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Old 05-15-2014, 10:55 AM   #41
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Money is fungible. Whether it is invested in your bank account or in your house, it's the same thing. No one who puts money into their bank account treats it as an expense. Similarly putting it into your house is not an expense. Additionally, repaying a low-interest mortgage via future (inflated) dollars effectively reduces the interest rate to near zero. Should inflation spike in a few years, still having a low-interest mortgage around is equivalent to earning tax-free interest.
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Old 05-15-2014, 11:00 AM   #42
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Originally Posted by GrayHare View Post
Money is fungible. Whether it is invested in your bank account or in your house, it's the same thing. No one who puts money into their bank account treats it as an expense. Similarly putting it into your house is not an expense. Additionally, repaying a low-interest mortgage via future (inflated) dollars effectively reduces the interest rate to near zero. Should inflation spike in a few years, still having a low-interest mortgage around is equivalent to earning tax-free interest.
Ok...and how can I use this information to achieve a guaranteed ESR date in less than the six years it will take me if I continue with accelerated mortgage payments?
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Old 05-15-2014, 11:43 AM   #43
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We have decided we don't really care if we have a mortgage or not, we are more focused on total net worth and annual expenses (including income taxes and health insurance premiums) as more key issues.

Sometimes paying off the mortgage is the best idea, sometimes you might come out ahead financially keeping more money in after tax accounts and having a low interest fixed rate loan with the mortgage interest deduction. This can keep your taxable income / O-MAGI low, which in turn might allow you to pay zero in income taxes, pay close to zero in ACA health insurance premiums and convert retirement money to Roth accounts without paying income taxes.
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Old 05-15-2014, 11:52 AM   #44
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We have decided we don't really care if we have a mortgage or not, we are more focused on total net worth and annual expenses (including income taxes and health insurance premiums) as more key issues.
For us, I don't see how net worth has any practical effect on FI. One day, when we're 55+ and we can draw from retirement accounts without penalty, it will become more relevant.

Annual expenses? Yes, reducing them is key to ESR for us. And the only portion of our annual expenses that we can realistically get rid of is the mortgage. P&I accounts for about 1/3 of our living expenses, and since it can be paid off in 6 years without compromising our ability to max out 401(k), Roth IRAs, or decimating our emergency savings, it seems like ridiculously low-hanging fruit to me.
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Old 05-15-2014, 12:15 PM   #45
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I don't know your specifics, but just to use a generic example, if being able to drawdown after tax money money saves a household $10K in taxes and $10K in ACA health insurance premiums, that might make more financial sense than paying 3% after tax interest on a $200K mortgage. The numbers aren't going to be the same for every household. For some keeping the mortgage may be financially advantageous. It depends on a wide variety of financial factors.
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Old 05-15-2014, 12:50 PM   #46
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To answer the original question:

I think 45 represents the following:
Smart, career minded person graduates with some debt and lives it up in their 20s.
Age 30 rolls around, career romance loses luster, and person asks "is this all".
Discovers ER reality, saves 50% for 15 years and with decent investment growth ends up with 25x annual expenses around age 45. It seems like a good live for now / live for future balance and allows a reasonably full and enjoyable career. After 20 years, I imagine almost any career would start getting old.

I've noticed many here are engineer types working in the corporate world. I've noticed that engineers typically seem to either move up into management or find something else fun to do in their 40s. I work in a newer field though so this view may be skewed somewhat. I wonder if they aren't hitting FI and leaving careers at a substantial rate, actually. Maybe this is part of why "there aren't enough STEMs" in the USA?
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Old 05-16-2014, 09:00 AM   #47
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I don't know your specifics, but just to use a generic example, if being able to drawdown after tax money money saves a household $10K in taxes and $10K in ACA health insurance premiums, that might make more financial sense than paying 3% after tax interest on a $200K mortgage. The numbers aren't going to be the same for every household. For some keeping the mortgage may be financially advantageous. It depends on a wide variety of financial factors.
Ah, interesting points that I hadn't considered. In our case it's not really relevant, since we'll still be covered by our employer's health insurance plans in ESR (ages 45-55). But I can see how someone retiring now without employer-subsidized HI might need to...creatively manipulate MAGI in order to optimize expenses WRT ACA.

Right now our itemized deductions come out to just a couple thousand more than the standard deduction, so I'm not sure the mortgage interest deduction offers much in terms of reducing income to qualify for ACA subsidies in the future. Admittedly I don't know a whole lot about *-MAGI and its implications to ACA subsidies, and the rules might very well change substantially by the time it's relevant to us in 17 years or so. Maybe I'll find that a cash-out refinance will make sense in retirement simply to help qualify for ACA subsidies.
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Old 05-16-2015, 11:28 PM   #48
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Another year has passed since my last financial update. Here's how things went over the last year:

Married, both of us approaching 40, 3 children all < 10 years old
$188k left on mortgage -> $161k
Still paying ~ $1,100/mo extra on mortgage
$755k in retirement accounts -> ~$884k
$120k cash/non-retirement investments -> $105k

It was a pretty good year. We're now very close to $1MM in combined retirement/cash accounts -- an increase of about $114k over last year. Mortgage balance went down by $27k, so our NW went up > $140k. If we were to take the kids out of private school, sell the house, and live in a van down by the river, we could retire tomorrow.

Our cash accounts keep dwindling as we continue to fund our IRAs annually. Without one or both of us earning additional income in the near future, we'll soon come to a point where we have less cash than we would prefer to withstand a period of prolonged unemployment. When the time comes, we might be forced to sacrifice our sacred cow -- extra principal payments and the dream of super-early mortgage payoff.
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Old 05-17-2015, 05:59 AM   #49
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If you have a good mortgage rate, you may be too aggressive with early mortgage payoff. You could be investing and saving more. If ROI averages 7-8% and your mortgage is in the 3-4%, you're losing that extra 3-4% as well as increasing your income tax liability. Consider cutting your extra payments to a more reasonable amount and save and invest more. Also have you considered helping your kids through college with 529 plans?

I was FI before we paid off the mortgage. We just plugged away with an extra $200-500/mo over the life of the mortgages (moved, then refinanced to a 15 year mortgage which we paid off in 11 years).

IMO you should back off paying so much principal and invest in 529s or a taxable account.


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Old 05-17-2015, 06:59 AM   #50
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Bird; in your OP you mention funds in TSP. Are you a federal employee? If so will you be eligible for a pension retiring at 45 from the government? I do understand the desire to pay off the mortgage aggressively. Did you refi at the recent low mortgage rates of 3.375 vs the 4 percent plus that you referenced in your 2012 post?
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Old 05-17-2015, 08:22 AM   #51
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If you have a good mortgage rate, you may be too aggressive with early mortgage payoff. You could be investing and saving more. If ROI averages 7-8% and your mortgage is in the 3-4%, you're losing that extra 3-4% as well as increasing your income tax liability.
It's the age-old "should I pay down the mortgage or invest?" question, and I sure as heck hope we don't resolve it in this thread!

From my point of view, I see a lot of "if's" in your last sentence above. Granted, those if's are quite likely, but fall just short of likely enough for me to hang my future FI on.

FYI my rate is 4.25%, and the mortgage interest we paid last year just barely pushed our itemized deductions higher than the standard deduction amount. So the comparison should be "guaranteed 4.25% return vs risky 7-8% return (before capital gains tax?) in the stock market." For a short timeline of ~5 years until FI, we're not comfortable chasing a theoretical 3% spread.

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Consider cutting your extra payments to a more reasonable amount and save and invest more.
Despite my defense of paying down the mortgage above, we often consider pulling back somewhat on the mortgage payments and increasing our after-tax savings. The main reason is that we'll need more after-tax savings to bridge the gap between ER and the age when we can reasonably withdraw from our retirement accounts (72(t) notwithstanding).

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Also have you considered helping your kids through college with 529 plans?
529's don't do a whole lot for us since we don't pay a state income tax. I understand there are a couple other advantages (and also restrictions). Our plan for kid's college expenses is: save what we can after funding for our own ER goals; use some expected small inheritances that we expect by then (I know that sounds crass!); encourage the kids to attend reasonably priced schools; expect the kids to get scholarships and/or work to pay for much of college; possibly help the kids pay off student loans if need be. And as long as I keep working at least 1/2 time, my employer will pay $10k per kid per year.

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I was FI before we paid off the mortgage.
P&I is our biggest non-discretionary expense (we consider private school tuition to be discretionary). Eliminating it will allow us to work part time, have one of us stay home with the kids, etc. So while paying off the mortgage won't get us to FI, it will enable ESR in our low 40s.
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Old 05-17-2015, 08:56 AM   #52
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Bird; in your OP you mention funds in TSP. Are you a federal employee? If so will you be eligible for a pension retiring at 45 from the government?
TSP is from a previous job; no pension at 45 (or any other age!)

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I do understand the desire to pay off the mortgage aggressively. Did you refi at the recent low mortgage rates of 3.375 vs the 4 percent plus that you referenced in your 2012 post?
Still at 4.25%/20 yrs. We occasionally consider refinancing at ~3.5%/30 yrs just to give us payment flexibility should the need/desire arise. We've paid so much in extra principal payments over the past 5 years that the potential savings (on interest) from refinancing to a lower rate is small. Even if we did refinance, there's a good chance we'd continue on paying extra such that mortgage will be gone in ~5 years.
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Old 05-26-2016, 07:16 AM   #53
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Yet another year has passed since my last financial update. Here's how things went over the last year:

Married, both of us ~40, 3 children all < 10 years old
$161k left on mortgage -> $132k
Still paying ~ $1,100/mo extra on mortgage
$884k in retirement accounts -> ~$920k
$105k cash/non-retirement investments -> $90k

Investment returns were decidedly 'bleh' last year, but this month we managed to cross $1MM in combined retirement/cash accounts (and stay there for the past couple weeks). Mortgage balance went down by another $29k, and NW went up by $50k.

Roth IRA contributions and private school are killing our savings. But everyone's always telling us not to have so much $$ in low-interest savings accounts, so...
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Old 06-03-2016, 01:19 PM   #54
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Things are looking really great! I love the updates. Makes for some very interesting reading. Curious...what do you pay for private school, if you don't mind sharing?
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Old 06-03-2016, 02:05 PM   #55
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Things are looking really great! I love the updates. Makes for some very interesting reading. Curious...what do you pay for private school, if you don't mind sharing?
Thanks Andy. This thread is mostly to help keep me focused on ER goals, but I'm glad someone else finds it interesting.

Private school is ~$10k/kid/year. A bit cheaper than the mediocre public school, but alas we have to pay for both.
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Old 06-03-2016, 03:31 PM   #56
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Thanks Andy. This thread is mostly to help keep me focused on ER goals, but I'm glad someone else finds it interesting.

Private school is ~$10k/kid/year. A bit cheaper than the mediocre public school, but alas we have to pay for both.
As someone who paid for 13 years, each, of parochial school for two kids, I can say it was worth it. I know our 401(k)'s would probably be bigger if we hadn't, but watching them as responsible, contributing adults makes us realize the ROI is priceless.

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Old 06-03-2016, 03:54 PM   #57
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As someone who paid for 13 years, each, of parochial school for two kids, I can say it was worth it. I know our 401(k)'s would probably be bigger if we hadn't, but watching them as responsible, contributing adults makes us realize the ROI is priceless.
Without the private school tuition, I think we could achieve FI ~5-10 years earlier. All while having more/better vacations, cars, etc. And there's unfortunately no way of knowing whether the superior education will make our kids turn out any better. Yet we suspect it will, and somehow that suspicion is enough to convince us to keep paying the big $$ for tuition.

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Keep up the good work. You have good problems - many don't.
Well said (the latter part). That really puts things in perspective. We are indeed very fortunate to have the the kind of problems we do.
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Old 06-03-2016, 07:57 PM   #58
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Thanks for letting us know your continued progress and the Roth IRA is a nice addition to your "savings"
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Old 06-03-2016, 08:01 PM   #59
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...but alas we have to pay for both.
Why shouldn't you have to? All of society benefits from an educated populace.
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Old 06-04-2016, 08:00 AM   #60
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Why shouldn't you have to? All of society benefits from an educated populace.
I think you're barking up the wrong tree, comrade.

We're doing our part to ensure an educated populace -- to the tune of $30k+ per year out of pocket (our family's, not the other tax payers'). At the same time, we're relieving the tax payers in our town of $40k/year (based on the school's estimate of $13k+/year per child) by not sending our kids to the public school. Then on top of that we pay about $5k/year via taxes to educate other kids whose parents send them to the public school. Mind you, we don't make more money than most other families in town. We just take fewer vacations, drive older cars, and buy fewer toys.

Pardon me if I feel our civic duty to 'educate the populace' has been fulfilled and then some.
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