

« Last Edit: July 18, 2016, 02:26:24 PM by MoonLiteNite »

JLee

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Re: Save more or pay off house?
« Reply #5 on: July 18, 2016, 03:09:50 PM »
To start, I would definitely NOT cut back on the 401(k) unless you have a solid reason for doing so.  There are huge advantages to contributing to such tax-deferred accounts.

Regarding paying back your dad at an accelerated rate - that's a personal call and involves lots of unknowns, like family values, your father's financial stability, whether the loan is causing friction in your relationship, etc.

The reason to cut back on 401k is i could use that money for house/personal savings. Can't really retire early with all my money in a 401k.

My father is set, no money issues, he works for fun and earns more than myself and he personally does not invest due to tinfoil hat reasons.

What's your Dad's situation?  Does he need/want the money back as soon as reasonable?  Is he just going to put it back in the bank earning less interest?  Do you have siblings or other family members where this loan may cause friction?  Does owing your Dad this money lead him to belief he has a say in your life?

I general paying back a bank for a mortgage would be relativity low on my priority list.  But owning money to family members would move it way up the list.

As stated above, no issues with my dad. He is basically a bank, he  is more than happy to collect the money back over the 10 year agreed upon time.

Why are you doing a roth 401k instead of a traditional 401k?
See this - http://www.madfientist.com/how-to-access-retirement-funds-early/
As you can see the only time a Roth 401k makes sense is compared to a fully taxable account. Otherwise any of the other traditional solutions do better.

If you were doing a traditional 401k I would say max that out first. So $18k a year.

Then personally I would pay dad back first with any extra because family. Math wise it is hard to say since you didn't give the rate on the mortgage. But unless it is significantly higher I would still pay dad back myself. For all the reasons others listed.

I started doing this early retirement thing on my own and never really looked into it online. At the time i figured a roth would be better, since i was only making less then 20k a year in taxable income and had planned on retiring with around 40k a year. Clearly not being 16 years old anymore i see my math was off, and also since then i have doubled my income. I haven't really looked into switching things around. I will be checking out your link.

http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

nereo

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Re: Save more or pay off house?
« Reply #6 on: July 18, 2016, 03:30:11 PM »
To start, I would definitely NOT cut back on the 401(k) unless you have a solid reason for doing so.  There are huge advantages to contributing to such tax-deferred accounts.

The reason to cut back on 401k is i could use that money for house/personal savings. Can't really retire early with all my money in a 401k.


JLee beat me to it, but it's worth repeating that you absolutely can access money in a 401(k) before you are 59.5 penalty free.  It's even easier to access that money if it is in a ROTH 401(k), though as rugorak points out, its rare for a ROTh 401(k) to be the better choice.

To understand why investing as much as you can in your 401(k) can be so rewarding vs investing in taxable accounts, read this and this and this.

retiringearly

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Re: Save more or pay off house?
« Reply #7 on: July 18, 2016, 03:39:12 PM »
Are you able to deduct the interest you pay to your dad on your taxes?

If not, I would get a real mortgage. 

nereo

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Re: Save more or pay off house?
« Reply #8 on: July 18, 2016, 03:42:31 PM »
Are you able to deduct the interest you pay to your dad on your taxes?

If not, I would get a real mortgage.

It is unlikely the OP would benefit from the mortgage interest deduction given his/her current salary and contributions towards tax deferred accounts - especially if the ROTH 401(k) were switched to a regular 401(k).

MoonLiteNite

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Re: Save more or pay off house?
« Reply #9 on: July 21, 2016, 03:47:14 AM »
Are you able to deduct the interest you pay to your dad on your taxes?

If not, I would get a real mortgage.

It is unlikely the OP would benefit from the mortgage interest deduction given his/her current salary and contributions towards tax deferred accounts - especially if the ROTH 401(k) were switched to a regular 401(k).

We did the math for our taxes and it is better just to keep it under the table, he would basically have to pay tax on his gains and blah blah blah.


MoonLiteNite

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Re: Save more or pay off house?
« Reply #10 on: July 21, 2016, 03:50:04 AM »

http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

Golden links thanks.
I have just recently started to read posts. A few years ago i found few, but not until last week did i start to read them all. Hadn't gotten to these two just yet, but i'll be skipping ahead!

To start, I would definitely NOT cut back on the 401(k) unless you have a solid reason for doing so.  There are huge advantages to contributing to such tax-deferred accounts.

The reason to cut back on 401k is i could use that money for house/personal savings. Can't really retire early with all my money in a 401k.


JLee beat me to it, but it's worth repeating that you absolutely can access money in a 401(k) before you are 59.5 penalty free.  It's even easier to access that money if it is in a ROTH 401(k), though as rugorak points out, its rare for a ROTh 401(k) to be the better choice.

To understand why investing as much as you can in your 401(k) can be so rewarding vs investing in taxable accounts, read this and this and this.

Yes, that would be with the ladder method? From what i have read you can do it in like 15mins, just have to plan out 5 years into the future, and know how much you will need for the 5 years into the future. I  personally do not know if i like that idea.... I believe in the end i will put very little into my 401k once it gets large enough and switch over to a taxable account only.

nereo

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Re: Save more or pay off house?
« Reply #11 on: July 21, 2016, 06:36:09 AM »

http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

Golden links thanks.
I have just recently started to read posts. A few years ago i found few, but not until last week did i start to read them all. Hadn't gotten to these two just yet, but i'll be skipping ahead!

To start, I would definitely NOT cut back on the 401(k) unless you have a solid reason for doing so.  There are huge advantages to contributing to such tax-deferred accounts.

The reason to cut back on 401k is i could use that money for house/personal savings. Can't really retire early with all my money in a 401k.


JLee beat me to it, but it's worth repeating that you absolutely can access money in a 401(k) before you are 59.5 penalty free.  It's even easier to access that money if it is in a ROTH 401(k), though as rugorak points out, its rare for a ROTh 401(k) to be the better choice.

To understand why investing as much as you can in your 401(k) can be so rewarding vs investing in taxable accounts, read this and this and this.

Yes, that would be with the ladder method? From what i have read you can do it in like 15mins, just have to plan out 5 years into the future, and know how much you will need for the 5 years into the future. I  personally do not know if i like that idea.... I believe in the end i will put very little into my 401k once it gets large enough and switch over to a taxable account only.

Did you read the links? 
To answer your questions and assumptions;
1) no - you are not necessarily restricted to the ladder method.  There is also the 72(t) method, and both can be used in tandem.

2) the reason that you invest in a 401(k) is that you wind up with a crap-ton more money in the future vs investing it in a taxable account.  That's because it goes in pre-tax and is allowed to grow tax free.  Suppose you are in the 25% tax bracket and you have $1k/mo you can invest.  If you put that in your 401(k) it would be $1,000... but if you pay taxes on it and then invest it in your personal brokerage fund it will be $750.  This happens month after month (and then compound interest takes over), and the difference in your ending balance can be >>$100k over 20 years.

3) You don't have to know how much $ you will need in 5 years to effectively use this strategy. It's still smart to have some money in taxable accounts.  When you ladder, you can make a rough estimate based on your expected spending, but if you over estimate that money isn't wasted - it continues to sit in your ROTH account growing tax free.  If you under-estimate, you still get a large chunk of that year's spending coming tax-free.  For example, many people will just ladder a portion of their IRA each year - say $20k, based on their current-year's tax burden. Down the road they know they can take some, all  or none of that money from their ROTH based on both their current financial needs and their tax burden at that time.

In short, I can't emphasize enough the differences you will pay in taxes if you forgo your 401(k) and IRA accounts and choose instead to simply invest everything in a taxable brokerage account.  Then again, maybe I should stop trying... better those tax dollars come from someone else, right ;-)

Kapiira

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Re: Save more or pay off house?
« Reply #12 on: July 21, 2016, 10:24:51 AM »