extra money - send to 401k or brokerage acct?

[beth]

Hi,

Still in accumulation phase here. I will soon have my mortgage paid off. The balance due is under 15k. Going to try to finish it within a year by scrimping a bit to knock that thing out. Which means I will soon have extra money monthly that I would like to invest towards early retirement. I am still new here and trying to determine exactly what early means for me, but I am assuming somewhere between age 55-60. The extra would be about $600 per month (payment total - escrow amount).

44 years old, no children, no spouse, not likely to have either in future
inherited IRA 45,000
rollover IRA 20,000
Roth IRA 94,000 (5500 contribution per year)
current job 401k 47,000 (4456 contribution per year)
brokerage account 589,000
no pension, no debt other than mortgage, emergency fund 16k
income 55,700

I assume that I will be using brokerage fund for income to cover the years before I can use roth or IRA/401k. Should my extra money go to 401k or brokerage or a combo of both?

[DrRoy]

You have over 70% of your investments in a taxable account now, so I would say 401K. A Roth one if available.

[NgineER]

Welcome!
You've done a fantastic job saving in after tax accounts!
I'd recommend bumping up your 401(k) contribution such that you can get into the 15% tax bracket. This should eliminate any tax on your brokerage account dividends.
I'd consider putting your emergency fund money to work as well, using it to do your Roth contributions or paying off mortgage. You can always use a credit card for short term emergencies, pull out Roth IRA contributions or use some of your after tax brokerage account money if you have a longer emergency.

[exnavynuke]

If you're planning on retiring no earlier than 55, your current taxable account balance (assuming reasonable growth) should more than cover your spending based on the assumption that you're expenses are currently less than your income (I'm guessing around $39k/year total spending after the PI from the mortgage goes away based on the numbers you've shown).

With 6% growth you'd have $1.1+M in just your brokerage account in 11 years at 55. Adding in your other accounts, in 11 years with 6% growth you'd have ~$1.5M. At a 3% withdrawal rate (which I use as a "safe withdrawal rate" for just about any early retirement) that could produce $45k/year throughout retirement which I imagine would provide more spending that you're currently doing.

All of that just uses your current balances, with zero additional contributions to your IRAs or 401k or brokerage account and doesn't include putting even more into them due to paying off the mortgage into any of those. As such, in your position I think you have to ask the following questions:
When do you want to retire? Do you plan on spending more in retirement?

If you don't want to retire until you're 55 and don't plan on spending more in retirement, then I'd say spend the extra money on vacations or whatever makes you happy instead of saving even more since your current savings rate and existing investments are already on track to conservatively replace your entire income without any social security being collected etc by that time.

If you want to retire earlier and/or you want to spend more in retirement, then I'd put it in the 401k to fund your earlier retirement and/or increased spending.

[NgineER]

+1
Without the mortgage, that $600 extra cuts down your needs for retirement by about $7k per year. I think exnavynuke had some really good points that you need to think about. Like, when do you want to retire and how much do you want to spend in retirement?
I think that if your spend level is about $39k now, it will be $54k adjusted for inflation in 11 years. But if you cut out the mortgage, you'll be right at $45k in 11 years.
Firecalc can help you model that, but I think you are in a really good position to hit retirement at 55.
Great work!

[N02L84ER]

I would max out the 401k first to reduce current taxes. If you still had extra, then I would add it to the Roth or taxable brokerage. You will have a very nice window between early retirement and SS with plenty of taxable investments to live on and do Roth conversions of the 401k with very low to zero tax rates.

[beth]

Thanks for all the great responses.