where to allocate funds: 403b, Roth, mortgage payoff?

[megan1104]

Hi everyone,

This is a relatively open-ended post regarding where we should invest our current monthly stash for investments and/or mortgage payoff. I'm sure I'll leave out some relevant information, but here goes. Our current situation is this: my wife and I live in Seattle with our four kids (9-year-old twins, 4 year old, 2.5 year old). We bought our house in NE Seattle just a few years ago, did a ton of renovations, and are here for the long haul (there are factors that keep us here and prevent us from moving to a lower cost area.) A year ago, we refinanced our house and consolidated our home equity line into one loan. We spent a lot in the past few years and now we're ready to buckle down and focus on savings and investing. As of today, we have roughly:

TIAA: $320k retirement (almost all invested in Vanguard Total Stock Market Index Funds)
Vanguard:$90k inherited IRAs (intended to fund kids' college from grandma)
$80k (529s for the 4 kids)
$30k Roths

Mortgage: $407k with 29 years (!) to go. Home appraised at ~ $650k and would probably sell for much more in Seattle's crazy real estate market, but not really relevant because we plan on being in this home at least until all of the kids are outside of the house. Again, not leaving the neighborhood or Seattle so that's not a way to boost savings for investments.

My employer contributes 12% of my salary into TIAA without matching and I've recently upped my contribution every paycheck to max out to the $18k/yr limit. We plan on maxing out both of our Roths this year.

If we have any "extra" after this, where would folks recommend putting it? Toward the mortgage or other investments? I should say that I'm 42 and my wife will turn 40 next month. We hate the idea of having such a large balance on the mortgage and so far to go with it, but are extra mortgage principal payments the wisest place to allocate our surplus? We are later to this game than many other who follow MMM and other FIRE blogs and we're doing our best to catch up!

Thanks,
Megan

[seattlecyclone]

What's the mortgage rate? If it's below 4-5%, the math generally favors putting in minimum payments and instead putting extra cash into investments (retirement accounts until maxed out, then taxable mutual funds). Over the long run this is likely to be a winning strategy compared to aggressive mortgage payoff. However if you can't stand being in debt for the next 29 years, there's nothing wrong with putting a bit of extra cash toward the mortgage. Accelerated mortgage payments may not be the best strategy, but it's not a bad strategy by any means.

[megan1104]

Sorry -- this is one important fact I failed to include: the rate for the mortgage is 3.875%.

[MDM]

I'm sure I'll leave out some relevant information, but here goes.

Gross income?  Actually, see How To Write a "Case Study".  Whether or not you choose to share all the information suggested there (you'll likely get better responses if you do), it should be worthwhile for your own study.

If we have any "extra" after this, where would folks recommend putting it?

See the 'Investment Order' tab in the spreadsheet mentioned in the link above.  Good luck!

[jjandjab]

Without too much more info on your cash flow, I'd suggest that if you have extra funds and won't be moving, to refi to a 15 year mortgage which should be below 3% (many now around 2.75%) with little or no closing costs. You will be paying much less interest over the life of the loan with 29 still to go at 3.875.