@Ben Kurtz - thanks for taking the time to reply. I tried to respond to your points below.
You mention two young sons but no 529 plan contributions. That's another tax-sheltered account you can use to shield yourself from recognizing unwanted yearly investment income. The answer to your dilemma may be as simple as that.
Yes - two young sons, and no plans to contribute to 529 plans. It is tax sheltered in the sense that investment gains grow tax free, but I get no federal tax benefit from the upfront contribution. Without going too far off topic, I do not believe college will be necessary unless my boys want to go into a select few fields. If so, I will be happy to help them fund their educations (working longer, etc). Regardless, a 529 leaves me with a half paid off mortgage (in years) and no access to that money to pay off the mortgage or to live on if need be.
But if you strongly believe that you do not need educational savings accounts, and instead want the cash to accrue strictly to you, the answer then, as @Dicey suggests, is NOT to buy VTI or anything with a significant dividend rate. The NASDAQ ETF (QQQ) has a dividend yield of around 0.80%. Meaning you'd have to hold $100,000 in order to realize an annual dividend income of merely $800 from that source. More generally, any index specializing in "growth" stocks over "value" stocks" will have a low dividend rate, and a true index fund will have very little churn, throwing off very little involuntary capital gains.
If you really want to minimize your odds of realizing involuntary capital gains, this would be the time to step away from funds and buy individual stocks, buying a good mix of larger growth companies. That way, you control realization events almost perfectly -- nothing short of a cash buyout could trigger an involuntary capital gain. You just buy and hold individual stocks potentially forever (or at least until you are at Medicare age, when all this income planning won't be necessary even under current rules). Such portfolio construction may make your rebalancing events more complicated or imperfect, but such is life. And with more individual issuers in your portfolio, you also increase the odds of having some tax losses available in any given year, which you can selectively harvest to offset any involuntary gains.
I know this will sound very lazy (because it is), but honestly even with companies like M1 Finance making individual stocks far more easy and attractive, that still sounds like more work then I'd want to put in. The upside just isn't large enough to be worth the effort IMHO. We are talking about a refi of a $150,000 balance. Because the numbers are so much smaller than a typical American mortgage, I'd have to significantly outpace the rate of return to make it worth the time and effort.
At 30 years @ 3.75%, my PI would roughly be $1,054/month.
At 15 years @ 3.25%, my PI would roughly be $695/month.
Plugging in that difference of $359 into a compound interest calculator gets me: $96,000 at 5% nominal & $114,000 at 7% nominal (rounding for simplicity) after 15 years. If I take the 30 year mortgage, my balance is roughly $95,000 at the end 15 years. I realize I could make much more than 7%, but I could also do much worse.
The numbers seem to work much better for those who have a way higher mortgage balance than we do. With that small of an amount of upside, it just isn't worth it to me. I'll take the guaranteed return of 3.75% and treat that portion of my portfolio like a bond or high yield savings account (more on that below).
Also realize I'm already investing about $75K/year into the market moving forward, so we are talking about investing $75K into the market vs roughly $79K into the market. Less than 5% of my overall yearly investments if I chose to go with the 15 year vs 30 year mortgage.
We will also be saving around $6,000 year in high yield savings accounts. So all in all, if you count what I'm saving in low yield investments (the difference in mortgage payments plus the monthly addition to high yield savings accounts), we are taking about $10K a year going to low risk, low return investments and $75K going into 100% stock index funds/etfs. So I look at it as investing around 88% in stocks, and 12% in bonds/cash. I believe that to be a good overall asset allocation for us to achieve our goals.
Back to the main point, though, is would I take the guaranteed return of mortgage pay down vs the non-guaranteed return of investing the difference plus the worry/hassle of keeping income as low as possible? Yes, I would, even realizing I may be shorting myself a few thousand dollars at the end of 15 years.
Finally, given that you have a business that you run as an S-Corp, you must be in a position to incur some additional business expenses come the second half of December in order to offset any additional income you didn't want to earn -- didn't you mean to stock up on $800 worth of toner cartriges, or something?
I generally believe that a family is well served by living in a fully paid-off house when it reaches FIRE. Minimizing one's fixed monthly obligations when living entirely off of investments brings peace of mind to a lot of people and can have good tax and ACA subsidy benefits. But I equally believe that one should not get there by applying large amounts of one's surplus and savings, year after year, to extra mortgage payments while one is still building up a nest egg. It ties up equity and the "earnings" (i.e. the avoided interest cost) aren't worth it. Build the nest-egg first, build-up a sinking fund, and when close to retirement work out an off-ramp for liquidating investments and paying off the house.
Regarding the business stuff, yes, I could come up with some phantom expenses (real expenses but purchasing stuff I don't really need), but that doesn't go with my overall goal of working as little as possible to make this plan a reality. Cash flow is somewhat tight in the sense that I am trying hard not to earn too much as I have run out of pre-tax room to defer it in (more income equals less ACA subsidies).
My business is pretty straight forward - all clients are on a monthly billing arrangement (my billing software debits the same amount on the first of the month), and all my expenses are pretty standard as well (mostly software, insurance, collection costs, and a few other miscellaneous things that are the same amount each month). So if my income is the same, but I raise expenses for no reason other than to reduce income, then I've basically reduced our retirement contributions to make that work. Hope that makes sense.
I agree with your last paragraph completely. I think you can see that I am not tying up large portions of our net worth or investments in a 15 vs 30 year mortgage. We are talking about a couple thousand dollars a year, which is an overall very small piece of our yearly investment amounts which I believe fit nicely when viewed as bonds/savings account portion of our portfolio.
Feel free to poke any holes in my thoughts/plans. I'm always wanting to learn and consider other options.
