Help a Newbie MMM

[Peter Parker]

Hi all.  First post.  Forgive me for being naive/stupid to the ways of MMM.  I'm looking for guidance....

First, I suppose we are a little old for this site:  55.  But I would like to retire ASAP--I'm aiming between 60 and 62.

Currently, my wife and I have jobs with pensions--so if we retired at our goal age, we would each get about 70% of our current income.

We are currently maxing out our deferred comp programs (with catch-up provisions) at $48K per year.   Currently we have about $400K in our deferred comp accounts.   We are doing our best to cash-flow college costs for our three children.   We have no debt other than our home--which is mortgaged at 3.375% for 30 years. 

I know this isn't a mustachian thought, but I'd rather not touch/paydown the mortgage at such a low rate and invest additional monthly surplus, rather than pay down the mortgage. This is a Ric Edelman approach, I suppose, but it seems to make sense to me...thoughts?  I have about $1000 additional per month that I could either apply to the mortgage, or (which is the way I'm leaning) to invest in a Vanguard account.  Thoughts?

If I was to not pay down the mortgage and invest in Vanguard, I would not be eligible for a Roth due to income restrictions.  What would you suggest I do with the money????

Thanks for any suggestions!

[Interest Compound]

I wouldn't be paying down that 3.375% mortgage either. Your plan makes sense to me. Put it all in a taxable account.

[RedmondStash]

I know this isn't a mustachian thought, but I'd rather not touch/paydown the mortgage at such a low rate and invest additional monthly surplus, rather than pay down the mortgage.

This is a very mustachian thought. :) You're doing the math and seeing that the probabilities favor a better return in investments than in paying down the mortgage. Both camps exist on this forum and have strong proponents. We are doing something similar, although I really itch to just pay off the mortgage.

If I was to not pay down the mortgage and invest in Vanguard, I would not be eligible for a Roth due to income restrictions.  What would you suggest I do with the money????

I'd suggest determining your risk tolerance and figuring out the percentages you want in stocks and bonds. At Vanguard, the easiest thing is VTSAX for stocks, and VBTLX for bonds. Both index funds encompass pretty much their entire U.S. market.

Good luck.

[DaveR]

...I would not be eligible for a Roth due to income restrictions.  What would you suggest I do with the money????

Take a look at a Backdoor Roth IRA. There should be another $13k (with catch up contributions) you can save there.

[NWOutlier]

I'll be 48 this year; and I believe I have similar views;  I don't owe much on my home in comparison to what homes are selling for now a days... but, I can't push myself to pay it off because I haven't hit my number yet for savings... to me, having money in the taxable account for a longer period of time is more beneficial (valuable) than paying off my home right now.

So, I do the following:
fully fund 401k
fully fund spousal traditional IRA (Vanguard VTSAX - Total Stock Market)
fully fund roth IRA (Vanguard VGSLX - REIT)
fully fund H.S.A (Fidelity Nasdaq Index)
6,000 - 18,000 additional into a taxable vanguard account with a goal of 800,000 or more befor I consider leaving my company... Then, assuming I am 59 1/2, I would pull from my 401k and IRA, but keep my tax bracket below 15% and put it all in the taxable account year over year and focus on living on dividends from the taxable account...  the objective is to never touch 1 share if possible... I started late in life, so I may or may not hit that goal, but I'm really trying.  Take the dividens + social security and I Just may be living better in retirement than while working!  :)

Sure wish I would have found this site and JLCollinsNH back in 2009.  These guys and their readers have litterally changed my future.

[Peter Parker]

Thanks all for the input...Glad to see I'm not alone on the "not payoff the mortgage approach."  I think I'm fine with the notion of paying a mortgage into retirement--but can understand completely why, for some, paying off the mortgage is a tempting goal....

I will look into the backdoor roth opportunities....I haven't really explored that avenue.  Anyone want to give me a Reader's Digest version as to pros and cons of doing this?

In any case, I appreciated the input, suggestions, and encouragement!

[earthshine]

Check gocurrycracker for backdoor Roth writeup

[Woody Viet]

Is your pension independent of the assets you have in your deferred comp accounts?

When are you expecting this college costs to start arriving? Do you have any estimate of how much it is going to be? How much do you think your asset stash will be worth when you retire? Your cash flow needs will probably be the biggest determiner of what assets you can safely invest in. If you can manage all these cash flow needs with 4% or less of the stash then all equities is probably fine.

I would definitely go for the investment over mortgage pay-down approach. Inflation is going to eat away at your mortgage anyway so your real cost will probably only be around 1-2% a year. Vanguard taxable is probably the way to go.

[RedmondStash]

Inflation is going to eat away at your mortgage anyway so your real cost will probably only be around 1-2% a year. Vanguard taxable is probably the way to go.

Not sure what you mean here -- can you please explain, Woody?

[MustacheAndaHalf]

In 5 years from now, in retirement, what split of stocks / bonds are you planning?

I think you should treat your mortgage as your "risk free rate", and decide if the volatility of a portfolio is worth it.  I like to run numbers to get an idea: Let's say it's evenly split between stocks and bonds.  Bonds currently earn 2.3%, and for the past 20 years stocks (US/intl) spent 2/3rds of their time returning between -12.5% to +25.7%.  A portfolio would be expected to earn +1% more than your mortgage if the past 20 years repeats - but that's the risk, because the past 20 years doesn't predict the next 10 years.

Another way to view it, if you're less comfortable on numbers, is to guage how big your mortgage is relative to your portfolio, and how big your mortgage payment is relative to your overall expenses.  Often a mortgage is the largest expense, by far.  Would reducing your expenses when you're retired be worth reducing your portfolio to pay off the mortgage?

[Woody Viet]

Inflation is going to eat away at your mortgage anyway so your real cost will probably only be around 1-2% a year. Vanguard taxable is probably the way to go.

Not sure what you mean here -- can you please explain, Woody?

Sure thing!

Your mortgage is quoted in nominal terms. Say you have a house worth 100k, an interest only mortgage worth 100k (at 3.5%), and inflation runs at 3.5% (these numbers are purely for expositions sake, I chose them for convenience). How much does your mortgage cost you each year? I will assume the house increases in value exactly in line with inflation (a very strong assumption in the short term, reasonable in the long term).

In year 1 you pay $3.5k in interest in your mortgage. However your house appreciates to $103.5k giving you a capital gain of $3.5k. What is the real cost of your mortgage here? Zero. You do however have a negative cash flow of $3.5k which you have to fund from somewhere.

This implies in a world where you can secure a fixed rate mortgage for around 3.5% and expect inflation of around 2% then your mortgages real cost is only around 1.5%.

The actual cost of home ownership is a lot more complicated as the equity in peoples houses generates an opportunity cost (you could mortgage that equity and invest the money elsewhere, or alternatively rent and release your equity in the same manner). Now if you have very reliable cash flows to fund your mortgage (a big if!), then you can see why paying a real cost of 1.5% on a loan and investing it for a long run return of even 4% can be very lucrative.

[RedmondStash]

Inflation is going to eat away at your mortgage anyway so your real cost will probably only be around 1-2% a year. Vanguard taxable is probably the way to go.

Not sure what you mean here -- can you please explain, Woody?

Sure thing!

Your mortgage is quoted in nominal terms. Say you have a house worth 100k, an interest only mortgage worth 100k (at 3.5%), and inflation runs at 3.5% (these numbers are purely for expositions sake, I chose them for convenience). How much does your mortgage cost you each year? I will assume the house increases in value exactly in line with inflation (a very strong assumption in the short term, reasonable in the long term).

In year 1 you pay $3.5k in interest in your mortgage. However your house appreciates to $103.5k giving you a capital gain of $3.5k. What is the real cost of your mortgage here? Zero. You do however have a negative cash flow of $3.5k which you have to fund from somewhere.

This implies in a world where you can secure a fixed rate mortgage for around 3.5% and expect inflation of around 2% then your mortgages real cost is only around 1.5%.

The actual cost of home ownership is a lot more complicated as the equity in peoples houses generates an opportunity cost (you could mortgage that equity and invest the money elsewhere, or alternatively rent and release your equity in the same manner). Now if you have very reliable cash flows to fund your mortgage (a big if!), then you can see why paying a real cost of 1.5% on a loan and investing it for a long run return of even 4% can be very lucrative.

Ah, got it. I hadn't thought in terms of the house value appreciating at the rate of inflation, which does make sense. I generally just think of home equity as an investment that doesn't actually produce anything the way a company does, although it does remove the monthly expense of funding a place to live. And yet, for irrational and non-mathematical reasons, I still want to pay off my mortgage. Go figure.

Interesting perspective. Thanks.

[Peter Parker]

Is your pension independent of the assets you have in your deferred comp accounts?

When are you expecting this college costs to start arriving? Do you have any estimate of how much it is going to be? How much do you think your asset stash will be worth when you retire? Your cash flow needs will probably be the biggest determiner of what assets you can safely invest in. If you can manage all these cash flow needs with 4% or less of the stash then all equities is probably fine.

I would definitely go for the investment over mortgage pay-down approach. Inflation is going to eat away at your mortgage anyway so your real cost will probably only be around 1-2% a year. Vanguard taxable is probably the way to go.

Yes.  My Pension is independent of the assets I have in my deferred comp.  My pension (alone) will cover about 70% of my current income at age 62 (7 years from now).

College cost are occurring now....My eldest son just graduated, and we were able to cash flow all of his education.  My second child is now and school, and we expect to cash flow that as well given he is attending a less expensive school than my eldest son.  The unknown is my youngest--she will be in college in a year and half--and we will have two years of dual college costs.  Not sure what her costs will be yet...

After going back and reading Ric Edelman's take on carrying a mortgage, I'm more convinced than ever to invest, rather than pay it down.

One new twist:  I just learned that my wife has BOTH a 403b AND a 457, so I will be stashing extra cash there....

Thanks for the input!