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Hi. Pay down mortgage or invest in TODAY's market ?
Old 07-05-2019, 04:01 PM   #1
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Hi. Pay down mortgage or invest in TODAY's market ?

Hello. I've read many articles online about this topic but none of them seem to be current with today's market trends/forecasts. I understand the math says best to invest in stock market vs low interest mortgage rates but just curious if that still applies with the expected 'correction' coming this year or next. My mortgage rate is 3.875 and have $40K left on mortgage. I'm invested in index and mutual funds with Fidelity. I'm not so much looking to pay off mortgage in full but when have extra couple/few hundred dollars each month, would you invest or pay down principle? Currently I do hybrid with little to both areas. I'm 57 yrs old, have about 340K in retirement. Hope to retire in about 3 years. Thanks so much to the wonderful folks on this site.
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Old 07-05-2019, 04:18 PM   #2
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Originally Posted by filmguyinla View Post
I understand the math says best to invest in stock market vs low interest mortgage rates but just curious if that still applies with the expected 'correction' coming this year or next.
If you know the exact date the 'correction' will occur, then you can time the market. Otherwise, don't try.

Quote:
My mortgage rate is 3.875 and have $40K left on mortgage. I'm invested in index and mutual funds with Fidelity. I'm not so much looking to pay off mortgage in full but when have extra couple/few hundred dollars each month, would you invest or pay down principle?
I don't see the point in putting a few hundred dollars on occasion toward your very inexpensive mortgage unless you find yourself unable to sleep with worry over this small remainder amount.

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I'm 57 yrs old, have about 340K in retirement. Hope to retire in about 3 years. Thanks so much to the wonderful folks on this site.
3 years? Focus on increasing your nest egg.

I hope you have other income streams coming your way soon?
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Old 07-05-2019, 05:15 PM   #3
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+1 focus on increasing the nest egg and just pay the mortgage as contractually due.
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Old 07-05-2019, 05:33 PM   #4
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This is one of the oldest, truest and most time-tested question in personal finance.

With a mortgage rate of 3.875% (same as mine) and with only $40K left on the mortgage, I don't really see a huge urgency to paying it down/off early. I'd be more inclined to invest excess cash flow given the interest rate. Yeah, the market could tank, but you would be dollar cost averaging into it, which would smooth out some of the pain of a future bear market as long as you could keep investing when the market falls.

In the end, if you want to, fine. If you don't want to, fine. I don't see either decision making or breaking a retirement here.
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Old 07-05-2019, 05:45 PM   #5
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Thanks. To PB4 - could you expand further on your reasoning. One goal of mine was to have the house paid off for retirement which is why I was doing hybrid approach. I'm assuming it is simply for the math says it's the correct thing to do which I do understand. Any emphasis on peace of mind?
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Old 07-05-2019, 05:47 PM   #6
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Paying off the mortgage is a guaranteed return - the market (obviously) is not. And, while it's "only" a 3.875% return..it's still 3.875% and you won't find that rate of return with any other risk-free investment at present. How would you feel if you put that $40K into the market (vs paying off your mortgage), and the market dropped 50+%? There are plenty of times throughout history (some fairly recent) where stocks were under-water for 6-10 years before getting back to "even"..consider that when evaluating the options.

I've paid off two mortgages early and would do the same again in a heartbeat. No mortgage today (very helpful as I ER'd early this year), and I don't plan on having another one. It's hugely empowering to be at a point where you have no debt.

One of the single most important things to ER and be FI, IMHO, is to be debt-free. Why pay interest to someone when you don't have to? That's a direct expense that you don't need to incur.

ETA - that said, it'd be helpful to also have additional context on your expected expenses and income in retirement, since it appears you'd like to ER in ~3 years. With $340K in retirement assets, a 3% SWR only gets you about $10K (very roughly) of income annually. Do you have other sources of income (pension, etc) to cover you until getting to SS and Medicare?
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Old 07-05-2019, 06:03 PM   #7
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Originally Posted by filmguyinla View Post
Thanks. To PB4 - could you expand further on your reasoning. One goal of mine was to have the house paid off for retirement which is why I was doing hybrid approach. I'm assuming it is simply for the math says it's the correct thing to do which I do understand. Any emphasis on peace of mind?
My thinking was that $340k of a nestegg 3 years from retiring isn't a lot in the whole scheme of things ($13,600/year withdrawals at 4% rule) and the mortgage rate is reasonable so it would be better to focus on beefing up that nestegg.

But to really answer the question we need to know if you don't pay off the mortgage what would you invest in? Stocks? Bonds? some mix of stock and bonds and if so, what % mix.

I guess having a mortgage doesn't bother me a bit... I have it on autopay and the payments are comfortable so I hardly notice it. I know in my case that I am way ahead by having not used investment funds to pay off my mortgage when I retired in 2012 and refinancing at 3.375% for 15 years.

To be honest given it is a $40k issue, either extreme... all to mortgage or all to investments or something in between will likely be fine.
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Old 07-05-2019, 06:03 PM   #8
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I've just made a decision on a similar situation:

I plan to retire in January 2022 at age 61, and I want the mortgage paid off before then. In case I drop dead shortly thereafter, I don't want my wife to worry about about a house payment.

I have been reading articles (Kitces) about having too much in tax-deferred 401k accounts (resulting in higher taxes), rather than in Roth 401k, and so for the last several months, my 401k contributions had been going into the Roth 401k bucket (the portion up to my company match must go into the regular 401k tax-deferred bucket). My annual contribution percentage for the last 2-3 years has been 22% of my salary. Pretty aggressive, but we have been able to swing it.

But the mortgage balance has just been gnawing at me...for years!

So, since I don't see any windfall of cash coming before 2022, I recently reduced my 401k contribution to a level just low enough to get the company match (6% of salary), and, starting this month, I will use the funds that I had been diverting to my Roth 401k (i.e. after tax) to pay down and pay off our mortgage by 2022.

My regular Roth account already has a very sizable balance. Our mortgage interest rate is 3.625%. 97k left on the mortgage. Our investment assets are ~ $1.25 million.

My personal reasons for doing this are:
- I just hate having a mortgage and having to answer to the "man". When work is done I want to answer to the man as little as possible.
- I'm getting closer to retirement and I've moved some money into a guaranteed income fund. I was nearly 100% stocks until this past March; now I'm 80/20. I've done well. I don't want to push risk unnecessarily anymore (or at least I want to push it less).
- My wife will still work for at least 10 more years after I retire (she is 7 years younger.)
- It's a gamble, but I can't see the market staying on the same trajectory. If the market tanks (severely, like 20-30%), I won't feel bad about my current investments and will sure feel glad that I didn't invest (now depreciated) funds that I could have used to pay off the mortgage. If the market continues like a bullet, well...that's on me! YMMV, this is my plan based on my risk tolerance and desires.

I understand the risks and possible flawed logic, but dreaming of not having a mortgage brings me great joy.
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Old 07-06-2019, 05:52 AM   #9
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Our plan is to pay off the mortgage in roughly 3 years. After that time we will continue to pile that cash toward a wealth “bucket”. That money will most likely go into low interest CDs that will just be cash on hand so when we decide to pull the plug it will be there as a buffer. I plan to take SS at 62 and to earn the maximum 17,640 working part time doing something fun. DW does real estate appraisals and will slow way down. We will have decent income and lots of time for leisure and travel. Health Care will be the biggest unknown. The cost to cover the two of us until Medicare still to be determined. DW is 3.5 years younger.
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Old 07-06-2019, 07:00 AM   #10
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I paid off my mortgage several years ago.

As a specific, at-the-margin financial decision, it was a very bad one. Clearly my net worth would have increased more rapidly had I left it all in the market. Moving much of my kids college fund into a college-inflation-matched 529 program was also a bad decision.

At least that's all true as of this writing. Past performance is no guarantee of future results.

I also believe the "low interest rate" theory is a red herring. Paying off the mortgage is a guaranteed rate of return. When compared to other guaranteed rates of return (Treasuries), net of taxes, its a push. People have been trying to time the interest rate market for years on the theory that interest rates HAD to go up a lot and therefore holding a low interest mortgage was a good idea. As history shows, timing the market is not possible.

Of course history would also say that over the very long term term, keeping the mortgage would be a better idea.

The reality is that paying off the mortgage was as part of my overall portfolio plan. Having the mortgage gone has given me the comfort to be more aggressive elsewhere. Same for the protected 529s.

IMO, the trick to these things, as always, is:
1) Have an integrated plan
2) Don't try to time the market on any asset
3) Know your risk tolerance
4) Know your time horizons

In your situation, I don't think I would pay off the mortgage. You're close to retirement, your nest egg is not large, and liquidity strikes me as very important. Of course, you also shouldn't go crazy on risk right now, so your total returns will likely not be that high.

My $0.02...that was more like $0.05 I guess!
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Old 07-06-2019, 07:11 AM   #11
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I plan to retire in January 2022 at age 61, and I want the mortgage paid off before then.

But the mortgage balance has just been gnawing at me...for years!

I just hate having a mortgage and having to answer to the "man".
You clearly should pay off your mortgage today. Don't let the thought of having a mortgage balance gnaw at you any longer.
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Old 07-06-2019, 07:23 AM   #12
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You clearly should pay off your mortgage today. Don't let the thought of having a mortgage balance gnaw at you any longer.
+ 0.5 I never give specific financial suggestions here, but I agree with the sentiments expressed here. And, this is somewhat like my philosophy when I had a mortgage. Pay off mortgage or invest instead is one of the recurring themes on this site, and IMO there is no one right answer. For me, no longer having that legal obligation every month was important, and when I paid off my mortgage it felt so liberating. You appear to be in that same mindset.
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Old 07-06-2019, 07:39 AM   #13
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My situation was a lot different then yours. I was young 28 years old and was married and paid off my home that I built from ground up. My loan was small only 30K and after a few years of payments I just paid it off and then my goal was saving and investing. I credit my success from an early debt free life so I could save early with accumulating more early in life for larger gains in the end.

In your case I wouldn't pay off your home but instead put every dime you can into your portfolio.

I wish you well in what ever decision you make.
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Old 07-06-2019, 08:07 AM   #14
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Originally Posted by filmguyinla View Post
My mortgage rate is 3.875 and have $40K left on mortgage... would you invest or pay down principle? ... I'm 57 yrs old, have about 340K in retirement. Hope to retire in about 3 years.
Personally, I would do everything I could to pay off the mortgage as quickly as possible. As others have said, the mortgage is a sure thing, the markets are not.

More importantly, what would happen if you lost your job now or had a health situation that prevented you from working? That mortgage bill still has to be paid.

Debt of any kind is a weight on your shoulders. The quicker you can get rid of it the better. Once it's gone your cost of living will be less, and you'll have more to save.
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Old 07-06-2019, 08:29 AM   #15
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A mortgage acts as a negative on your total amount of bonds in your AA. So if you are 50/50 AA, say 1M Stocks and 1M Bonds, but you have a 500K mortgage, your actual AA is really 1M stocks and 500K bonds or 66/33.

Combine this with the fact that (most) people don't get the full value of the interest deduction anymore (new tax law) and you need to compare the after tax rates of returns on all of this.

Personally I would avoid the comparison w/ stock returns as it is not apples to apples, and instead compare to bond returns and look at your adjusted AA w/ the mortgage reducing it. View your liquidity now, and for ER until you can access tax deferred and make a decision.

Slightly different view than many, but hope this helps
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Old 07-06-2019, 08:31 AM   #16
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Originally Posted by filmguyinla View Post
Thanks. To PB4 - could you expand further on your reasoning. One goal of mine was to have the house paid off for retirement which is why I was doing hybrid approach. I'm assuming it is simply for the math says it's the correct thing to do which I do understand. Any emphasis on peace of mind?
Why?

Without knowing what is driving this, it's a bit harder to provide useful information. There's no magic to having the mortgage paid off in retirement, many of us have successfully retired with a mortgage.

How many years left on the mortgage?


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...

I plan to retire in January 2022 at age 61, and I want the mortgage paid off before then....

My personal reasons for doing this are:
- I just hate having a mortgage and having to answer to the "man". When work is done I want to answer to the man as little as possible. ....
So what are you going to do about property tax, insurance, utilities, the roofer, HVAC guy person, plumber, painter, etc?

And in this PC world, I am feeling offended that "the man" is used in a derogatory sense. I believe all perceived negatives should be equally distributed across all genders. Do we now have to say "I don't want to answer to the person"? (j/k kinda)

-ERD50
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Old 07-06-2019, 08:38 AM   #17
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Personally, I would do everything I could to pay off the mortgage as quickly as possible. As others have said, the mortgage is a sure thing, the markets are not.. ..
So your AA is 0/100?

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... More importantly, what would happen if you lost your job now or had a health situation that prevented you from working? That mortgage bill still has to be paid. ...
Good point, but it is generally one in favor of keeping a mortgage.

The $40K will pay a mortgage for a long, long time. And the utilities, property tax, maintenance, insurance etc, and all your other non-house related bills, like food. If you pay it off, you have $40K less to cover property tax, maintenance, insurance etc. That is what could put you in a bind.


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... Debt of any kind is a weight on your shoulders. The quicker you can get rid of it the better. Once it's gone your cost of living will be less, and you'll have more to save.
Hogwash. Maybe it feels like a weight on your shoulders, but many of us are just fine with it, and have benefited immensely from it. Not all debt is bad debt. That kind of thinking holds you back from taking advantage of good opportunities.

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Old 07-11-2019, 02:02 AM   #18
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We had ours paid off about 10 yrs before ret. Home was a new one w/15 yr loan, paid off in 9yrs. No regrets here.
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Old 07-12-2019, 04:38 AM   #19
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With $40k left on the mortgage what if any tax advantage is left? Wasn't most of that interest paid in the early years of payments and what is left is mainly principle? Once I was a little more than halfway through my mortgage it no longer was a tax advantage. It was the major component of being able to itemize and by then I had to revert to standard deduction. I made a point of making an extra payment on the mortgage principle each month and got it paid off in a few years. Then I continued to use the mortgage payment and the extra principle payment toward each of our 403b and taxable investment.
Being a bear of little brain maybe it wasn't the best idea but we are in great financial shape now that we are retired.


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Old 07-12-2019, 05:42 AM   #20
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This is more of an emotional decision, not a math decision. The long term math usually says to let the low interest mortgage stay in place. One has to consider what lets them sleep best. Those who can’t stand missing out on market growth should keep the mortgage and invest. Those who are very risk-averse should pay off the mortgage. Those who can’t stand debt should pay off the mortgage. There are trade offs on every financial decision but you gotta sleep. I want no mortgage, of course, but see other ways to get rid of it in the future while I continue to invest now, e.g. downsizing to a smaller place some day or just waiting until the balance is small enough for the large portfolio to snuff it out.
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