Author Topic: Work Gig Might End in Two Years. Save more or payoff house? Age 54  (Read 3393 times)

hdatontodo

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Here's my first OP.

Let me tell you what I'm planning to do and let you agree or shoot it full of holes.

I am married, 54, and working as a Unix Customer Engineer assigned to one customer who pays for me, but who told me they plan to leave in 2 years and do their own tech work.

Note that I am a few months from the Age 55 Rule where, if needed, I can take money from my 401K w/o penalty (just taxes and losing future returns.) The Mrs, age 48, and I have about $800K in our 401K's and no debt besides the house. At the end of this year, we'll owe $133K on the house.

We are currently making our $2K mortgage payment plus sending an extra $1,325/mo to reduce principal. At this rate, it would take us to the end of 2018 to pay off the house balance, $133K (4 years of payments of about $35K/yr.) However, this extends 2 years past my possible unemployment.

I was trying to figure out if I should keep my 40K in savings, and add to it over the next two years, keeping current payments, or if I should work to pay off the house during the two years, so that if I'm unemployed, our monthly expenses go way down.

Paying off the house in 2 years would be done by putting my $40K savings against the principal in the year I turn 55, 2015, leaving a $93K house balance, continuing the currently planned 2 years of $35K/yr payments, plus using OT and unspent income (about $30K/yr) during those 2 years to pay the balance. The advantage to this plan was that it would reduce our monthly expenses $2-3K, so that if I lost my job, we could live on my wife's income or I'd could take out minimal from my 401K until I'm 62 and can get Soc Sec + 3 years Child Benefits. I'd save some thousand in interest too. The Mrs has about 20K in savings.

If I didn't try to pay the house early, I could add to the $40K savings account and continue the two years of $35K/year payments, but, after losing my job, switch back to the standard $2K mortage payment which would take 4 more years after the first two. Basically, each year of accelerated payments $2K + $1325/mo extra knocks a year extra off the loan. This option would mean possibly taking more out of my 401K since I'm paying more in interest.

So, should I plan on paying off the house in two years, or sandbag money and pay it off in 6 years, keeping more in savings for the unknown? I did a year by year comparison and it seems I'd be better off paying off the house, but I might be missing something.

I do want the house paid off by the time I'm 62 anyway.

I'm not factoring in finding a new job at this time, or possibly being reassigned to another customer who might want to pay for a FT Unix resource since I'm doing worst case scenario. We have done 4 years of prepaid MD 529 for the kid.

Thanks for your input
« Last Edit: October 29, 2014, 08:38:08 PM by hdatontodo »

TN_Steve

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Re: Work Gig Might End in Two Years. Save more or payoff house? Age 54
« Reply #1 on: October 30, 2014, 08:00:49 AM »
Good variant on one of the eternal questions!  I believe it hinges on these three issues, at least to the extent that an objective answer is possible:

  • What is your interest rate on the home loan?
  • What is your marginal tax bracket now, versus when/if your job is gone and you can do the unpenalized 401k disbursement
    • What is expense ratio and expected returns (and standard deviation) in your 401k investment choice?

Other than that, it is a comfort level issue.  In our case, I'd like to have our mtg. gone right now.  My wife, correctly, points out that it is 3.25% and we should just mentally earmark some of our non-deferred asset accumulation to pay it off at or in retirement.  She wins this, although I may be able to win paying it off in the first months of retirement.  :-)

You might want to search around on Bogleheads personal finance forum for more on this--I suspect it has been beaten to death several times.

hdatontodo

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Re: Work Gig Might End in Two Years. Save more or payoff house? Age 54
« Reply #2 on: October 30, 2014, 08:23:00 AM »
Good variant on one of the eternal questions!  I believe it hinges on these three issues, at least to the extent that an objective answer is possible:

  • What is your interest rate on the home loan?
  • What is your marginal tax bracket now, versus when/if your job is gone and you can do the unpenalized 401k disbursement
    • What is expense ratio and expected returns (and standard deviation) in your 401k investment choice?

Other than that, it is a comfort level issue.  In our case, I'd like to have our mtg. gone right now.  My wife, correctly, points out that it is 3.25% and we should just mentally earmark some of our non-deferred asset accumulation to pay it off at or in retirement.  She wins this, although I may be able to win paying it off in the first months of retirement.  :-)

You might want to search around on Bogleheads personal finance forum for more on this--I suspect it has been beaten to death several times.

Thanks.

Our mortgage rate is 4.5% so next year we'll pay like $5K in interest.

Our Marginal tax bracket is 33%, but since my wife only makes 60K, that would drop if I'm not working and am withdrawing from my 401K.

I'm temporarily in a 50/50 Target Date fund (high 0.65% Expense Ratio) and will be putting any new 401K money in 2015 in US Large Cap (0.0260%). Fidelity told me I should switch back to growth mode, so I thought I'd dollar cost average my way there with new deposits over the next two years. Also my wife's 401K is much more aggressive than mine since she's 6 years younger and not facing a job change. I do need to see if using multiple separate funds would have a lower expense ratio. My rate of return for this year is 3.3%, but I did not put my $ in this fund until recently.

« Last Edit: October 30, 2014, 08:24:48 AM by hdatontodo »

TN_Steve

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Re: Work Gig Might End in Two Years. Save more or payoff house? Age 54
« Reply #3 on: October 30, 2014, 09:10:07 AM »
If W makes 66 and continues working after you are retired post 55, you can easily take the remaining mortgage balance from your 401k in the year of termination and remain in the 28% tax bracket (can take 166, even ignoring the "not taxed" income from MFJ and child).  That weighs heavily in putting it into the 401k as long as you are in the 33%. 

In our case, we debate only because savings that could pay off the mtg. are not going into the already topped off deferred plans.  If it were a choice of deferred plan fill-up versus mortgage paydown, it would be easy call for us, even at 4.5%.

Nonetheless, much of this is a comfort call.  Given that you are going to either save it or reduce liability, I'd not call either decision "Wrong."

frugaliknowit

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Re: Work Gig Might End in Two Years. Save more or payoff house? Age 54
« Reply #4 on: October 30, 2014, 01:25:15 PM »
I am also a "one customer consultant", single, with similar concerns.  Keep in mind that clients say all kinds of things.  What they actually do depends on the numbers at the time of renewal.  Ever hear them say, "...we need to pay you guys MORE!!!"  The point is, I would not bet the house on your not having a job in two years.  I would look for a new gig starting now (I am always looking).

That said, I recently decided that my cash reserves were large enough and do not want to add any to them and I am already maxing my roth (no 401k available), so what do I do?  I decided I like options, and opening a non-retirement VGTX to add to whenever my reserves go over 1 years expenses is the route I am going.  Options:  Lose my job and there's more reserves, hopefully not too deeply underwater.  Not lose my job, I can always liquidate to pay off the mortgage when the value is high enough, or just keep paying it.  Another advantage, though the least important is that mathematically (mortgage is 4% with 11 years remaining), not pre-paying the mortgage will likely produce a better outcome (not guaranteed).

In your case, maybe you should divert the funds for pre-paying mortgage into a roth (IRA or 401k) to give you a non-taxable bucket to give you more flexibility for some of your capital?

hdatontodo

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Re: Work Gig Might End in Two Years. Save more or payoff house? Age 54
« Reply #5 on: October 30, 2014, 09:22:20 PM »
This thread had a good discussion on paying off the mortgage vs investing the funds

http://forum.mrmoneymustache.com/ask-a-mustachian/invest-vs-payoff-debts-swr-effects-of-mortgage-payoff/

I would recommend to start reading at the beginning of the thread.

Dicey

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Re: Work Gig Might End in Two Years. Save more or payoff house? Age 54
« Reply #6 on: October 31, 2014, 12:15:26 AM »
^^ What frugaliknowit and hdatontodo said. ^^

What I say: Money you control (save) is worth more than money you don't (prepay) in your situation.

Also, interest rates have dipped lately. If you could shave off at least half a point, I'd even consider a re-fi before the job goes bye-bye.