Author Topic: SI3K: pay off house or add to retirement accounts?  (Read 861 times)

clairebonk

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SI3K: pay off house or add to retirement accounts?
« on: July 20, 2020, 12:45:38 PM »
I will stop working in 8 years. I will try to be FI by that point, and if I'm not, my partner can worry about our family finances for the next decade (he's okay with that).

Our savings rate is 40%. Our total home mortgage is 4 times my annual salary, with 3% interest. We have 6 times my annual salary in investments (mostly low cost index funds). We only need 1/3 my annual salary to live off, once we have the house paid off.

I would love to have the house paid off when I retire in 8 years. My partner, a dedicated mustachian, is not worried about paying off the house by then. Since our interest rate is so low, it's better to use the money for investments. He's right.

But there's something so freeing about not having a mortgage! It will be really hard for me to make the leap of retiring early with a huge monthly mortgage payment. I'd rather pay off the house so my partner can do a fun side hustle to pay our meager bills, and let the 'stche grow on its own without touching it. Otherwise, I feel in 8 years we'll have to start drawing the 'stache to pay our bills. I feel like I'm bringing emotion into this decision instead of just looking at the numbers (we can draw the 'stache to pay the mortgage and we'll still end up with more money in the end because 3% mortgage rate vs ~7% growth....)

Any advice?

Laura33

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Re: SI3K: pay off house or add to retirement accounts?
« Reply #1 on: July 20, 2020, 12:56:34 PM »
There is a difference between the accumulation years and the drawdown years:  risk tolerance.  When you are working and earning and all that, you can afford to take some risks on investment gains, because you can continue working if you run into a crash.  When you retire, you are somewhat more vulnerable to downside risk, because you do not have the steady cash influx to cushion a drop in asset value, and the best way to do that is to have lower expenses.  Therefore, I am a proponent of having a mortgage when working and having it paid off in retirement. 

K_in_the_kitchen

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Re: SI3K: pay off house or add to retirement accounts?
« Reply #2 on: July 20, 2020, 06:25:27 PM »
We recently paid off our low interest mortgage, because we're at the point where we've achieved FI (we don't include home equity in our numbers) and we wanted the FIRE decision to be as easy as a 2 week notice for DH.  Our FIRE plan includes a paid off mortgage.  DH may OMY for several years, but we also want him to be able to give 2 weeks notice at any point.  We didn't want the money for the mortgage payoff tied up in the market and potentially have to sell during a low period, and there's no sense in putting it in a CD.  But in our case we also wanted to be 100% debt free, period.  It's amazing how incredible it feels.

MonkeyJenga

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Re: SI3K: pay off house or add to retirement accounts?
« Reply #3 on: July 20, 2020, 08:07:41 PM »
How huge is this mortgage? Can you downsize?

TheFrenchCat

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Re: SI3K: pay off house or add to retirement accounts?
« Reply #4 on: July 20, 2020, 09:53:48 PM »
Can you do some of both?  Pay a bit extra on the mortgage to decrease the principle, but put most into investments?  Since your partner is ok with working, this doesn't seem as risky to me. 

Goldielocks

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Re: SI3K: pay off house or add to retirement accounts?
« Reply #5 on: July 20, 2020, 11:33:13 PM »
Create an investment that is med to low risk, that is earmarked your "house fund".  Then add to it and grow it to cover your mortgage 100%.  When you retire, you can decide if you keep this fund invested or use it to pay off your mortgage at one go.


clairebonk

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Re: SI3K: pay off house or add to retirement accounts?
« Reply #6 on: July 21, 2020, 12:49:19 PM »
Thanks for all your comments, stories, and suggestions.

The risk tolerance is the factor I wasn't able to express succinctly, thanks for putting a name to it.

I like the idea of a separate investment named "house fund", in addition to adding to our other investment accounts. I think this is the route we'll take.

We live in HCOL, and have 1100sq ft for family of 5. We bought a fixer upper and home has increased 30% in value. Renting is not cheaper. Market has gone up too much to trade for something smaller (and honestly I don't want to). We grow a lot of our fruit and veg and are adjacent to a big park. If we stay in HCOL, this is the right place to do it. I am open to moving to L/MCOL but have not decided where.

Taran Wanderer

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Re: SI3K: pay off house or add to retirement accounts?
« Reply #7 on: July 25, 2020, 07:39:42 PM »
Create an investment that is med to low risk, that is earmarked your "house fund".  Then add to it and grow it to cover your mortgage 100%.  When you retire, you can decide if you keep this fund invested or use it to pay off your mortgage at one go.

I love this advice, and I recently committed to going this route.  But I have to say, when I look at our list of accounts and the only one (besides credit cards that are paid in full each month) that is red is the mortgage, I have a very strong urge to pay that thing down as quickly as possible.  I guess that's a mustachian people problem...

rmorris50

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Re: SI3K: pay off house or add to retirement accounts?
« Reply #8 on: July 25, 2020, 09:32:30 PM »
Create an investment that is med to low risk, that is earmarked your "house fund".  Then add to it and grow it to cover your mortgage 100%.  When you retire, you can decide if you keep this fund invested or use it to pay off your mortgage at one go.

I like this approach because paying extra towards your mortgage doesn't really provide extra financial security from a cash flow perspective until it's completely paid off. If one or both of you lose your job, you can use this fund to pay the mortgage.

MickeyFinn

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Re: SI3K: pay off house or add to retirement accounts?
« Reply #9 on: July 26, 2020, 07:45:09 AM »
Create an investment that is med to low risk, that is earmarked your "house fund".  Then add to it and grow it to cover your mortgage 100%.  When you retire, you can decide if you keep this fund invested or use it to pay off your mortgage at one go.

I like this approach because paying extra towards your mortgage doesn't really provide extra financial security from a cash flow perspective until it's completely paid off. If one or both of you lose your job, you can use this fund to pay the mortgage.

I really like this idea too!
Thank you for starting this thread, I'm in a similar boat myself. Would it make sense to open a betterment big purchase account just for saving up money for a mortgage buyout?


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Goldielocks

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Re: SI3K: pay off house or add to retirement accounts?
« Reply #10 on: July 27, 2020, 03:11:40 PM »
Create an investment that is med to low risk, that is earmarked your "house fund".  Then add to it and grow it to cover your mortgage 100%.  When you retire, you can decide if you keep this fund invested or use it to pay off your mortgage at one go.

I like this approach because paying extra towards your mortgage doesn't really provide extra financial security from a cash flow perspective until it's completely paid off. If one or both of you lose your job, you can use this fund to pay the mortgage.

I really like this idea too!
Thank you for starting this thread, I'm in a similar boat myself. Would it make sense to open a betterment big purchase account just for saving up money for a mortgage buyout?


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My advice --
Save it wherever you have good guaranteed interest and ability to invest some of it.  Invest it with moderately low risk overall.  Keep a portion in savings.
Once you have 3-5 years of monthly payments in it, start putting some of the account into better returning investments.  Obviously this account is added to AFTER you max your retirement funds.

slappy

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Re: SI3K: pay off house or add to retirement accounts?
« Reply #11 on: July 28, 2020, 09:24:14 AM »
Not sure if this is a good way to do things, but we just refi to a 15 year mortage at under 3% rate. Then I calculated how much I would need to pay each much to pay it off in 10 years (FIRE goal). My reasoning is that a) it's not a huge amount, only an extra $300 a month, and b) if something happened where my income decreased, I could just cut that $300 out of the budget and pay the normal amount. I know a lot of people feel that it doesn't make sense to pay extra, because the mortgage company doesn't care about that if you suddenly can't make payments, but for me it was a good compromise.