Author Topic: Pay off mortgage or invest cash?  (Read 3326 times)

Teachstache

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Pay off mortgage or invest cash?
« on: October 22, 2016, 06:36:28 AM »
Spouse and I are 4 years and 2 months into a 3.625% 30 year mortgage. Bought our 3 bed 3 bath home pre-baby. Had our son Feb 2015. Don't plan on having any more children. I am 34, spouse is 35. Both have reasonably enjoyable and stable jobs in education.

Gross income is $115k with some adjuncting work that I do during the summers and evenings.

Mortgage is $115k. We have no other debt.

Retirement accounts now stand at $170k, we are maxing out 2 403bs, putting $6k into a 457. Putting $3600 annually into a 529 for son.

We have $140k sitting in a 0.75% savings account (put there pre-kid, before I was comfortable with 403bs and 457).

We don't plan on moving anytime in the future. We love our mid century home and have plans to install a patio and fence (ourselves, with family help) this upcoming summer.

We are debating taking our $140k in cash and paying off our mortgage balance.

Pros? Cons? Advice would be appreciated.

Goals: I plan to keep teaching until I can collect my defined benefit NE teachers pension at 55.


KBecks

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Re: Pay off mortgage or invest cash?
« Reply #1 on: October 22, 2016, 06:58:42 AM »
Go for it.   I would consider this diversifying your money between the stock market and real estate, so your money is in different places.

Now, cash may be good if the market tanks, but your ongoing contributions will average in over those times.

Keep an emergency fund of course.

Another Reader

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Re: Pay off mortgage or invest cash?
« Reply #2 on: October 22, 2016, 07:35:23 AM »
In your shoes, I would max out the 457 accounts as well as the 403(b) accounts.Those accounts will give you the maximum flexibility if your employment situation changes or you decide to retire early.  Your accumulation of cash shows you have more investable income than you are actually investing.  At 3.625 percent, I would not be in a hurry to pay off the mortgage.

You might be interested in Ed Mills' blog - The Millionaire Educator - http://www.millionaireeducator.com/

Teachstache

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Re: Pay off mortgage or invest cash?
« Reply #3 on: October 22, 2016, 08:14:00 AM »
In your shoes, I would max out the 457 accounts as well as the 403(b) accounts.Those accounts will give you the maximum flexibility if your employment situation changes or you decide to retire early.  Your accumulation of cash shows you have more investable income than you are actually investing.  At 3.625 percent, I would not be in a hurry to pay off the mortgage.

You might be interested in Ed Mills' blog - The Millionaire Educator - http://www.millionaireeducator.com/

We only have access to 1 457 account. Both employers offer 1 403b account. The $6k in the 457 account is the highest amount we can do while still paying the $585 mortgage. If we paid off the mortgage, we could increase 457 to $12k per year.

Does that info alter your recommendation at all?

Addition: Budget excluding mortgage: $1,670/mo

Property taxes:$275/mo
Homeowners insurance: $85/mo
Electric, gas, water, trash: $180/mo
Phone & internet: $70/mo
Term Life & car insurance: $100/mo
Daycare: $300/mo during school year
Food & gasoline: $435
Planned expenses: $225 (gifts, tech upgrades, camping vacation, house expenses amortized)

With mortgage of $585: $2,255
« Last Edit: October 22, 2016, 08:23:24 AM by Teachstache »

K-ice

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Re: Pay off mortgage or invest cash?
« Reply #4 on: October 22, 2016, 08:23:15 AM »
This debate happens a lot around here.

Mathamatically investing in a balanced collection of ETFs is better.

But since you have the money sitting in a savings account paying off the mortgage is mathamatically better.

However, I think you need to start getting comfortable with investing.
(I reread your post again & you are already maxing these so you must now be comfortable even if you weren't pre_baby.)

I think the best steps are something like:

1) Have a small emergency fund (& squishy debt)
2) pay off other debt above 7% (I assume you have none)
3) Max out any 457 & 403, especially matching fund ones (get started investing)
4) Pay off your mortgage
5) Invest in taxable accounts.


By doing step 3 before 4 at least you get used to investing a little.

Max out 3 for 2016, put enough cash aside to max it out early 2017. Put everything else against your mortgage.

Following that plan you may not be mortgage free immediatly but you sound like good savers & I think it will be paid by this time next year.

Once 4 is done you will have the big Mustacian people problem of what to do with your money. Don't let so much build up in a savings account again.

Because you have been doing step 3 step 5 will be easier.

Take the plung & start investing more, then hit your mortgage hard.

Good luck & congrats!

nereo

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Re: Pay off mortgage or invest cash?
« Reply #5 on: October 22, 2016, 08:49:52 AM »
This definitely is a hot topic around here...

I would caution against paying off your mortgage with this hoard of cash right now.  It will make your house be about 40% of your net worth, and that can be dangerous (research why your house is not an investment).  Holdin a mortgage is also a good hedge against inflation, especially at 3.6x%.

First max out your 457 and 403 accounts.  Since it is almost 2017 you can do this for both years over the next few months.  Keep an e-fund to your satisfaction and put some of what remains into a normal taxable investment account (e.g. A total market index fund held at Vanguard or similar). After all that is done go ahead and put some towards the mortgage if it helps you sleep better, but invested money nearly always beats out mortgage pay down at your rates.

Congrats on being in such an enviable position in your 30s. You are on the fast path to FI.

ender

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Re: Pay off mortgage or invest cash?
« Reply #6 on: October 22, 2016, 09:04:36 AM »
We only have access to 1 457 account. Both employers offer 1 403b account. The $6k in the 457 account is the highest amount we can do while still paying the $585 mortgage. If we paid off the mortgage, we could increase 457 to $12k per year.

Does that info alter your recommendation at all?

Addition: Budget excluding mortgage: $1,670/mo

With mortgage of $585: $2,255

Maybe I'm missing something but why can't you:

  • Max out 403bs ($36k)
  • Max out 457 ($18k)

Leaves you with about 61k income less the FICA taxes, which would drop it a bit from there still.

That's way over $2.2k takehome a month, which only really requires ~$30k income, so I don't really understand that you can only contribute $6k/year to the 457. Even assuming 10% of your pay going to a pension still leaves you with a lot of extra money when maxing out both 403bs and the 457.

Where does all the extra money go? Or is that why you have $140k worth of cash now?

waltworks

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Re: Pay off mortgage or invest cash?
« Reply #7 on: October 22, 2016, 09:55:26 AM »
Gross income of $115k has got to be at least $6-7k/month even if you're somehow getting taxed to death. With ~$2225 in expenses, you should be able to max out all your available retirement accounts (and have a ton left over) very easily.

It sounds like you have stable jobs and a ton more income than spending. In your shoes I'd be in no hurry to pay the mortgage down but that's just me. Mortgage at 5% of gross income is basically negligible.

It sounds like you've solved the savings part of things, now put that money to work for you somehow. If you really just can't stand the thought of investing, then I guess paying off the mortgage is better than what you're doing now.

-W

Teachstache

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Re: Pay off mortgage or invest cash?
« Reply #8 on: October 22, 2016, 04:29:22 PM »
We only have access to 1 457 account. Both employers offer 1 403b account. The $6k in the 457 account is the highest amount we can do while still paying the $585 mortgage. If we paid off the mortgage, we could increase 457 to $12k per year.

Does that info alter your recommendation at all?

Addition: Budget excluding mortgage: $1,670/mo

With mortgage of $585: $2,255

Maybe I'm missing something but why can't you:

  • Max out 403bs ($36k)
  • Max out 457 ($18k)

Leaves you with about 61k income less the FICA taxes, which would drop it a bit from there still.

That's way over $2.2k takehome a month, which only really requires ~$30k income, so I don't really understand that you can only contribute $6k/year to the 457. Even assuming 10% of your pay going to a pension still leaves you with a lot of extra money when maxing out both 403bs and the 457.

Where does all the extra money go? Or is that why you have $140k worth of cash now?

Spouse brings home $800/mo after taxes and deductions. I bring home $1,800/mo after taxes and deductions. Regular salaries are $110k gross. We claim single and 1 for each our taxes. We don't ever get much back at tax time.


Teachstache

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Re: Pay off mortgage or invest cash?
« Reply #9 on: October 22, 2016, 04:55:19 PM »
If spouse and I keep our mortgage, what do you suggest we do with this $140k in cash?

Just very unsure what to do with this amount of cash that will preserve the principal as much as possible.

ender

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Re: Pay off mortgage or invest cash?
« Reply #10 on: October 22, 2016, 05:24:57 PM »
I don't understand still.

Are you doing all Roth for those? It seems really confusing that your takehome would only be $2.6k with that much regular income.

Do you have huge healthcare payroll deductions, too?

Teachstache

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Re: Pay off mortgage or invest cash?
« Reply #11 on: October 22, 2016, 06:39:08 PM »
I don't understand still.

Are you doing all Roth for those? It seems really confusing that your takehome would only be $2.6k with that much regular income.

Do you have huge healthcare payroll deductions, too?

No Roth deductions. Healthcare is $311.25/mo for son and myself. Spouse has healthcare paid through work.

My pension contribution is 9.78% of my salary ($61k)

State income taxes aren't cheap in Nebraska.

Are we doing something wrong in terms of deductions?

Metric Mouse

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Re: Pay off mortgage or invest cash?
« Reply #12 on: October 22, 2016, 10:49:17 PM »
If spouse and I keep our mortgage, what do you suggest we do with this $140k in cash?

Just very unsure what to do with this amount of cash that will preserve the principal as much as possible.

VTSAX.

ender

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Re: Pay off mortgage or invest cash?
« Reply #13 on: October 23, 2016, 07:24:15 AM »
No Roth deductions. Healthcare is $311.25/mo for son and myself. Spouse has healthcare paid through work.

My pension contribution is 9.78% of my salary ($61k)

State income taxes aren't cheap in Nebraska.

Are we doing something wrong in terms of deductions?

I'm trying to understand where your money is going.

Your comment here:

We only have access to 1 457 account. Both employers offer 1 403b account. The $6k in the 457 account is the highest amount we can do while still paying the $585 mortgage.

Doesn't seem at all to match the math behind your actual stated numbers. Updating some of my previous post:


Starting: $115k income.

  • Max out 403bs ($36k)
  • Max out 457 ($18k)

Leaves you with about 61k income less the FICA taxes, which are about 8.3k. Healthcare looks like about 3.7k. Pension contributions are another 6k.

Now you've got $43k in income after all these. Given that all of this except FICA is pre-tax you're looking at only a few thousand in actual income taxes, with a kid and married filing jointly and crazy low AGI. Guesstimating here you guys owe around $3-4k total income taxes between NE/federal after deductions.

That's still way over $2.2k takehome a month (about $3250), even with much higher deductions than you currently have - and my example uses maxed out 457 too - so I don't really understand that you can only contribute $6k/year to the 457 while paying the mortgage.

I'm still not sure how this breaks down for you to have such minimal takehome pay.

Something in your numbers still doesn't make sense to me, unless your spending is much higher than your state $2.2k a month, and you are using the "we can only pay the minimum mortgage payment because our actual spending is much higher than our budgeted spending." But you specifically say that your take home is only $2.6k (with a lot lower deductions than I used, since you're only doing $6k in the 457 instead of $18k) and that you don't have a significant tax return anytime.

State income taxes aren't cheap in Nebraska.

If you max out all these accounts you guys will owe less than $2k worth of Nebraska income taxes, while making $115k. That's cheap to me.

arebelspy

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Re: Pay off mortgage or invest cash?
« Reply #14 on: October 23, 2016, 08:33:12 AM »
Spouse brings home $800/mo after taxes and deductions. I bring home $1,800/mo after taxes and deductions. Regular salaries are $110k gross.

Those numbers don't make sense at all.

110k combined gross should give you way more than 2600/mo take home, even if you maxed tax accounts.

You need to dig into your paystubs and find out what's really going on with the numbers.
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waltworks

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Re: Pay off mortgage or invest cash?
« Reply #15 on: October 23, 2016, 10:06:30 AM »
Yes, this is insanity. You are saying that your take-home pay is $2600 a month? On $110k gross?

Sorry, that's not even vaguely possible anywhere that I know.

-W

kpd905

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Re: Pay off mortgage or invest cash?
« Reply #16 on: October 23, 2016, 01:45:34 PM »
Your take home pay doesn't make any sense for your gross income, but ignoring that, I'd do the following:

Max out both 403b's
Max out the 457
Max out two IRAs

This will be $65,000 invested in a year, so this will take a chunk out of your cash.  At the new year, you can max out the IRAs again for 2017.  You could also front load all the other accounts and live off your cash stores, as long as that doesn't affect your employer matches.

Metric Mouse

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Re: Pay off mortgage or invest cash?
« Reply #17 on: October 23, 2016, 05:26:02 PM »
Your take home pay doesn't make any sense for your gross income, but ignoring that, I'd do the following:

Max out both 403b's
Max out the 457
Max out two IRAs

This will be $65,000 invested in a year, so this will take a chunk out of your cash.  At the new year, you can max out the IRAs again for 2017.  You could also front load all the other accounts and live off your cash stores, as long as that doesn't affect your employer matches.

+1.  Running down the cash stores is an interesting option - I don't see that brought up too much here, where the mantra usually is to lump sum invest it.

Teachstache

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Re: Pay off mortgage or invest cash?
« Reply #18 on: October 23, 2016, 05:29:09 PM »
All good points. I run the numbers pretty continuously, and our paychecks come in much less than what I calculate, every time. I can assure you that I am not faking our salaries. Our actual  spending really is in line with our budgeted spending.

I will look into our pay stubs.

Currently, our combined taxes (FICA, state, Medicare, social security) run us around 28%.

Metric Mouse

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Re: Pay off mortgage or invest cash?
« Reply #19 on: October 23, 2016, 05:32:06 PM »
All good points. I run the numbers pretty continuously, and our paychecks come in much less than what I calculate, every time. I can assure you that I am not faking our salaries. Our actual  spending really is in line with our budgeted spending.

I will look into our pay stubs.

Currently, our combined taxes (FICA, state, Medicare, social security) run us around 28%.

Did you mean 2600 per paycheck? That would be closer to the math I find...

MDM

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Re: Pay off mortgage or invest cash?
« Reply #20 on: October 23, 2016, 06:21:41 PM »
All good points. I run the numbers pretty continuously, and our paychecks come in much less than what I calculate, every time. I can assure you that I am not faking our salaries. Our actual  spending really is in line with our budgeted spending.

I will look into our pay stubs.

Currently, our combined taxes (FICA, state, Medicare, social security) run us around 28%.
How do your numbers compare with what you get if you fill in the case study spreadsheet ?  If you take a dependent care tax credit the spreadsheet may overestimate taxes.

In particular, what are your marginal savings rates for the $65K of pre-tax investing space available to you?

waltworks

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Re: Pay off mortgage or invest cash?
« Reply #21 on: October 23, 2016, 09:10:16 PM »
$115k x .72 = $82.8k. So $6,900 a month after tax. You have some pension and health care costs that are deducted, but do they really add up to over $4k/month?!?

Anyway, invest your **** money. If your mortgage is the only way you feel safe doing that, then do that first. Max all your available tax advantaged accounts all the time, every time. Done.

-W