Reader Case Study - Pay down mortgage in 7 years or continue extra retirement contributions

EDIT:

Updated asset list with missing line

Updated the expenses with avg of past couple year costs

Updated questions sections with 7% interest along with some of our family philosophy on life.

**Life Situation: **

Married (late 20's) with one dependent (infant) (we hope to add more children every ~3 years)

Wife and I both have zero debt, both own a car. I tend to bicycle commute (we live in one of the few locations decently priced that has bike paths rather than highways) and she is stay at home with a new infant. Flexible work with job security on both sides. Wife can start work again if needed or go part time.

Recently purchased a house for $**260,000 **with a **30 **year **4.375**% rate. 20% was put down to avoid PMI.

Before the house purchase, I routinely put 40% of my income into retirement. Combined, my wife and I have ~$330,000 in retirement accounts, mostly index funds (VTSAX and derivatives).

I can retire from my current employment in **16 **years (age 45) with medical benefits and a pension or cut the amount of hours I work to 75% and still keep full benefits (Working indefinitely because my IT job is fun but still with more family time. I get 4 weeks paid vacation plus 14 hours accrued every month)

Honestly we are in a really fortunate place in our life, that even if major set backs happened and we couldn't invest in retirement anymore plus had major expenses we'd still be in a good place financially, especially if the wife picked up work again.

**Gross Salary:** $**81,000** (12% federal tax bracket) single income

**Pretax monthly deductions: **

Dental Insurance 38.92

Vision Insurance 12.46

Health Insurance 258.18

HSA: 333.00

Retirement (8% of salary with 6% match): 540.00

Parking Fees: 7.34

**TOTAL:** $**1,189.90**

**AGI:** $**61,200**

Work forces 8% of my paycheck into a retirment plan with a 6% match. I also contribute 6% of my pay into an HSA as a retirement vehicle.

We're down to 14% of income going into retirement accounts: $873 monthly, $10,476 yearly + $3672 match = ~$14,000

EDIT: Updated to average from past years

**Current expenses **~~previous month~~ monthly:

Mortgage: $1367

Medical: $345 ~~$1000 (high right now until we hit deductible. ~~~~Estimated yearly expense is <$8000 including premiums, so real AVG of $666 a month per year.~~ Wife and I both have chronic conditions) EDIT: accidentally included premiums in avg price. Average ~$4144 spent on medical after tax == $345/month

Groceries: $450

Charitable Giving: $300 (supports local parish, homeless, women in crisis pregnancies, and the arts. Non negotiable)

Utilities: avg <$180 (gas, electricity, water, sewage, trash, internet)

Car Insurance: $180 (2 cars, this is the lowest we've been able to get in the state. Before I was paying more than this on a single car and that was considered decent)

Gas: $100

Restaurants: $<40 (twice a month order out)

Music: $10 (Working on convincing SO to drop this)

General Merchandise: $440 (Home improvement, baby, clothes, hobbies, maintenance, gifts) EDIT: Added average cost of general goods

without mortgage: $2045/month, $**24,540**/year

mortgage 16+,400/year

b]TOTAL expenses[/b]: $**40,940**/year

Leftover: $**20260**/year

**Assets:**

Using rounded numbers for easier math

Everything below is traditional, no ROTH as they were contributed to at a time when our individual earnings put us in the 22% bracket.

IRA: $108,000

403b: $12,000

457b: $68,500

HSA: $17,000

TRSL: $17,000

401k: $43,000

Work Pension: $47500 (fully vested next year)

Savings (Anything breaks/needs replacing. Will be filled back up to amount after spending): $15,000

**TOTAL Assets**: $**327,000**

~~2 cars, paid off. Both are Prius (prii?) a 2011 and a 2015.~~

House: estimated worth $274,000, ~$87,000 in equity, Brand new roof, appliances, HVAC, water heater, and interiors. Purchased last year 2022

Fancy record player and sound system from my bachelor days: ~$1000

Bike: ~$750

Should we need any additional income say for children costs or surprise maintenance/replacement, the wife can always go back into teaching/tutoring for a time.

**Liabilities:**

Mortgage: $**1367** monthly

Unpaid principal: $191,000

4.375% interest rate on a 30 year loan

**Questions:**

1) **When is enough enough?** If we only contributed the 14% of income plus 6% match ($14,000 total) then the $313,000 we have will wind up at a nest egg of ~$1,000,000 by my retirement time (see math below). A 4% withdrawal rate gives $36,291, almost 1.5 times our current expenses (minus the mortgage). Keeping up our 40% into retirement maybe ~~doubles ~~ increases the amount in the nest egg later in life, but we do we really need it, you know? Halting the extra retirement contribs helps get us quicker to the security of owning a house. Our life ideal is not really about how much money we've accumulated by the end of our lives but rather how it was lived. I want to make sure I'm not shooting our future in the foot by pursuing paying down the mortgage (even though that is less efficient).

Compounding calculator:

EDIT: Since 5% was considered too conservative, I've adjust below for 7% compounding return on interest as well:

Current Principal: $313,000

Annual Addition: $14,000

Years to grow: 16

Interest Rate: X

FUTURE VALUE at 5%: $1,031,004,88 or ~$**900,000** after taxes

FUTURE VALUE at 7%: $1,341,790.30 or ~$**1,180,000** after taxes

2) **Is it worth continuing putting extra into mortgage instead of retirement?** Doing so will allow us to pay it off in ~**7 years**. Basically, for the next 7 years, here are a couple things I can do with this extra ~$20,000 a year. Let's assume no major renovations/maintenance costs. If those happen, we'll pull from savings and work on refilling that bucket likely setting back the target goal by a year.

Earlier pay off is desirable as it is right after the first kid starts primary schooling allowing flexibility for private/public schools. Being able to start contributing to college funds and owning our property is a mental security that means more to our family than purchasing power does (time and energy spent in moving, losing current location and bikeability to work, and history with neighbors are all costs that money can't replace).

Taking **all retirement except 457b**, assuming no more contributions

over **16 years** compounding $244,500 at 7%: $**721,804.04 **(This ~$700,000 with a **10% penalty is an acceptable ~$21,800/yr** (assuming 12% tax and 10% penalty, 4% withdrawal)

And at **30 years** later when I can withdraw without penalty: $**1,861,196.36 **(This is way more than we would ever need to the point where withdrawing at 16+ years makes more sense if extra income is needed).

Contributing to 457b and** not accelerating paying off mortgage**:

If we contribute $20,000 to the 457b (currently at $68,500) for the full 16 years, it will grow to

compounding at 5%: $**646,334.24**

compounding at 7%: $**799,027.56**

~~If I retire at 45, I can pull ~$~~**28,000/year** and drain 457b by 65 years of age (assuming an unlikely no further growth and 12% in taxes). Then I can begin draining other retirement accounts (IRA, 401k, etc)

If I retire at 45 I can withdraw ~$**28,000**. EDIT: Thanks Index for catching my misunderstanding on the withdrawal rate.

TOTAL at 16 years 457b + other accounts = $**49,000**

MINUS $16,400/yr in mortgage payments: $**32,600**

Contributing to 457b after **paying off mortgage**:

If we don't contribute to the 457b until after the mortgage is paid off it'll be 7 years of growth only and 9 years of contributions:

7 years with no contributions compounding the 457b will be:

5% interest: $96,386.38 (just 457b)

7% interest: $109,996.03

16 years total with 9 years of contributions:

5% ~$335,000 after 12% tax

7%: $**403,525 **after 12% tax

This gives ~$**16,141 a month** with %4 withdrawal. Likely wife would go back part time before I retire anyways so we'd have that supplemental income. Or we could just accept the 10% penalty on the IRA and withdraw from that to supplement.

TOTAL at 16 years 457b + other accounts = $**37,000 ** with the advantage of no mortgage payments

I realize the math might be slightly off, (like tax brackets are not a flat 12% but the first ~$9000 is at 10%. The numbers are close enough for me working at this distance from retirement)

~~3) ~~**How would I describe our nest egg?** With $313,000 in retirement in stocks and ~$87,000 in estimated home equity can I say this is a 75/25 aggressive split? Does thinking about our egg this way make sense? Right now I feel we have a significant portion in retirement funds and not much liquidity and it makes sense to start "investing" in the house so to speak. EDIT: Explained in posts below