Author Topic: 403b or Mortgage Paydown?  (Read 2135 times)

FIT_Goat

  • Stubble
  • **
  • Posts: 114
  • Location: Florida
403b or Mortgage Paydown?
« on: January 31, 2017, 05:31:27 PM »
I am assuming this is going to be pretty obvious to most.  I am a teacher, and our household income isn't much compared to many here.  I am trying to do my best with what we got.

  • My highest tax bracket is 15%
  • I have maxed out my Traditional IRA for 2017.
  • My current 403b is returning a rate of around 3%.
  • My mortgage is 3.25% + MI of 0.89% (FHA), so call it 4.14%
  • I have very little equity in the house (~5.25%)
  • I do not have enough deductions to itemize and include the mortgage interest/insurance

I know the FHA loan is a bad decision.  I could explain why we got in this spot, but I'm not sure it is relevant.  The long-and-short of it is that it came down to financing only on my income while still holding on to a previous property (now sold), which made my debt-to-income ratio too high for other options.

I am assuming it's best to up my contribution to the 403b (currently only $2,640/year) over accelerating the mortgage pay-down.  Although, I am considering splitting the extra money between each.  My current budget has about $700 extra (post-tax) to work with.  That's about $823 pre-tax, right?  So, even though the rate is lower in the 403b, it is better because I get a 15% increase by putting it in pre-tax.  That's probably the wise choice.

My only reason for wanting to hit the mortgage, is that I would like to get to 20% equity as soon as possible and refinance into a 15 year conventional loan.  The risk there is that rates could be up, by the time I have the equity, and it will no longer make sense.  There's no point in refinancing to a higher rate, even if it does get the mortgage insurance off.

I am thinking of adding an extra $400 to my 403b a month, and then putting the rest (~$360 after taxes) toward the mortgage.  Giving me a little bit of each.  That's $7,440/year to the 403b and $5,500 towards the IRA.  Not much for most, but it's a start.     

rpr

  • Pencil Stache
  • ****
  • Posts: 646
Re: 403b or Mortgage Paydown?
« Reply #1 on: January 31, 2017, 05:36:56 PM »

  • My current 403b is returning a rate of around 3%.


Are there other options in the 403b besides the 3% rate? Do you have TIAA?

FIT_Goat

  • Stubble
  • **
  • Posts: 114
  • Location: Florida
Re: 403b or Mortgage Paydown?
« Reply #2 on: January 31, 2017, 05:54:04 PM »
Not sure what TIAA is. The 3% return is the most aggressive option offered. All the other choices are lower. In fact, most of my original money is tied up in an older account returning less than 2%, close to 1% actually. And, it is nearly impossible to move it. We are waiting for the penalty period to expire.

rpr

  • Pencil Stache
  • ****
  • Posts: 646
Re: 403b or Mortgage Paydown?
« Reply #3 on: January 31, 2017, 06:00:06 PM »
Not sure what TIAA is. The 3% return is the most aggressive option offered. All the other choices are lower. In fact, most of my original money is tied up in an older account returning less than 2%, close to 1% actually. And, it is nearly impossible to move it. We are waiting for the penalty period to expire.

Can you list all the investment options provided by your employer under your 403b plan?

Coming back to your original question, I would agree that getting the mortgage paid down so that you can refinance to a conventional fixed rate  mortgage is a good idea.


FIT_Goat

  • Stubble
  • **
  • Posts: 114
  • Location: Florida
Re: 403b or Mortgage Paydown?
« Reply #4 on: January 31, 2017, 06:14:23 PM »
I will have to try and get them from the financial company the school works with.  It is not easy getting clear information out of them, and I don't think I have ever gotten a copy I can keep with all my options on it.  The way it works it sketchy as it gets.  They meet with you and basically give you a sheet with the 2-3 options available for your 403b. I took the most aggressive one, which I think goes as high as 5% (not that I have seen that) and will never go below 0%.  The other plans all guarantee some return above 0%.  I think one was fixed at 1.5% and the other was capped at 3% but wouldn't go below 1%.

That's the best I can recall.  I am trying to get the financial guy who works for me to meet with me again.  Even telling him that I intend on increasing my contributions and would like to see him hasn't lit a fire under his ass.  He hasn't gotten back to me since I mentioned this two weeks ago.

rpr

  • Pencil Stache
  • ****
  • Posts: 646
Re: 403b or Mortgage Paydown?
« Reply #5 on: January 31, 2017, 06:24:50 PM »
Do you know the name of the financial company the school works with?

Given how unresponsive they are, I would focus on contributing enough to the 403b to maximize the match. Then I would shift to paying down the mortgage in order to be able to refi.

FIT_Goat

  • Stubble
  • **
  • Posts: 114
  • Location: Florida
Re: 403b or Mortgage Paydown?
« Reply #6 on: January 31, 2017, 06:43:15 PM »
There is no match.

My current 403b is an "indexed annuity" product from "National Life Group."  It's the "SP Elite" product.  Has a floor of 0% (you won't ever have less than your investments) but also a cap.  I am not sure of the cap.  I'm not even sure I understand the statement and why it is broken down the way it is.  I've attached a screenshot of their interest portion of the most recent statement.  That only has $10,300 in it.

My old 403b is through Voya.  Their website insists that I have other sessions open and refuses to let me log in.  That one has actually returned an estimated 2.7% based on the difference between balances from 12/15 and 1/26.  I have about $23,400 in that account.  There is some ridiculously long surrender period on it.  National Life would have moved it otherwise.

So, in short, neither of these products is serving me very well.  But, they are the only pre-tax options I have once the IRA is maxed.  I've also got very little saved up, for my age.  It helps that I have a pension plan, but I've still not done well.

rpr

  • Pencil Stache
  • ****
  • Posts: 646
Re: 403b or Mortgage Paydown?
« Reply #7 on: January 31, 2017, 06:54:40 PM »
AFAIK, indexed annuities are usually not good investments as they have lots of caps and constraints. While they protect against downside, the hugely cap upside as well. I suppose that once the IRA is maxed, you don't have much of a choice when it comes to tax advantaged space.

FIT_Goat

  • Stubble
  • **
  • Posts: 114
  • Location: Florida
Re: 403b or Mortgage Paydown?
« Reply #8 on: January 31, 2017, 07:03:43 PM »
AFAIK, indexed annuities are usually not good investments as they have lots of caps and constraints. While they protect against downside, the hugely cap upside as well. I suppose that once the IRA is maxed, you don't have much of a choice when it comes to tax advantaged space.

Yeah, that's how I feel.  I will be sure to ask the "adviser" that I work with about other products, especially products that might be available but are not on the default list.  I feel like all the options were nearly equally bad.  I remember meeting with this person as Voya was pretty terrible and this was the other company my school works with.  I wasn't happy with Voya, and moved to the best plan this company offered.  I am not hopeful.  Due to lack of choice, I am sure we're going to be offered only high-cost low-return options.  I wish I could just make my own 401k/403k like I can with the IRA.

Maybe I will keep going with my default.  Right now, I am throwing the full $700 extra at the mortgage.  It does give me some flexibility to pay less if a major expense comes up.

FIT_Goat

  • Stubble
  • **
  • Posts: 114
  • Location: Florida
Re: 403b or Mortgage Paydown?
« Reply #9 on: January 31, 2017, 08:30:34 PM »
I guess a third option would also be opening a different account with Vanguard and throwing $300/no towards that. It would be post-tax investing. So, I am not sure what sort of returns I would need to look for to make up for missing out on the tax break.

It seems like $300/mo at 7% for 20 years will outperform $353/mo at 3% for 20 years. Even with the profits taxed. Although, I am sure I am missing something.
« Last Edit: January 31, 2017, 08:34:21 PM by FIT_Goat »

MDM

  • Walrus Stache
  • *******
  • Posts: 9679
Re: 403b or Mortgage Paydown?
« Reply #10 on: February 01, 2017, 12:10:48 AM »
403b plans are, unfortunately, often poor.

See www.403bwise.com, and a recent NY Times series (especially the third one):
http://www.nytimes.com/2016/10/23/your-money/403-b-retirement-plans-fees-teachers.html
http://www.nytimes.com/2016/10/27/your-money/403-b-retirement-plans-teachers-brokers-fees.html
http://www.nytimes.com/2016/10/29/your-money/403b-teachers-annuities.html
http://www.nytimes.com/2016/11/05/your-money/403-b-retirement-plan-tips.html

Sometimes there are good, but somewhat hidden, options.  Do try to get a list of all the 403b providers for your plan and post that.