New Here and Questions about where savings should go

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brokrken

Full time employment: Posting here.
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Hello all, I just joined the forum a few days ago and already have learned a ton. A little about our situation:

I'm 40 and my wife is 44. We both work full time and have combined gross income of about $230K. We also have 1 child that is 10, so we've got a ways to go with those expenses, although we do have about $80k in a 529 as it stands.

Currently, we have $1.1mln in retirement accounts, $225 in taxable brokerage/savings accounts, not including the 529 money.

After expenses and maxing both 401ks, we have $2-4K left each month (depending on spending that month) we need to do something with. My question to you all is should we just invest it in a low cost index fund and continue to grow our nest egg, or start to aggressively pay down our mortgage. Currently, we owe $435k (30 yr mortgage) on a home worth about $650k.

I'm also considering taking a chunk of the $225k in savings mentioned above and putting it towards the mortgage. Maybe $50k of it.

Longer term we have always planned on retiring at 55, but we are ahead of our plan and it would be great if at least my wife could stop at 50 and then I'd play mine by ear. But, that's for another thread. :)

Thanks for the advice and look forward to learning more from everyone.
 
What is your after-tax income?

Is the $2K - $4K for each of you or both of you?

If it is for both of you, that seems to me to be on the low side?
 
After tax, about $11k per month. Yes, the $2-$4k per month is total left out of the $11k.
 
What's the rate on the mortgage? If it is much more than what you can get on a 15 year, I'd refi and keep it.

Some people here have an emotional thing about paying off debt, but if you have a decent rate, it isn't likely to matter much one way or the other over the long term. We should reasonably expect long term returns to exceed these current low rates, but they might not. But I think the odds are in favor of keeping a good rate, so that's what I am doing.

-ERD50
 
ERD50, the rate is 3.6%. The point you made is exactly the reason I'm struggling with the decision. On the one hand, I should be able to beat 3.6% in the long run. On the other hand, it would be nice to pay that debt off. An extra $1000 per month would pay it off in a little over 15 years. So, I could just do that and invest the rest.
 
Considering your current tax bracket - paying the mortgage off on a 15 year schedule makes sense. That will coincide nicely with your projected early retirement date.

Invest the rest.
 
Paying off the mortgage and having the lower overhead gives one a lot of flexibility when you're working, and it provided a lot of comfort when my work situation was uncertain, and again when my late wife was terminally ill. Have found that flexibility less valuable now that ensuring liquidity is the priority.

If I read it right, you have 15 years to put enough money away to see you through the 55+ years. You can estimate your annual burn rate, and your estimates will be more accurate as the time approaches. I believe making sure you can bridge the years before tax deferred and SS kicks in is more important than having the mortgage paid off, especially given what it will take to pay off the $435k balance (mine was >$120K when I got after it).

Figure out what you'll need and develop a plan to cover the bridge years. Make that the priority and put the mortgage behind that. The earlier you get the bridge money in, the more it can make for you. Rough math says your current bridge $$ will double twice in about 15 years ($225K becomes $550K in 7-ish, years, $1.1 million in 15). Maybe you have enough now if you invest it prudently, even it ends up at $0.9-1.0 mill?

The only caveat is if your employment situation is unstable, you want to stay in that area and the job prospects are limited should you need to find another one. Would work both the taxable savings and paydown tracks in that case.
 
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You could consider doing some of both. Maybe $1K/mo toward the mortgage and the rest to the index fund.
 
I like the idea of retiring the mortgage at the same time that you cease working and your income drops, so if it were me I would throw the additional $1,000/mo at the mortgage and invest the rest in your AA investment account.
 
When I was working, rather than pay off the mortgage, I kept an amount equal to the mortgage in liquid money market instruments (money market funds and Treasury bills). My feeling was that if I paid off the mortgage and got laid off, I would not be able to get a new mortgage since my income would be greatly reduced. These funds represented a source of living expenses should I become unemployed for a period of time. My situation was somewhat different than yours in that my wife did not work (in business, that is :)), so I was the sole breadwinner.
 
Have you run your numbers through FIRECalc yet? I'd do that first and make sure it says your FIRE plans are on track if you aren't putting that $2-4k into investments.

If it says you're good without additional contributions above and beyond the 401k, then I'd do what DrRoy and Godlen_Sunsets suggested and toss enough to pay off the mortgage when you retire (for peace of mind mostly) and invest the rest.
 
At 3.6% I think it would be foolish to pay off the mortgage early.... I would invest what would go to pay down the mortgage in taxable accounts in equities. The income from the taxable account equities will be tax preferenced and the interest on the mortgage will reduce your ordinary income.

When you decide to retire you can always then pay off your mortgage with some of the proceeds of the taxable account if you want (I decided to just keep our mortgage but knowing that I can write a check and pay it off anytime I want is sufficient peace of mind for me).
 
Being debt free provides a great feeling of financial freedom and flexibility for many of us. We aggressively paid off school, car and home loans and were debt free at age of 41. We recognized we'd probably make more money investing the money than paying off the debts but decided it was the right thing for us. We had some concerns with debt. We were a one income family with several kids. A job loss could be critical financially. A severe family illnes / injury might also. A severe market downturn could devastate our savings. Being out of debt felt much more comfortable when we got into financial stress times. Also, the paid off equity in our home also was protected in our state from creditors so was one way to lock in savings and we never had to worry about a place to live.

Your situation is different than ours was. You have a low interest rate relative to expected investment returns. You have two incomes rather than one (more stable income). You have only one child to be concerned with (less opportunities for major medical expenses). You have a goal to retire early which means maximizing finanical returns and minimizing expenses are critical. In your case, I would choose to pay the mortage down at a rate that pays off the load when I retired.
 
All good advice and sound reasoning. It seems like the group is split about evenly on investing it all since the rate is low and it keeps the cash available vs paying the extra to reduce the term to align with retirement and investing the rest. I haven't really heard anyone say to pile it all into the retirement to pay it off as early as possible. So, that's good, as I didn't think that was the best plan. Also, no one has commented on the option of throwing a lump sum at it like I mentioned. The only reason this is even crossing my mind is that there is not an investment (equity, RE, or otherwise) that I am really excited about now, so I hate to see that cash just sitting there earning nothing.
 
pb4uski said:
At 3.6% I think it would be foolish to pay off the mortgage early.... I would invest what would go to pay down the mortgage in taxable accounts in equities. The income from the taxable account equities will be tax preferenced and the interest on the mortgage will reduce your ordinary income.

When you decide to retire you can always then pay off your mortgage with some of the proceeds of the taxable account if you want (I decided to just keep our mortgage but knowing that I can write a check and pay it off anytime I want is sufficient peace of mind for me).
Click to expand...

Assuming you feel that your investments will return more than 3.6%, I agree with this.

You are already on track for a great retirement nest egg. Taking advantage of historically low mortgage interest rates in order to make bigger investments now can pay off in the long term.

And if your financial situation changes, or if the economy drastically changes, or if tax rules change, you will have still retained maximum liquidity and flexibility. You can spend some of your investments, pay off the mortgage some time down the road, etc.

Personally, I see no financial reason to be "debt free" at the expense of my other assets. And if for some reason you feel compelled to do so, you will have more than sufficient funds to do it.
 
Found your topic, great NW for your age!!! you are doing extremely well, and yes, I do also see similarities, subscribed for updates and will be following your progress :)
 
IMHO, we hate debt and the interest on it. There is a feeling of freedom when there is no debt. We own our cars, our house, our upgrades. 3.6% is a low interest rate and you could make 7-8%, maybe more in an index fund, pay taxes on the capital gains, pay whatever fees and be ahead of the game by a percentage or two. And yes, the market could go down and you could lose some of the principal and end up in a less than desirable situation. I feel I have more control when I don't have to think about debt and DH and I have been this way for years. Just an opinion.
 
For those interested, in the end what I did was add $1k per month to the mortgage payment and I add the rest each month to our Vanguard funds and a smaller amount to the 529. Also, rather than take a lump sum of the cash and put it towards the mortgage, I finally did find real estate investment that I liked.
 
Paying down your mortgage effectively changes your AA towards security vs a potential gain. You might well do better than 3.6% in your investments, but there is an economic risk that your investments could do much worse, the market tanks, the economy stalls, you loose your job, become ill, and you would still be stuck with the mortgage. You are on track with your investments already, I would take some of the extra and pay down the mortgage. That is what I did, and although in hindsight, thanks to a helpful market, my investments did do better, but it didn't have to be that way. I sleep better at night knowing whatever happens, even if we are eating canned beans, the house we will be eating them in is ours. :)
 
pay off the mortgage. The 3.6% is guaranteed, the stock market/realestate is not. You will sleep much better. I did. JMHO
 
We struggled with the same decision at about your age we similar income and savings/investment rates. We paid off the house for peace of mind. I am still good with that decision however in hindsight I would still accelerate the pay off only a bit slower and would have built my cash stash and after tax investment accounts along the way. We did build the after after tax stash after house paid off but would have been further ahead if we would have done a bit of both.
 
LiveBelowMeans said:
pay off the mortgage. The 3.6% is guaranteed, the stock market/realestate is not. You will sleep much better. I did. JMHO
Click to expand...

I sleep like a baby. My taxable portfolio has trounced the 3.375% that I pay on my mortgage, which is on autopay so other than getting a statement each month from the mortgage company showing my automatic payment was posted, I hardly know it is there.

I refied in January 2012 just before I stopped working. The Vanguard LifeStrategy Moderate Growth fund is a good proxy for my 60/40 portfolio. From 1/1/2012 to now, $10k had grown to $16,428.23... about 9% year vs 3.375%.... an average annual gain of over $10,000* on my mortgage that has averaged $180k over that period.... that is not chump change.

It is a risk that I took with my eyes wide open that has worked out very well. I'll take that $10k a year over some feel good from being "debt free".

* $180,000 *(9% - 3.375%) = $10,125.
 
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I would buy the market. The 3.6% is tax advantaged, and over decades the market returns twice that so the leverage pays a return. Also because of inflation as you pay, you pay with cheaper dollars, compared with paying more expensive dollars today. Once your payment becomes mostly principal, then I might consider paying off the loan
 
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