The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Panchos on July 17, 2015, 09:08:56 AM
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Soooo.... I just changed my 457 contribution from maxing it out to $20 a paycheck because I've been getting almost 0% rate of return for the last year (I'm in a fund comparable to the S&P 500). Meanwhile, I'm paying 5.875% on the house. Is this a smart move or not? Naturally, if the markets crash and prices drop, I'll get aggressive on my 457 and 401k, but it just doesn't make sense right now. Part of my financial independence goal and comfort level includes having my house paid. I feel once the house is paid, I would basically be financially independent as I would still work part time or a lot less hours.
Thanks!
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Don't look at short term performance. It's totally irrelevant. And you can only contribute during the tax year, so next year is too late to max out this year.
If you're in the S&P500, great. What's the expense ratio for that fund? If it's good, stick with it (or something similar) for the long haul.
Your mortgage is crazy high. Can you refinance?
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+1 to forummm
The decision to invest vs payoff the mortgage should be made independently of the 1yr performance of your investments. Don't change the plan because you are flat for the yr - that's not a big deal. It happens. You'll even have many periods where you lose money over a year.
Make the plan based on what you are trying to accomplish - consider your goals, objectives, time horizon, etc then weigh the pros & cons of each strategy. But don't switch things up based on short term performance because that will hurt you over the long run - you won't be sticking to a disciplined plan, you'll be chasing hot dots & getting blown around by the whims of the market. Not good.
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I'm in a Nationwide S&P 500 large cap index fund. The expense ratio is 0.42. The only reason I'm considering this is because I hope to have the house paid in the next 1-1.5 years tops. Due to the expected pay off being 1-2 years absolute tops, I don't see refinance making much sense. After that, I fully intend on maxing out my 457 and 401k again. Additionally, paying off the house is a major personal goal of mine. I feel that would give me more freedom and opportunities to pursue other opportunities without the need to make so much money to cover the mortgage and other expenses.
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It's kind of a personal decision, and there are differing opinions on that. But generally you are financially better off if you can lock in a very low 30-year fixed rate (like you can get now).
http://forum.mrmoneymustache.com/investor-alley/pay-off-mortgage-or-invest-5951/
http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/
http://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/
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Note that S&P 500 has been pretty tepid since 2015, and if you bought your 457 index funds post October 2014, your returns will be none/minimal.
I can't comment on whether it is financially savvy to pay off mortgage or continue contributing to 457 without further information, but note, also that it doesn't have to be an all or nothing deal. You can contribute may be $9k to your 457 and divert $9k to your mortgage. Not sure if it will help you, but just a possibility.
On a separate note, an expense ratio of 0.42% seems a lot, especially if it does nothing more than track the S&P 500 index. Those funds shouldn't cost that much. Hopefully your 457 gives you a few different funds, and hopefully there are at least one or two "Spartan" or "Admiral" type funds (Fidelity and Vanguard respectively).
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I'm in a Nationwide S&P 500 large cap index fund. The expense ratio is 0.42. The only reason I'm considering this is because I hope to have the house paid in the next 1-1.5 years tops. Due to the expected pay off being 1-2 years absolute tops, I don't see refinance making much sense. After that, I fully intend on maxing out my 457 and 401k again. Additionally, paying off the house is a major personal goal of mine. I feel that would give me more freedom and opportunities to pursue other opportunities without the need to make so much money to cover the mortgage and other expenses.
All the reasons you gave in this post are good (and highly personal) reasons for choosing to pay off the mortgage instead of contributing to your 457. What the market has done over the past year is not a good reason.
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Hindsight is always 20-20.
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What EXACTLY is the return you are bitching about, and what is the S&P 500 over the exact same timeframe?
Unless the numbers are significantly different, you aren't looking at stock market investing correctly.
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It looks like your fund is the "Institutional Service Class" share class which is 0.42% ER as you mentioned.
Nationwide S&P 500 Index Fund (https://mutualfunds.nationwide.com/iApp/mfsc/FundProfile.action?ticker=GRISX&audience=NF&tabViewName=overview)
The Institutional Class share class is 0.17% ER. Maybe you can petition your 457 administrator to get this changed. In my 401k, several funds have had their share classes changed to reduce ER so it does happen.
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Another comment - your trailing twelve month return in your fund is 10.39% as of 7/17/2015. You can see this value in the link I just provided.
So, maybe you should double check your returns and also include your tax savings in the calculations as mentioned above and reevaluate.
Right now, just using TTM return, it is better to be in the fund rather than paying off mortgage. However, as mentioned above, you really shouldn't look at short term returns to decide this. And, please look into refinancing your mortgage.
<edit - just saw you only have 1-2 years left and don't want to refinance.> So, personal choice on early payoff but the math shows that at least for the last year it was a better deal to max out your 457.