The Money Mustache Community
General Discussion => Welcome and General Discussion => Topic started by: DebtFreeinPhilly on May 21, 2018, 02:34:12 PM
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Hi Everybody!
I am having some trouble coming to a conclusion with paying off my mortgage before retirement vs. maxing out my retirement contributions. I have searched the forums for an answer, and there are some great threads out there about which option is mathematically better. I understand that financially it is smarter to invest the money instead of paying down your mortgage. My left brain agrees with you. My right brain says lower your expenses/debt sucks before retirement and pay that crap off. Thus my dilemma... Also, we are free from debt.
Here is the scenario:
My current salary is $125,000/year
I currently have $317,000 in TSP 401k
I contribute 5% which is 100% matched for a total of $12,500/year (yes I can contribute more, yes I did max out last year, but we are saving for a down payment right now to buy said home)
I plan to retire in approximately 14-15 years (age 50)
My calcs show that my TSP balance + $12,500/yr contributions @ 8% ROI for 14 years will = $1.2 million. I can max out my contributions ($18,500 + match) and reach $1.6 million.
How does one come to a resolution? Paid off home & no other debts at retirement, nest egg of $1.2 million, and a $45k/yr pension or have mortgage debt at retirement, $1.6 million nest egg, and $45k/yr pension.
I am looking for help with the non-math side on making this decision. I get the math part. Its the internal struggle I am having trouble with. Thanks in advance.
If this should be in the Case Study section, I'll move it there
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The tax savings from a 401k tip the scales highly in favor of maxing retirement funding. If you are weighing taxable investing vs. mortgage then its debatable.
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By paying off the mortgage, you'd be trading high return/high variance for low return/low variance. This might make sense for you over a shorter time horizon, but given that you've still got 15 years of work left, I would expect the choice to invest would win out.
Besides, the downside risk of poor market returns pushing back your retirement date is somewhat mitigated by your (defined benefits?) pension.
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You would have to change your forums ID though. Make sure to factor that into the decision.
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You would have to change your forums ID though. Make sure to factor that into the decision.
Touche...
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Evaluate your 'household' risk and risk tolerance:
-How secure is your income? You are projecting 14 years into the future, a lot can happen over that time frame, including entire industries being turned upside down
-Do you have a spouse and what kind of earning potential does that spouse have?
-Do you have any other income streams (e.g. job is 70%, side business is 15%, rental property is 15% ...)?
-How transferable are your skills to other jobs / industries in the area?
-What kind of after tax savings or investments could you tap if you lost your main source of income (i.e. your 'runway'. An example: has $50K set aside in an emergency fund and in an after-tax brokerage account with $3K monthly expenses = 16 months.)
-Image both scenarios: you paid off the house early and you held the mortgage and invested the difference: How would you feel if over the next 14 years the stock market stayed flat? How would you feel if it increased 10x? Do the thought experiment for both scenarios
a) The higher the risk profile, the less likely you should pay down your mortgage as it'll give you a larger buffer to weather any disruption in income. Once you have enough to pay the entire mortgage off, do so because your income isn't secure
b) The lower the risk profile coupled with the emotional 'I want to be completely debt free', no brainer --> pay off the mortgage early for the emotional benefit
c) Low risk profile with a high risk tolerance, take on some market risk --> keep the mortgage for 30 years and invest the rest.
Thanks for the risk scenarios to play through. My job as a federal employee is pretty secure. My wife makes enough to pay for day care because she doesn't want to be a full time SAHM. In the future when the kids are in school full time, her income will help. We have about 4 months worth of emergency funds set aside which is enough for us at the moment. (that answers the first few questions)
My gut reaction for paying the mortgage off early in either scenario is still win-win. Market stays flat, I reduced my debt load & my current TSP balance can still support my family when I factor in the pension. Though its not a woo-hoo retirement life, its still a good one and I know I will be okay. Market increases 10x, I reduced my debt load & my current TSP balance has grown to be huge. Retirement is now a woo-hoo type of retirement with the fear of outliving my money completely gone.
Market stays flat vs. market increase 10x and not paying the mortgage early is an interesting scenario to ponder. That might take me a few days to mull over, but I will get back to you.
Our risk profile is moderately aggressive. We are okay with taking on more risk because of the pension and secure job prospects. Again more personal evaluation needs to be done, because its very hard to quantify risk and emotions.
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By paying off the mortgage, you'd be trading high return/high variance for low return/low variance. This might make sense for you over a shorter time horizon, but given that you've still got 15 years of work left, I would expect the choice to invest would win out.
Besides, the downside risk of poor market returns pushing back your retirement date is somewhat mitigated by your (defined benefits?) pension.
Not sure what you mean by defined benefits, but I am anticipating a 41% pension (approx. $51k/yr) and 75% of my medical/dental/vision insurance premiums paid for (I would pay about $400/month for full coverage) at age 50.
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the tax savings from maxing a 401k or equivalent plan make it not even a debate you should be maxing your TSP - and really even when it comes to taxable investing you'll still come out miles ahead.
betting on the market to be flat or down over then next 10-15 years has historically proven to be a losers game. play the odds invest the money your future self will thank you.
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The thing I always find most entertaining about these discussions is that loads of people will advise you to invest rather than pay the mortgage (and they have the maths to support it), but if you already had a paid-off house hardly anyone would recommend you take out a mortgage to invest the proceeds in the market. Logically and mathematically the two are identical so I take that as pretty hard evidence that there is a lot more than just the maths involved in the decision!
At the end of the day, it all comes down to you. You have to try and work out what will make you happiest, but also what impact the different options might have on your own behaviour. Some people might find seeing the mortgage shrink gave them a much stronger mental stimulus than watching their investments grow and this might drive them to save harder than otherwise - developing more frugal habits that can then both accelerate stash growth and reduce the amount of stash needed once the mortgage is paid off. Other people might find that as the mortgage shrinks, and especially once it's gone, they feel much richer and start spending more as a result leaving them with a triple whammy of missed investment returns, reduced saving and higher 'needs'. You need to really think about what is going to work for you.
In my own case, I paid off my mortgage (twice) as I didn't know much about investing at the time and I found it really motivating towards increasing my savings rates to mustachian levels - which then let me power through to my imminent RE on the back of a huge savings rate rather than long term returns. Mathematically I'd be much richer if I'd invested more post the 2008 crash, but I'm not sure I would be as frugal and doubt I'd be any happier. Who knows?
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Everything is a personal choice.
The two-fold path I've decided to take is to first invest up to a magic number, and then pay the mortgage down to zero to reduce the monthly spend during FIRE. When both of those things have happened, we will be FIRE. It so happens that in my projected timeline, my 15 year fixed will be mostly paid down by the time I reach the magic number, so the mortgage payoff phase will probably take less than a year.
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The thing I always find most entertaining about these discussions is that loads of people will advise you to invest rather than pay the mortgage (and they have the maths to support it), but if you already had a paid-off house hardly anyone would recommend you take out a mortgage to invest the proceeds in the market. Logically and mathematically the two are identical so I take that as pretty hard evidence that there is a lot more than just the maths involved in the decision!
At the end of the day, it all comes down to you. You have to try and work out what will make you happiest, but also what impact the different options might have on your own behaviour. Some people might find seeing the mortgage shrink gave them a much stronger mental stimulus than watching their investments grow and this might drive them to save harder than otherwise - developing more frugal habits that can then both accelerate stash growth and reduce the amount of stash needed once the mortgage is paid off. Other people might find that as the mortgage shrinks, and especially once it's gone, they feel much richer and start spending more as a result leaving them with a triple whammy of missed investment returns, reduced saving and higher 'needs'. You need to really think about what is going to work for you.
In my own case, I paid off my mortgage (twice) as I didn't know much about investing at the time and I found it really motivating towards increasing my savings rates to mustachian levels - which then let me power through to my imminent RE on the back of a huge savings rate rather than long term returns. Mathematically I'd be much richer if I'd invested more post the 2008 crash, but I'm not sure I would be as frugal and doubt I'd be any happier. Who knows?
Disagree. Depending on the math, this might be exactly what I'd recommend.
The personal choice aspect comes in to play only when factors outside of the math are considered. At our historically very low mortgage interest rates, the math is quite clearly in favor of a slow-as-possible pay down.
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The thing I always find most entertaining about these discussions is that loads of people will advise you to invest rather than pay the mortgage (and they have the maths to support it), but if you already had a paid-off house hardly anyone would recommend you take out a mortgage to invest the proceeds in the market. Logically and mathematically the two are identical so I take that as pretty hard evidence that there is a lot more than just the maths involved in the decision!
First, as a counterpoint, when I moved I sold my paid-off house and purchased the new home with a mortgage to invest the difference. I didn't have to, but felt the return would outpace the loan interest.
Second, a cash-out mortgage is more difficult to get and usually has less favorable terms than a purchase mortgage, which is why I have never recommended this approach to anyone.
Lastly, the advice given is usually asked from the context of someone that already has a mortgage and needs to determine how to invest their surplus funds with a choice of one or the other. I've yet to see someone say "Should I just invest x dollars, or should I mortgage my house and invest the proceeds." That would probably be quite a lively discussion.
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Here's a suggestion for dealing with this conundrum:
Promise yourself you'll save and invest like a badass mustachian until you hit $1M. Keep making regular mortgage payments along the way. When you get to $1M, give yourself permission to pay off the mortgage in a lump sum. Hint, you will hit $1M faster than you ever thought possible, and when you get to $1M, you probably won't want to pay off the mortgage. You'll sleep great knowing that your investments are earning more than you do and you could vanquish that ol' mortgage any time you want.
There is no downside to this approach. You will end up with a bigger 'stache and hit FIRE faster. Who can't get all warm and fuzzy about that?
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How do you assess risk tolerance over a 15 year time period? As I mentioned, we are moderately aggressive when it comes to financial. I understand that it varies from person to person. I am looking for ways to delve into this so I end up feeling good about which ever decision I make. Kinda like "my conscience is clean" when all said and done.
For those that paid off their mortgage early over investing more, do you think you made the right decision? What would you do differently?
For those that invested the difference and kept a mortgage, do you think you made the right decision? Would you do it differently?
Thank you all for the great advice so far.
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I refinanced last year to a 15 year mortgage at 3.25%. I will not send an extra penny into it since I am very comfortable in the belief that investing that money will yield higher returns over that time.
(((Thanks Boarder)))
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How do you assess risk tolerance over a 15 year time period? As I mentioned, we are moderately aggressive when it comes to financial. I understand that it varies from person to person. I am looking for ways to delve into this so I end up feeling good about which ever decision I make. Kinda like "my conscience is clean" when all said and done.
For those that paid off their mortgage early over investing more, do you think you made the right decision? What would you do differently?
For those that invested the difference and kept a mortgage, do you think you made the right decision? Would you do it differently?
Thank you all for the great advice so far.
So most here who pay down their mortgage due so after maxing tax advantaged space even Pizza Steve said you should not be paying down your mortgage prior to maxing this space. its a guaranteed 10% ROI on your money from the git go based on the numbers you've presented so far. plus you have all the added security.
if you were talking about after tax money that would be invested in a taxable account here are your benefits of each situation
Invest
1. Inflation protection - mortgages dont index to inflation
2. Longevity of money protection - assuming you dont get bit by Sequence of Returns your money will historically last much longer.
(ie hit a huge down market in the first 4-5 years)<-- this doesnt apply to you b/c you have protection with your pensions.
Paydown
1. deflation protection - unlikely to happen - long periods of deflation would devastate the economic system and you'd have other problems whether you paid it down or invested.
2. Sequence of returns protection - again you dont really need this due to your other assets that will pay out and protect from this ie your pensions.
for you the worst decision you can make for you future self is to pay down the mortgage b/c you're giving up a tax savings.
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I had the same struggle, and now feel peaceful about our decision to ride out the mortgage, and invest, invest, invest. For me, it came down to this: life is uncertain, and things rarely go according to plan.
If we put $2k/month extra toward our mortgage, 5 years from now, our mortgage balance will be $120k lower than if we just made the minimum payment due. That amount is nothing to sneeze at. But we will not be in a substantially different cash flow position. We would also not be in a significantly different asset/liability position UNLESS and UNTIL we sell - the money is tied up until that point. The benefit to a paid-off mortgage comes only after the balance has reached zero.
If we put $2k/month into a taxable investment account, 5 years from now, odds are we will have at least $120k sitting there still. Then, if things hit the fan, and we face illness/disability/fire/tornado/whathaveyou: we have a sizeable cushion, which we could always use to make the minimum monthly payment if we needed to.
If you really just can't decide, go half-and-half: whatever your available surplus is for this purpose, put half toward the mortgage and half into investments.
Good luck.
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We use the strategy to max out tax sheltered accounts (HSA, ROTH, 401k), then use the rest of the paying mortgage principle. Having debt of any kind stresses me out so paying down the mortgage is kind of like a partial HSA as well for me. This is probably due to being super risk adverse, living thru the dotcom era and being IT with cronic layoffs early in my career and NEVER again wanting to be close the brink. My stock portfolio went down 70% and I was under indescribable stress as I just spent years saving that money in shit jobs and lost most of it (or so I thought at the time). If you have no emotions when stocks drop like that, debt is probably the way to go.
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3.375% mortgage rate. I won't pay that off until I reach FI and have the extra funds to do it.
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Speaking for myself, it makes no sense for me to pay extra to the mortgage, because if SHTF, all those extra payments don't prevent my house from being taken from me by the bank. On the other hand, if i invest that money (in stocks and bonds), not only does the money pile up faster, but if SHTF, I have a ton of cash I can tap into and pay my mortgage with.
IMO, it makes little sense to pay extra to the mortgage. Unless you have enough $$ to pay it off all at once. That's still not optimal (because you'd earn more by investing), but at least you avoid the risk of having all your $$ tied up in your house and no way to access it if SHTF (like a medical emergency, extended unemployment, another housing crash, etc...).
Always stay liquid, until you can pay in full. That hedges quite nicely against future instability.
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For those that paid off their mortgage early over investing more, do you think you made the right decision? What would you do differently?
I paid a couple mortgages off going back to loans I took out over 25 years ago. My rates were up in the 7 to 9 percent range. Neither loan earned me a tax deduction that would exceed my standard deduction. It was great to get that debt off my shoulders both times, and with no mortgage in many years now, I'm able to save 70% to 80% of my take home pay with a barebones budget of $1300/mo. Did I make the right decision? Absolutely. Would I do anything differently? Not with the higher rates from back then.
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What is your mortgage rate?
If 5% or more, I'd pay it off early.
With the pension you will be getting, you have a solid base that protects you for your basic expenses even if the stock market provides a rocky ride along the way.
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I had the same struggle, and now feel peaceful about our decision to ride out the mortgage, and invest, invest, invest.
I'm glad you are happy with the decision you made -- and it sounds like it turned out really well for you. Take all my comments below not as a rebuttal or argument in favor of paying off versus investing, but rather in the 'I'm a pedant and I can't help myself' sense. :D
For me, it came down to this: life is uncertain, and things rarely go according to plan.
Ironically, this is the same reason often cited by those who choose to pay down their mortgages! i.e., "my investments are at the whim of the markets, but at least I can count on my mortgage payoff having a known, positive return."
If we put $2k/month extra toward our mortgage, 5 years from now, our mortgage balance will be $120k lower than if we just made the minimum payment due.
Not quite. As an example, consider a $300k mortgage at 4% over 30 years. Paying $2,000/mo extra starting on month 1 of the mortgage, after 5 years the balance would be about $138,745. Without the extra payments it would be about $271,343. So the principal balance went down by about $132,598, which is $12,598 more than the extra payments. The mortgage would also be paid off in about 14.5 years instead of 30, assuming the extra payments stopped after 5 years.
Of course one might reasonably expect that $2,000 invested monthly in the S&P500 could be worth quite a bit more than $132,598 after 5 years. But in some 5 year periods you might break even or even lose $$.
That amount is nothing to sneeze at. But we will not be in a substantially different cash flow position. We would also not be in a significantly different asset/liability position UNLESS and UNTIL we sell - the money is tied up until that point. The benefit to a paid-off mortgage comes only after the balance has reached zero.
I get your point about the money being tied up. But it's not as though one has no options for getting the $$ if needed. If one needed cash for an emergency she could open a HELOC, do a cash-out refi, or sell the house. I'm not saying these are awesome options -- some of them have obvious downsides. If it's more a matter of monthly cash-flow, one could also recast. In the example above, the recast payment would be $732/mo versus the original $1,432 P&I. That would chop off $700/mo or $8,400/year from living expenses. Granted, $700/mo might (or might not) look like much in 5-25 years from now.
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Hi Everybody!
I am having some trouble coming to a conclusion with paying off my mortgage before retirement vs. maxing out my retirement contributions. I have searched the forums for an answer, and there are some great threads out there about which option is mathematically better. I understand that financially it is smarter to invest the money instead of paying down your mortgage. My left brain agrees with you. My right brain says lower your expenses/debt sucks before retirement and pay that crap off. Thus my dilemma... Also, we are free from debt.
Here is the scenario:
My current salary is $125,000/year
I currently have $317,000 in TSP 401k
I contribute 5% which is 100% matched for a total of $12,500/year (yes I can contribute more, yes I did max out last year, but we are saving for a down payment right now to buy said home)
I plan to retire in approximately 14-15 years (age 50)
My calcs show that my TSP balance + $12,500/yr contributions @ 8% ROI for 14 years will = $1.2 million. I can max out my contributions ($18,500 + match) and reach $1.6 million.
How does one come to a resolution? Paid off home & no other debts at retirement, nest egg of $1.2 million, and a $45k/yr pension or have mortgage debt at retirement, $1.6 million nest egg, and $45k/yr pension.
I am looking for help with the non-math side on making this decision. I get the math part. Its the internal struggle I am having trouble with. Thanks in advance.
If this should be in the Case Study section, I'll move it there
Put more into retirement, you can always change your mind and pay off the mortgage and still be ahead. If you max out your 401k now (18,500 of your own contributions), and change your mind in 5 years because you hate the mortgage, you can crank down the retirement and start paying the mortgage. Or at 50, you could probably pull out a chunk of money and pay off the mortgage and still be ahead.
And as mentioned, the tax savings of the 401k are what make that true (the actual numbers would require a bit of number crunching).
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This is a value judgement, and your personal circumstance can change the answer. I will carry mortgage debt into retirement next month. My reasons:
- 2.38% mortgage for 3.5 more years. I can make more money than that with a balanced portfolio.
- Expected spending and taxable income still qualify us for ACA insurance subsidies.
- If we forego the cost sharing subsidies, we can convert another 30k per year with Roth ladder. Also nice to have if my calculations are wrong.
- Pay off mortgage or move / downsize in 3-5 year when it balloons, and eliminate mortgage that way.
Other factors that are minor for me:
- Paying the mortgage is investing with no risk at the interest rate. To me, T-bills are an equivalent safe investment, or about 3% now. I think people underestimate the peace of mind that comes from no risk. You will get exactly that return by not having to pay that portion of interest.
- On the flip side, paying the mortgage slowly takes money out of investment. Your equity sits at what ever the local property increase is. Where I am, that is maybe 2%. YMMV.
- No more mortgage deduction for many because deductions have been greatly restructured. This makes my lean more toward pay it off.
- If your retirement expenses are high, and you will rely on ACA, pay off allows you to spend on other things.
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The thing I always find most entertaining about these discussions is that loads of people will advise you to invest rather than pay the mortgage (and they have the maths to support it), but if you already had a paid-off house hardly anyone would recommend you take out a mortgage to invest the proceeds in the market. Logically and mathematically the two are identical so I take that as pretty hard evidence that there is a lot more than just the maths involved in the decision!
At the end of the day, it all comes down to you. You have to try and work out what will make you happiest, but also what impact the different options might have on your own behaviour. Some people might find seeing the mortgage shrink gave them a much stronger mental stimulus than watching their investments grow and this might drive them to save harder than otherwise - developing more frugal habits that can then both accelerate stash growth and reduce the amount of stash needed once the mortgage is paid off. Other people might find that as the mortgage shrinks, and especially once it's gone, they feel much richer and start spending more as a result leaving them with a triple whammy of missed investment returns, reduced saving and higher 'needs'. You need to really think about what is going to work for you.
In my own case, I paid off my mortgage (twice) as I didn't know much about investing at the time and I found it really motivating towards increasing my savings rates to mustachian levels - which then let me power through to my imminent RE on the back of a huge savings rate rather than long term returns. Mathematically I'd be much richer if I'd invested more post the 2008 crash, but I'm not sure I would be as frugal and doubt I'd be any happier. Who knows?
There is a big difference between the question of whether to invest surplus money into tax advantaged retirement account or paydown a mortgage and the question of whether to do a cash-out refinance to invest in non-tax deferred accounts.
In the first instance, you can pay down the mortgage, and get a guaranteed after tax return of the mortgage rate (or really a little bit less, if you are itemizing), or you can get a tax deferral and get the return of the stock market (or whatever fund you are investing in) or alternatively get tax free growth in the future if you go the roth route. It's really six of one, half a dozen of the other on a risk adjusted basis, except for the benefit of the tax-free growth in the retirement account.
If later on, you come into a chunk of money or just a much higher income, you can pay down the house and more or less pay off the house for the same benefit; the years you don't max out your retirement accounts are gone forever.
In the second instance, you are talking about incurring the costs of a cash-out refinance (which are realized immediately or rolled into the debt, so they are more expensive on a time-value of money basis than future returns in the stock market), and then betting that on an after tax basis, you are going to make up for the closing costs and then also get better returns than the after tax interest rate on your mortgage (which is just the actual rate if you are not itemizing).
When you're talking about essentially an arbitrage play, differences like that in the initial condition can easily swamp whatever positive benefit might have been had.
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I had the same struggle, and now feel peaceful about our decision to ride out the mortgage, and invest, invest, invest.
I'm glad you are happy with the decision you made -- and it sounds like it turned out really well for you. Take all my comments below not as a rebuttal or argument in favor of paying off versus investing, but rather in the 'I'm a pedant and I can't help myself' sense. :D
For me, it came down to this: life is uncertain, and things rarely go according to plan.
Ironically, this is the same reason often cited by those who choose to pay down their mortgages! i.e., "my investments are at the whim of the markets, but at least I can count on my mortgage payoff having a known, positive return."
If we put $2k/month extra toward our mortgage, 5 years from now, our mortgage balance will be $120k lower than if we just made the minimum payment due.
Not quite. As an example, consider a $300k mortgage at 4% over 30 years. Paying $2,000/mo extra starting on month 1 of the mortgage, after 5 years the balance would be about $138,745. Without the extra payments it would be about $271,343. So the principal balance went down by about $132,598, which is $12,598 more than the extra payments. The mortgage would also be paid off in about 14.5 years instead of 30, assuming the extra payments stopped after 5 years.
Of course one might reasonably expect that $2,000 invested monthly in the S&P500 could be worth quite a bit more than $132,598 after 5 years. But in some 5 year periods you might break even or even lose $$.
That amount is nothing to sneeze at. But we will not be in a substantially different cash flow position. We would also not be in a significantly different asset/liability position UNLESS and UNTIL we sell - the money is tied up until that point. The benefit to a paid-off mortgage comes only after the balance has reached zero.
I get your point about the money being tied up. But it's not as though one has no options for getting the $$ if needed. If one needed cash for an emergency she could open a HELOC, do a cash-out refi, or sell the house. I'm not saying these are awesome options -- some of them have obvious downsides. If it's more a matter of monthly cash-flow, one could also recast. In the example above, the recast payment would be $732/mo versus the original $1,432 P&I. That would chop off $700/mo or $8,400/year from living expenses. Granted, $700/mo might (or might not) look like much in 5-25 years from now.
Yes and when those who pay down there mortgages cite the reason of safety they are doing it incorrectly bc during the act of pay down they are less afe in this uncertain world. Many reasons cited by those paying down their mortgages and why actually increase risks they think they are decreasing.
There are very few 5 year periods where paying down a mortgage comes out ahead vs investing. To say there are some is true. Just like there are some green spaces on a roulette wheel but I choose to bet my future on both red and black vs green. This is another thing over stated by mortgage paydown club. Bc the odds of hitting the paydown window that it beats investing are close to slim to none.
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Option 3: Trade down on your house as soon as you are empty-nesters and buy something smaller for cash.
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i'll opt for :
Paid off home & no other debts at retirement, nest egg of $1.2 million, and a $45k/yr pension
since you were looking for a non-math oriented point of view, i think what you wanted is safety. which is what i wanted. i wanted to be sure that my home is paid up and secured, so that i need not worry about the market and losing a roof over my head during retirement.
having gone through 2008, it was extremely painful to be holding on to a mortgage and think that s**t, i could have paid of X% of the loan with the losses.
personally what happened for me was that i invested until i had more investments and cash than my outstanding mortgage loan. the year that happened, i paid up the loan in full and became totally debt/mortgage free.
since then i'm just saving and investing for retirement. the singular focus on investment (without balancing debt) is priceless from an emotional point of view.
in my view, there is no point in enduring more potential volatility by having a mortgage if circumstances allow you to pay it off easily. the additional earnings are only worth it if you're aiming to retire early. given that you're looking at a pension, is early retirement an aim?
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Thank you all for the great insight. I will try to address some of the questions posed and my thoughts going forward.
... given that you're looking at a pension, is early retirement an aim?
ER at 50 was my goal. By normal standards thats 15 years ahead of most. By MMM standards, thats 15 years behind! We do not have the assets at the moment to ER before 50. We are continually pushing to go earlier but for now its ER at 50.
For your second question...yes paid it. No regrets. It is a lower, but certain return. However, I paid it as a satisfaction item, not a wealth growth decision. It was not a hugely meaningful impact on our retirement, one way or the other. There is no wrong decision among your choices, IMHO. Spending choices will have a much bigger impact, e.g. what car to buy, if any.
Thanks. I'm glad it worked out for you.
I have a bit of thinking to do about it since both sides (pay off early vs invest) have some good points that are pertinent to me (emotions attached to being debt free, higher risk tolerance, safety net of pension, time period to invest, ROI, liquidity of assets, etc.). Thank you all for the help! This forum is awesome!
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i'll opt for :
Paid off home & no other debts at retirement, nest egg of $1.2 million, and a $45k/yr pension
since you were looking for a non-math oriented point of view, i think what you wanted is safety. which is what i wanted. i wanted to be sure that my home is paid up and secured, so that i need not worry about the market and losing a roof over my head during retirement.
having gone through 2008, it was extremely painful to be holding on to a mortgage and think that s**t, i could have paid of X% of the loan with the losses.
personally what happened for me was that i invested until i had more investments and cash than my outstanding mortgage loan. the year that happened, i paid up the loan in full and became totally debt/mortgage free.
since then i'm just saving and investing for retirement. the singular focus on investment (without balancing debt) is priceless from an emotional point of view.
in my view, there is no point in enduring more potential volatility by having a mortgage if circumstances allow you to pay it off easily. the additional earnings are only worth it if you're aiming to retire early. given that you're looking at a pension, is early retirement an aim?
you'd be making what historically has been an incredibly unsafe decision in the name of safety which really at its root is just fear. This isnt taxable dollars vs paying down a mortgage its tax advantaged dollars vs paying down a mortgage. the feeling of safety does not mean one is actually taking the path that historically has proven to be safer. even in the taxable vs paydown debate its still less safe and compounding paying the govt more money in peak earning years by choosing to paydown a mortgage vs take advantage of the gift our govt currently has on the table just compounds it.
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Follow the investment order advice here:
https://forum.mrmoneymustache.com/investor-alley/investment-order/ (https://forum.mrmoneymustache.com/investor-alley/investment-order/)
You only get a limited amount to put into retirement accounts each year -- any tax deferred accounts should be top priority.
If you end up getting a low-interest, fixed rate mortgage loan, then pay off (or down) your mortgage only after all tax-advantaged accounts are filled to the top each year.
While you're saving for the down payment, I would still save the max in TSP, but I would save enough for at least 20% down to avoid PMI.
As for paying down a mortgage, I personally want my primary home to be paid off by the time I retire, so I put a little extra toward it each month. I've also followed Dicey's advice and created a sinking fund to pay off the house. It's hard to take money out once you put it in, so although I have taken funds out of my taxable two times to make payments of $100K each, I am still far from paying it off. And when you get to around $1M, it's amazing how fast the money replenishes itself.
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Debt Free, are you FERS LEO or the like, if so you will be eligible to completely access the money in TSP at 50 instead of 59.5. Especially if you are I'd put the money into TSP, you can take a lump-sum out to pay off the mortgage at that time if you so desire.
I'd also plan on at least initially maxing out TSP, you can never get that tax advantaged money back. You may find in 5 years you can both Max out and pay down your mortgage. Plus you will be less tempted to use that "extra" money for other reasons. With TSP you never see the money, with having more in you paycheck you maybe tempted to take extra house payment money for other purposes.
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I understand that financially it is smarter to invest the money instead of paying down your mortgage. My left brain agrees with you. My right brain says lower your expenses/debt sucks before retirement and pay that crap off. Thus my dilemma... Also, we are free from debt.
I think you may have answered your own question right there. There is a "correct" answer mathematically (assuming returns for the next X amount of years yield their historical averages), but that may not be the "correct" answer for you. If paying your mortgage opens other opportunities or gives you peace of mind, that might be a good choice.
I wouldn't pay extra every month, though. I'd save the lump sum and pay it at once. That way, you're still liquid if a buying opportunity arises in the stock market. Plus if you run into trouble, having paid extra a while ago isn't going to save you from foreclosure.
Either way, it's not like you're blowing the money on a Porsche.
Agreed; the non-financial aspects of the decision often outweigh the difference in dollars. And just to make sure everyone knows this has been addressed on the blog as well:
https://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/
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I understand that financially it is smarter to invest the money instead of paying down your mortgage. My left brain agrees with you. My right brain says lower your expenses/debt sucks before retirement and pay that crap off. Thus my dilemma... Also, we are free from debt.
I think you may have answered your own question right there. There is a "correct" answer mathematically (assuming returns for the next X amount of years yield their historical averages), but that may not be the "correct" answer for you. If paying your mortgage opens other opportunities or gives you peace of mind, that might be a good choice.
I wouldn't pay extra every month, though. I'd save the lump sum and pay it at once. That way, you're still liquid if a buying opportunity arises in the stock market. Plus if you run into trouble, having paid extra a while ago isn't going to save you from foreclosure.
Either way, it's not like you're blowing the money on a Porsche.
Agreed; the non-financial aspects of the decision often outweigh the difference in dollars. And just to make sure everyone knows this has been addressed on the blog as well:
https://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/
yet again even the people here who are paying down mortgages would advise against it in the OPs situation due to not maxing tax advantaged space. Also MMM had a mortgage at a much different time than we have now with insanely low fixed rates. leaving tax advantaged space on the table to feel better is about the dumbest thing you can do.
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Follow the investment order advice here:
https://forum.mrmoneymustache.com/investor-alley/investment-order/ (https://forum.mrmoneymustache.com/investor-alley/investment-order/)
....While you're saving for the down payment, I would still save the max in TSP, but I would save enough for at least 20% down to avoid PMI.
I have seen the investment order and that's what kinda prompted my whole dilemma in the first place. If I max out TSP, I have very little to put towards a down payment fund each month, less than $100 or so, which would prohibit me from purchasing a home in the first place. Please keep in mind we live a MMM Lite lifestyle. We don't get all spendy but we have expenses that others would cringe at (CrossFit, French Lessons, etc.).
Not too digress too far off topic, we spend $1850/month on daycare & preschool. In September, my oldest starts kindergarten so that will drop by $500. Over the next few years, childcare costs will decrease and hopefully my wife's income will increase, which would help paying down a mortgage.
Debt Free, are you FERS LEO or the like, if so you will be eligible to completely access the money in TSP at 50 instead of 59.5. Especially if you are I'd put the money into TSP, you can take a lump-sum out to pay off the mortgage at that time if you so desire.
I am a FERS LEO. I have taken into consideration the lump sum withdrawal to pay off the mortgage at retirement. I am scared that the lump would be north of $200k by that time which would all be taxable income. As it stands now, I will not be able to take a lump sum from the Roth TSP without paying an early withdrawal penalty unless I am 59.5. I can withdraw from Traditional TSP penalty free at 50 though.
Agreed; the non-financial aspects of the decision often outweigh the difference in dollars. And just to make sure everyone knows this has been addressed on the blog as well:
https://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/
Thanks for the link to the blog post!
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I would load up on the tax free investment space before I paid down the mortgage. ESPECIALLY over the next 2 or 3 years. It sounds like your costs will be going down over the next few years, so your $100 left over becomes $600 in very short order.
In other words, if you don't fill up the tax sheltered space this year, that opportunity is lost and gone for ever. The option to pay extra on the mortgage will ALWAYS be there. Waiting an extra year or 2 for your other expenses to drop to free up cashflow is not going to make or break your plan to pay down the mortgage.
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Not too digress too far off topic, we spend $1850/month on daycare & preschool. In September, my oldest starts kindergarten so that will drop by $500. Over the next few years, childcare costs will decrease and hopefully my wife's income will increase, which would help paying down a mortgage.
Are you planning on paying for these kids' college at all? If so, that is another big cashflow risk in ~15 yrs. I would max all tax-advantaged investments, then 529 (3.07% tax savings in PA), then I would think about potentially paying extra toward mortgage (maybe). If you still are worried just buy a cheaper house ;P
Good luck buying a house in Philly, it is a brutal market right now. Maybe it will calm down in the fall.
Also, hopefully you are getting the $5000 dependent care FSA deduction. Maybe you should start a case study after all, there could be some other ideas to consider.
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Are you planning on paying for these kids' college at all? If so, that is another big cash flow risk in ~15 yrs. I would max all tax-advantaged investments, then 529 (3.07% tax savings in PA), then I would think about potentially paying extra toward mortgage (maybe). If you still are worried just buy a cheaper house ;P
Good luck buying a house in Philly, it is a brutal market right now. Maybe it will calm down in the fall.
Also, hopefully you are getting the $5000 dependent care FSA deduction. Maybe you should start a case study after all, there could be some other ideas to consider.
We have some saved for college ($9,500 & $4k) and will add to their 529s as we can budget for it. We do the $5000 FSA Dependent Care deduction already. Yes Philadelphia is a seller's market right now, so we are being patient.
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Since you already understand all of the math, here's the narrative that I would suggest to get your emotions on board.
The fastest way to pay off your mortgage is to invest your surplus each month, and then pay off your mortgage in a lump sum at the end. Instead of getting the 3-5% (mortgae rate) return you'll be getting a 6-8% (stock market) return, plus tax savings for anything saved in a retirement account. You'll save more, faster and in 15 years (or less) you can pay off your mortage in a lump sum. If you change your mind along the way, it will be because you feel really good about your massive cash cushion, and either way you'll be happy with your decision.
You also have the added benefit of knowing you won't get foreclosed on, should something happen to drastically reduce your income. If your savings are liquid, you can use them to pay your mortgage payment each month in the event of a disability or loss of employment. But if you've made additional payments for 8 years, and find yourself in a bad situation, unable to make the minimum payment each month, you will still get foreclosed on. They won't care that you're years ahead on your repayment schedule. Refinancing, or getting a HELOC becomes a lot harder if you're unemployed too. Whereas having a huge cash cushion never gets old.
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Follow the investment order advice here:
https://forum.mrmoneymustache.com/investor-alley/investment-order/ (https://forum.mrmoneymustache.com/investor-alley/investment-order/)
....While you're saving for the down payment, I would still save the max in TSP, but I would save enough for at least 20% down to avoid PMI.
I have seen the investment order and that's what kinda prompted my whole dilemma in the first place. If I max out TSP, I have very little to put towards a down payment fund each month, less than $100 or so, which would prohibit me from purchasing a home in the first place. Please keep in mind we live a MMM Lite lifestyle. We don't get all spendy but we have expenses that others would cringe at (CrossFit, French Lessons, etc.).
Not too digress too far off topic, we spend $1850/month on daycare & preschool. In September, my oldest starts kindergarten so that will drop by $500. Over the next few years, childcare costs will decrease and hopefully my wife's income will increase, which would help paying down a mortgage.
Debt Free, are you FERS LEO or the like, if so you will be eligible to completely access the money in TSP at 50 instead of 59.5. Especially if you are I'd put the money into TSP, you can take a lump-sum out to pay off the mortgage at that time if you so desire.
I am a FERS LEO. I have taken into consideration the lump sum withdrawal to pay off the mortgage at retirement. I am scared that the lump would be north of $200k by that time which would all be taxable income. As it stands now, I will not be able to take a lump sum from the Roth TSP without paying an early withdrawal penalty unless I am 59.5. I can withdraw from Traditional TSP penalty free at 50 though.
Agreed; the non-financial aspects of the decision often outweigh the difference in dollars. And just to make sure everyone knows this has been addressed on the blog as well:
https://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/
Thanks for the link to the blog post!
But you could take out your contributions from a Roth TSP (so 18,500 x 15 years is more than your $200,000)
BTW, if you aren't subscribing to Dan Jameison's FERSguide you should be. He's a former FBI Agent who retired and has been giving solid advise for years to other LEO's. He also at some point looked at MMM as it was though him I found this place.
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Since you already understand all of the math, here's the narrative that I would suggest to get your emotions on board.
The fastest way to pay off your mortgage is to invest your surplus each month, and then pay off your mortgage in a lump sum at the end. Instead of getting the 3-5% (mortgae rate) return you'll be getting a 6-8% (stock market) return, plus tax savings for anything saved in a retirement account. You'll save more, faster and in 15 years (or less) you can pay off your mortage in a lump sum. If you change your mind along the way, it will be because you feel really good about your massive cash cushion, and either way you'll be happy with your decision.
You also have the added benefit of knowing you won't get foreclosed on, should something happen to drastically reduce your income. If your savings are liquid, you can use them to pay your mortgage payment each month in the event of a disability or loss of employment. But if you've made additional payments for 8 years, and find yourself in a bad situation, unable to make the minimum payment each month, you will still get foreclosed on. They won't care that you're years ahead on your repayment schedule. Refinancing, or getting a HELOC becomes a lot harder if you're unemployed too. Whereas having a huge cash cushion never gets old.
Nope, it never does! Thanks for this post @Kay-Ell, it is a thing of beauty.
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The fastest way to pay off your mortgage is to invest your surplus each month, and then pay off your mortgage in a lump sum at the end. Instead of getting the 3-5% (mortgae rate) return you'll be getting a 6-8% (stock market) return, plus tax savings for anything saved in a retirement account. You'll save more, faster and in 15 years (or less) you can pay off your mortage in a lump sum. If you change your mind along the way, it will be because you feel really good about your massive cash cushion, and either way you'll be happy with your decision.
You also have the added benefit of knowing you won't get foreclosed on, should something happen to drastically reduce your income. If your savings are liquid, you can use them to pay your mortgage payment each month in the event of a disability or loss of employment. But if you've made additional payments for 8 years, and find yourself in a bad situation, unable to make the minimum payment each month, you will still get foreclosed on. They won't care that you're years ahead on your repayment schedule. Refinancing, or getting a HELOC becomes a lot harder if you're unemployed too. Whereas having a huge cash cushion never gets old.
Full disclosure: we've been paying extra mortgage principal payments since late 2010. I just did the math in our case (I realize the OP isn't interested in the math part -- this is for the comment above, and adds some context to the posts by boarder42, Dicey, et al), and had we instead invested 100% in the S&P500 since 2010 we would currently be about $26,000 ahead. Slightly more than $26,000 if you include the minor effect of the mortgage interest deduction (for us it was always minimal).
In our case the loan balance started at $274,000 for a 20 year term, and we made extra payments of about $1,150/mo. But I was curious to see how we would have fared in other ~7.5 year periods for the often-recommended 30 year term, so I used the yearly S&P500 returns and average 30 yr mortgage rates for the same length periods starting in 10/2010 and going back to 10/2001.
Inv*: the total amount of the S&P500 balance (https://dqydj.com/sp-500-dividend-reinvestment-and-periodic-investment-calculator/) after ~7.5 years less 15% LTCG tax
Mtg Rate: average 30 year (http://www.freddiemac.com/pmms/pmms30.html) mortgage rate for the starting year
Mtg Bal w/out Paydown: the mortgage balance after ~7.5 years of regular payments
Mtg Bal w/ Paydown: the mortgage balance after ~7.5 years of paying an extra $1,150/mo
Mtg Prin Red: the amount the mortgage balance was reduced by extra payments over ~7.5 years
Inv Advtg: The investment account balance (less 15% LTCG) minus the curtailed mortgage balance after ~7.5 years
| Period | | Inv* | | Mtg Rate | | Mtg Bal w/out Paydown | | Mtg Bal w/ Paydown | | Mtg Prin Red | | Inv Advtg |
| 10/10-5/18 | | 149,503 | | 4.69% | | 235,501 | | 108.475 | | 127,026 | | 22,477 |
| 10/09-05/17 | | 147,800 | | 5.04% | | 237,392 | | 108,569 | | 128,823 | | 18,977 |
| 10/08/-5/16 | | 145,214 | | 6.03% | | 242,379 | | 108,296 | | 134,083 | | 11,131 |
| 10/07-5/15 | | 155,327 | | 6.34% | | 243,832 | | 108,045 | | 135,787] | | 19,540 |
| 10/06-5/14 | | 143,086 | | 6.41 | | 244,152 | | 107,978 | | 136,174 | | 6,912 |
| 10/05-5/13 | | 128,308 | | 5.87% | | 241,609 | | 108,394 | | 133,215 | | -4,907 |
| 10/04-5/12 | | 107,296 | | 5.84% | | 241,463 | | 108,411 | | 133,052 | | -25,756 |
| 10/03-5/11 | | 109,070 | | 5.83% | | 241,414 | | 108,416 | | 132,998 | | -23,928 |
| 10/02-5/10 | | 95,413 | | 6.54% | | 244,742 | | 107,842 | | 136,900 | | -41,487 |
| 10/01-5/09 | | 76,931 | | 6.97% | | 246,627 | | 107,294 | | 139,333 | | -62.402 |
I did a similar analysis back in 2010. I realized that over a long enough time period, the S&P500 was likely to win out every time, and often by a large margin But in our case we were not interested in a long period. We were interested in a 10 year period (or less), because we wanted to be FI by ~2020. We were already maxing out our pre-tax retirement accounts, and we wanted the mortgage payment to be gone so we could cut down to PT at work after 2020. We weren't willing to take the risk of gambling this away (see the chart above). I also have a spouse who is a bit more conservative than I am about investing, and we made the choice together to take the sure thing and pay down the mortgage.
Obviously the earliest 5 rows in the chart above were affected heavily by the 2001-2002 and 2008 markets. But that's kind of the point when considering a shorter timeline (say 10 years or less) -- a really bad dip like 2008 or 2001-2002 can take a while to recover from. If you're talking 15+ years (along with < 5% mortgage interest rate for 30 yrs), I think the advantage of investing is much harder to argue against in most cases. One exception might be someone who is already FI with a ~4% SWR, and is just looking forward to the incremental lifestyle bump and/or reduced SWR for longer-term security that a vanquished mortgage payment might afford.
As to the OP's situation, I would echo everyone else's recommendation to load up on those tax-advantaged retirement accounts before thinking about paying down the mortgage.
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Bird in Hand, Kay Ell - great stuff!
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Bird in Hand, that's interesting. I wonder what would happen if you factored in inflation?
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Bird in Hand, that's interesting. I wonder what would happen if you factored in inflation?
Good question! I guess it might depend (or maybe not?) on what you want to adjust: the initial loan balance, the amount of the extra mortgage principal curtailment/monthly investments, the ending values of the investment account and the mortgage balance?
Whatever inflation adjustment we make to one thing we'd have to make to everything else. So my gut feeling is that it's probably just as well to leave all the figures unadjusted and everything's still apples-to-apples. I could be wrong though!
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Your payments wouldn't be inflation-adjusted, though, right?
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Your payments wouldn't be inflation-adjusted, though, right?
You mean the P&I and not the extra principal payments, right? That stays constant, and of course appears smaller over time in an inflationary environment (assuming wages keep up with inflation).
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The OP can use a loan from his TSP (401k) account for a primary residence downpayment:
https://www.tsp.gov/PlanParticipation/LoansAndWithdrawals/loans/index.html
The OP may be confused about FERS pensions. The minimum retirement age for most people is 57.
Read the madfientists posts about tax savings for 401ks. The OP would be leaving a lot of money on the table by not maxing out the 401k. Fact that its the TSP would make it even more of a shame.
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The OP can use a loan from his TSP (401k) account for a primary residence downpayment:
https://www.tsp.gov/PlanParticipation/LoansAndWithdrawals/loans/index.html
The OP may be confused about FERS pensions. The minimum retirement age for most people is 57.
Read the madfientists posts about tax savings for 401ks. The OP would be leaving a lot of money on the table by not maxing out the 401k. Fact that its the TSP would make it even more of a shame.
@afox you are wrong, OP has said he is a FERS LEO. This is a Special Employee Category and the rules are different. His contribution to the FERS is also different due to this. (He pays more than a regular employee). He can collect his pension at 50 years old with 20 years of service or with 25 years of service at any age. Additionally, as of last year he can access his TSP at age 50 without penalty due to a law passed by congress in regards to this.
Buy I do agree with you he should be maxing out thrift.
ETA: OP you said you can only save $100 if you max out TSP, you have also give your salary as $125,000. You need to look at your budget, you should be able to save more than this.
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Okay, I am wrong, I missed the LEO part.
The TSP down payment loans are a great way to save for a down payment.
If OP is making $125k the tax savings on the TSP contributions are going to be enormous and if OP can withdraw from TSP at 50 this seems like a no brainer.
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@Kay-Ell, thank you for the simple insight. It is really helpful. @Bird In Hand, your breakdown make sit easier to understand. Also, I agree leaving out inflation to make it easier to understand was helpful.
Buy I do agree with you he should be maxing out thrift.
ETA: OP you said you can only save $100 if you max out TSP, you have also give your salary as $125,000. You need to look at your budget, you should be able to save more than this.
As soon as we have the down payment for the house, I will be maxing out the ROth TSP option. Also, I will look at the budget again to see where I can save money on a monthly basis. I'm sure there are places I can cut back.
Okay, I am wrong, I missed the LEO part.
The TSP down payment loans are a great way to save for a down payment.
I am trying to avoid using the TSP Loan as a down payment. I am not opposed to it, more of I just would rather not touch it if all possible.
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why Roth TSP
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why Roth TSP
I posted this question (Roth vs. Traditional) over on the Boggleheads forum. I researched on here too. Here is the link to the discussion. https://www.bogleheads.org/forum/viewtopic.php?f=1&t=243148&p=3819976#p3809490 (https://www.bogleheads.org/forum/viewtopic.php?f=1&t=243148&p=3819976#p3809490)
I think that my current Traditional TSP will grow sufficiently to cover my expenses until I can tap my Roth TSP 9 years after retirement.
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Are you using the ROTH now or Traditional. I would continue maxing out the Traditional if you can at this time. This should be pretty equal to what you'd be doing at 10% in the ROTH.
I kind of agree with you on going to the Roth with the new rules. I just switched myself now that we don't have to follow the proportional rule.
Boarder42: While not the OP my reason for the switch are as follows.
1) I can still max out in the Roth.
2) As a single person or even a Married Filing Jointly with our Pension the OP and I will use almost all of the 22% tax bracket with our pension so we will be paying 24% in taxes on withdrawals or conversions.
3) Personally I also have after tax investments I will tap before my TSP.
4) If I keep adding to the traditional I will likely have to take large RMDs starting at 70.5. Putting money into the Roth option makes me not have to look at that.
5) Running the numbers I will still have a huge amount in the traditional in 7 years (at retirement) with compounding plus the match.
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I am currently in the Traditional while we save for the down payment.
Boarder42: While not the OP my reason for the switch are as follows.
1) I can still max out in the Roth.
2) As a single person or even a Married Filing Jointly with our Pension the OP and I will use almost all of the 22% tax bracket with our pension so we will be paying 24% in taxes on withdrawals or conversions.
3) Personally I also have after tax investments I will tap before my TSP.
4) If I keep adding to the traditional I will likely have to take large RMDs starting at 70.5. Putting money into the Roth option makes me not have to look at that.
5) Running the numbers I will still have a huge amount in the traditional in 7 years (at retirement) with compounding plus the match.
Your #2, #4, & #5 reasons are why I am switching to the Roth. Even after all of the tax calculations and trying to utilize every option, I still will be solidly in the 22% tax bracket for most of retirement due to pensions and other income. Also, I don't plan on not generating some sort of income in retirement (i.e. rentals, home based business, consulting, etc.) so having more in the Roth account will allow me to dictate how much to withdraw or not withdraw. Finally, my current $317k Traditional TSP should (in theory) grow to almost $900k in the next 15 years. Keep in mind, the gov't will only match into the Traditional TSP. So even if I contribute to the Roth money is still going into the Traditional. Ideally, my plan is to have all of my expenses & day-to-day living covered by my pension and only withdraw from retirement accounts as needed.
Your #3 reason is what I would like to build up later in my career but there is only so much income coming in each month.
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Philly, I've got about 5 years on you but the vast majority of my after tax have come in the last 5 years are so. In part because things really got rolling but in part because I made mistakes earlier on.
ETA: 50% of my taxable account is directly from electing to keep a mortgage and instead funnel the extra into the taxable. In fact, I could have bought my current home for cash 9 months ago, instead I have a mortgage on it.
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The future is uncertain. I am very debt averse, likely a product of six figure student loan debt and not truly understanding the sunk cost fallacy. Max employer match and any similar perks, everything else towards the debt. Max tax advantaged contributions afterward. I know how to live on virtually nothing, but can't do that while paying thousands per month toward debts.
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I understand that financially it is smarter to invest the money instead of paying down your mortgage. My left brain agrees with you. My right brain says lower your expenses/debt sucks before retirement and pay that crap off. Thus my dilemma... Also, we are free from debt.
I think you may have answered your own question right there. There is a "correct" answer mathematically (assuming returns for the next X amount of years yield their historical averages), but that may not be the "correct" answer for you. If paying your mortgage opens other opportunities or gives you peace of mind, that might be a good choice.
I wouldn't pay extra every month, though. I'd save the lump sum and pay it at once. That way, you're still liquid if a buying opportunity arises in the stock market. Plus if you run into trouble, having paid extra a while ago isn't going to save you from foreclosure.
Either way, it's not like you're blowing the money on a Porsche.
+1
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Philly, I've got about 5 years on you but the vast majority of my after tax have come in the last 5 years are so. In part because things really got rolling but in part because I made mistakes earlier on.
ETA: 50% of my taxable account is directly from electing to keep a mortgage and instead funnel the extra into the taxable. In fact, I could have bought my current home for cash 9 months ago, instead I have a mortgage on it.
Good to know. As soon as we get the down payment squared away, its on to maxing the TSP, HSA, DW Roth IRA, 529s...and then any and all extra cash goes towards investment account with the purpose of eventually paying off the mortgage early when the account balance is high enough.
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My order of operations for the bulk of extra income.
1. Max out 401k and Roth
2. Max out HSA
3. Max out 529
4. Pay off house
5. Taxable investments (once house is paid off)
If I were young again, I would get as much low interest credit I could and do something like 70% DGRO, 30% MUB in my taxable and 60% DGRO, 20% FREL, 20% TLT in tax sheltered. I have learned that my maximum risk tolerance is about a 30% total draw down before I start to freak out and do something irrational, hence the bonds. My portfolio choices keep up with the S&P but have much lower draw-downs in both 2002 and 2008 when I did some stupid emotional stuff with my portfolio.
For paying off the house in a lump sum after you have been saving ahwile... If you have a tendency to blow money when you see a bunch of it sitting idle or the economy tanks, paying off the house locks it up so you cannot easily get at it. I have learned that making withdrawals as hard as possible has probably been the best investment decisions I have made over the years and has the highest returns. Protect your investments from yourself first, then worry about the other things. Fidelity research says that dead people and people who forgot their password had the best returns...
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I have learned that my maximum risk tolerance is about a 30% total draw down before I start to freak out and do something irrational, hence the bonds. My portfolio choices keep up with the S&P but have much lower draw-downs in both 2002 and 2008 when I did some stupid emotional stuff with my portfolio.
For paying off the house in a lump sum after you have been saving ahwile... If you have a tendency to blow money when you see a bunch of it sitting idle or the economy tanks, paying off the house locks it up so you cannot easily get at it. I have learned that making withdrawals as hard as possible has probably been the best investment decisions I have made over the years and has the highest returns. Protect your investments from yourself first, then worry about the other things. Fidelity research says that dead people and people who forgot their password had the best returns...
I suspect you don't mean draw down, but drop in market value. Two totally different things.
The rest of your post makes me glad you've found this site. The whole point of being mustachian is to learn the skills to help you keep from making the kind of expensive mistakes you have described. And Fidelity's "reasearch" is more of an observation. It's just something they noticed. Had they conducted actual studies, surely they would have included black-belt mustachians in the group.
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I'm going to be signing a brand new mortage within the next month. The interest rate is 4.00% Not rock bottom but historically low by comparison to our original 8.5% in 1992 for our current home. I'm thinking of goimg to the Border42 dark side and not paying down the mortgage when we sell the current home. It would give us a nice big cash bubble for taxable investing. We have nearly 2MM in retirement funds combined. We don't have a lot of taxable accounts. Much of our cash will be going to pay the downpayment on the new house and make some updates. Rather than be cash poor right after FIRE we may just make notes for a while.
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I'm going to be signing a brand new mortage within the next month. The interest rate is 4.00% Not rock bottom but historically low by comparison to our original 8.5% in 1992 for our current home. I'm thinking of goimg to the Border42 dark side and not paying down the mortgage when we sell the current home. It would give us a nice big cash bubble for taxable investing. We have nearly 2MM in retirement funds combined. We don't have a lot of taxable accounts. Much of our cash will be going to pay the downpayment on the new house and make some updates. Rather than be cash poor right after FIRE we may just make notes for a while.
Welcome but it's not the dark side. Your using the force for good!