Author Topic: Invest in 401k vs prepay mortgage?  (Read 3869 times)

Benny86

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Invest in 401k vs prepay mortgage?
« on: May 13, 2014, 09:55:38 AM »
Hello, I'm 28 and single and make around 50k a year, I owe $140,000 on a 30 year 3.5% mortgage and I prepay a extra $500 a month right now. I also have a 401k at work that I contribute 6% to get the company match, should I put more in my 401k instead of prepaying mortgage??

Khan

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Re: Invest in 401k vs prepay mortgage?
« Reply #1 on: May 13, 2014, 10:31:44 AM »
Short answer is yes.

Consider that inflation has historically averaged ~2%, and there's talk that the target rate should probably be raised to ~3%. Consider also that investments(per Piketty) have historically averaged ~5% after inflation, or other historicals such as S&P500 yielding ~7% after inflation for the last ~100 odd years. Consider that many good dividend stocks yield between 2-5%. Lastly, consider that you have one of the lowest mortgage rates, ever known historically. 30 year fixed @ 3.5%? That is -unbelievable- to any other point in history in the US, and is about 2% better then a lot of people have spoken of from other countries.

If it makes you sleep better at night, then take that into account when analyzing your choices, but over the long run, you're probably better off increasing your net worth through investments instead of decreasing your mortgage liability.

(Also make sure you understand expense ratio when analyzing your 401k choices).

rpr

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Re: Invest in 401k vs prepay mortgage?
« Reply #2 on: May 13, 2014, 10:48:59 AM »

Hello, I'm 28 and single and make around 50k a year, I owe $140,000 on a 30 year 3.5% mortgage and I prepay a extra $500 a month right now. I also have a 401k at work that I contribute 6% to get the company match, should I put more in my 401k instead of prepaying mortgage??
Given your young age, it is probably better to contribute the maximum to a 401k.

Eric

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Re: Invest in 401k vs prepay mortgage?
« Reply #3 on: May 13, 2014, 11:25:03 AM »
401k is a no brainer to me.  You lower your current tax bill and your investments* should return much greater than 3.5% over the long term.

*Depending on your investment choices, obviously.  Putting it all in a money market fund within your 401k would not work.

Benny86

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Re: Invest in 401k vs prepay mortgage?
« Reply #4 on: May 13, 2014, 02:36:59 PM »
Thanks for the help guys! My 401k is invested 50% in a S&P 500 index fund (0.22%) and 50% in Barclays Aggregate Bond index fund (0.21%), is this good...

Khan

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Re: Invest in 401k vs prepay mortgage?
« Reply #5 on: May 13, 2014, 04:01:09 PM »
Thanks for the help guys! My 401k is invested 50% in a S&P 500 index fund (0.22%) and 50% in Barclays Aggregate Bond index fund (0.21%), is this good...

No, probably not, unless you're over 50.

The short, basic rule of thumb for bond allocation is 100 - age = stock allocation, so if you're 30, you should be 70% in equities, 30% in bonds. That's the basic starting point. As it seems you may not know that, then I would recommend you get started with The Investor's Manifesto or the bogleheads wiki:
http://www.bogleheads.org/wiki/Main_Page

http://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy

You're going to want to learn a lot of things. Why you want bonds vs. stocks, investing policy statement, tax efficient fund placement(eventually), etc.
You're also going to want to ask yourself about your own temperament. The starting point of asset allocation is only that, the starting point. If you're scared of seeing losses then you may have to adjust it to be more conservative(more bonds), or if you're young and have years ahead of you you might want to go with more risk(more equities).
If as you dig deeper into the rabbit hole of financial knowledge you find yourself becoming more interested in it, you may want to examine further diversification and investment strategies(foreign stocks, emerging markets, small cap, REITs, etc.)

Welcome to MMM, and financial literacy.

milesdividendmd

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Re: Invest in 401k vs prepay mortgage?
« Reply #6 on: May 13, 2014, 04:12:48 PM »
I would invest much more aggressively in the accumulation phase ( at least 70 % stocks/30% bonds.)

But your allocation really depends on your ability to stay the course through bear markets.  If you don't have the stomach to watch your portfolio drop by 30 or 40 % and then rebalance by selling your safe bonds in favor of your collapsing stocks, then 50/50 could make sense.

For an average 28 YO though, I would recommend 90/10 or 95/5 stock/bonds portfolio as this range has the highest risk adjusted returns historically.

The main thing is that you should read, read, and read, some more investing books.  There are so many great ones out there.  (anything by Larry Swedroe or William Bernstein would be a good place to start.)

Best of all reading this stuff is fun and philosophical, for more, see:

[MOD EDIT: Link removed.  Please stop spamming links promoting your own site.  A single link in your signature is sufficient, and will be under every post you make.  Thanks.]

Good Luck

Alexi
« Last Edit: May 20, 2014, 09:06:12 PM by arebelspy »