Suggestions

[namesbond]

I'm 29 years old single making about $50,000 per year before Taxes. This is my current financial situation. I own a condo and work for state government with a pension. I'm currently doing a 4% match in my 401K"not really 401K but is the same thing for government employees", maxing out HSA, maxing out Roth, then I'm paying down my mortgage. My mortgage is 3.375% with $71,658.14 left on the loan. I'm currently saving about 35% of take home. As far as emergencies I am 12 months ahead on my car loan, 7 months ahead on the mortgage as far as regular payments, and have a second job for fun money that could immediately scale up to full time.

3/1/2016 Roth $ 10,315.81 401K $10,729.66 Pension $ 36,684.14 HSA $ 4,183.87 Total Value $ 61,913.48 Condo Equity $ 48,313.32 Net Worth $ 110,226.80 Inv. Total $ 25,229.34 Pension age 65 monthly $ 803.01

[Big_Hitter]

my suggestion - keep it up!

[pb4uski]

First and foremost... welcome and congratulations.... you're doing great.

I would not view having paid ahead on your car or student loans as being the same as an emergency fund. For one thing, I'm not sure if having made extra payments earlier would necessarily allow you to skip payments if you needed to... check that with your lenders.

While I know it seems a waste given the interest that you are paying, I think it would be worthwhile to have $2-5k or more in an emergency fund just in case.

Also, have you used firecalc or Quicken Lifetime Planner or some similar tool to see how your savings will grow and assess if you are on track to retire when you want to?

[doneat54]

Sounds like you are doing great. 35% is a fantastic savings margin. One though I would caution you about however is paying down your condo. While it may make you feel good, mortgage interest is the one good tax deduction still out there. Without it, especially if you are making good money, you may get gouged in taxes. Every year after you do your taxes, compute your Federal and state (if you pay it in the state you are in) taxes paid as a percentage of your gross for that year. I have managed to keep my fed in the 13-15% range over the last 25 years or so, state, around 5%. I used to pay hard on my mortgage too, but started to see my tax rates rising as interest deductions fell. And the FA I recently hired advised against overpaying it as well, as long as my wife and I were both still working.

Good Luck...!!

[Dash man]

Quote:

Originally Posted by doneat58 Sounds like you are doing great. 35% is a fantastic savings margin. One though I would caution you about however is paying down your condo. While it may make you feel good, mortgage interest is the one good tax deduction still out there. Without it, especially if you are making good money, you may get gouged in taxes. Every year after you do your taxes, compute your Federal and state (if you pay it in the state you are in) taxes paid as a percentage of your gross for that year. I have managed to keep my fed in the 13-15% range over the last 25 years or so, state, around 5%. I used to pay hard on my mortgage too, but started to see my tax rates rising as interest deductions fell. And the FA I recently hired advised against overpaying it as well, as long as my wife and I were both still working. Good Luck...!!

Paying $1.00 in mortgage interest to save $0.28 (or whatever tax rate) in taxes never made sense to me. I'm in favor of living mortgage free if possible. All that interest money not paid improves your cash flow and helps you sleep at night. Those who say you can make more investing are betting their home on the markets going up.


Sent from my iPhone using Early Retirement Forum

[pb4uski]

While I don't care to renew the old pay off the mortgage or not debate, with a 3.375% rate I would not be in a hurry to pay it down but would focus on building some taxable savings instead as at his age having a large equity allocation should easily beat 3.375%.

[Slow But Steady]

Regarding mortgage interest: The standard deduction for 2016 is $6300.

OP's mortgage interest is a bit more than $2400, so no big savings there.


Edit: BTW, I agree with PB4 about building up some taxable savings.

[namesbond]

"I would not view having paid ahead on your car or student loans as being the same as an emergency fund. For one thing, I'm not sure if having made extra payments earlier would necessarily allow you to skip payments if you needed to... check that with your lenders." It does in fact allow me to skip payments for a period of time. I attended a mortgage focus group with my bank after acquiring the mortgage and specifically asked.

My rational for trying to pay off the mortgage is that generally someone my age should save 15% for retirement. I do 5% in company match, they do 13% into my pension "which I already bought 5 extra years of service", I then do $5,500 into Roth IRA which is over 10%, plus my HSA for another couple grand to max it out after what my company puts in.

The reason I like to pay on my mortgage is that I am someone who bought because I could get a nicer place for much less than renting if I leveraged a large down payment. My condo is 120,000 and I owe 72,000 after living there 5 months. My plan is to pay it off in 5 - 10 years then either rent it out or use it to get a 200,000 place with another small mortgage.

My priority is retirement investing but paying off my mortgage is my way of saving for the present. The tax incentive for paying interest seems to be worthless.

You guys have a good point about keeping a few grand around just in case but I have a credit card sitting in my glove box for those emergencies and who is to say I couldn't get a signature loan. I just don't like to feel that I have money or I will spend it.

The idea of using firecalc to figure out how much I should be saving is very valid but my personal opinion is the more the better so long as I'm not taking the present for granted.

[REWahoo]

Quote:

Originally Posted by namesbond I just don't like to feel that I have money or I will spend it.

You need to find a way to modify this behavior or you will have an uphill battle achieving financial independence prior to the grim reaper ringing your doorbell.

[rodi]

Wow - you are doing great! Much better than I was at your age.

Keep doing what you're doing. Only critique has already been mentioned - build up a cash buffer for an emergency fund... It should be a few months salary minimum... just in case you lose your job, have a medical emergency, have a car die... or other unplanned emergency.

[namesbond]

Thank you everyone for the advice!

[Hermit]

I didn't see a goal with all your work at savings. My advice is to take the suggestions to put your data in FireCalc and see what it says. That would help you get an idea of when you might become financially independent. After that happens, work is just play because you are no longer working to put bread on the table.

[papadad111]

I think you're doing fine. Welcome!!!

Take some time to learn about investing ..and as you grow more confident in the approach and asset allocation and risk tolerance you could always switch out of paying down the condo so quickly and divert funds into post tax retirement. Till you've had some time to learn what approach works for you, you're totally fine paying down the mortgage.

The psychological impact of no house payment is big. Even if the absolute financial impact is less so with the low rates.

Keep it up! You're on a nice path to retire early -- do you have a retire early age goal in mind? 40? 45? 48? 50?

Go ahead and set one now and shoot for it and I'll bet you hit it!!

Keep us updated.

[Davis65]

I agree with papadad: figure out what age you are working towards for financial independence. I started at 26 aiming to finish at 52. I am now six weeks away from d=finishing work at 50. It is a great feeling that all of my hard work and saving and investing has paid off. I can now plan long trips without worrying about work schedules, and no more 5:00 am alarms, commuting, etc.

Good luck to you. I look forward to reading about your progress.

[namesbond]

"Take some time to learn about investing ..and as you grow more confident in the approach and asset allocation and risk tolerance you could always switch out of paying down the condo so quickly and divert funds into post tax retirement. Till you've had some time to learn what approach works for you, you're totally fine paying down the mortgage."


I do feel very confident in investing. I have an HSA in S&P 500, Roth IRA in S&P 500, 401K in S&P500, Dividend, and International. I started my Roth IRA when I was 17 and consider index fund investing a hobby that I'm constantly learning about. I actually bought my Condo with $42,000 from my Roth IRA using contributions and $10,000 for first time home buyer.


My mortgage is part of my diversification and the small payment as a result of my down payment allows me to invest a high percentage of my salary now. I'm not brainwashed into thinking the mortgage is the smartest thing to pay off. My goal right now is to be 1/3 pension, 1/3 index funds, 1/3 home equity. So I'm currently home equity and pension heavy.


My goals are to retire fully or semi at 51 if I stay with the state since that would be full retirement age. If I leave the state before that I may cash out my pension into index funds and shoot for 59.5 to retire fully or semi. "depending on what I can likely get from the market on a 4% withdrawal vs. the pension at age 65"

[Markola]

I know that some people are driven to pay off the mortgage while others think a 30 year mortgage in the 3% range is the deal of a lifetime, with an extra dash of sweetener for interest tax-deduction. I'm kind of in the latter camp. I did read your rationales, too.

Your financial and savings habits are terrific but have you thought about the compounding effects of the money you are leaving on the table with your still-low 4% contribution (I think I understood) to your pretax retirement account? 15% retirement savings is ok, not great, but I think most here would advise to max that 401k out as soon as possible. You have a lot more room to sock away $ there and, because it is pretax, you get a free dollar for about every two you put in. That's a 33% instant return even before the hefty S&P 500 returns, which juice those returns further. I tend to think that's a much higher return savings vehicle in which to lock up dollars instead of extra payments on a 3% or so mortgage.

Plus, if the stuff in life ever hit the fan, and it can, you could get to the retirement account dollars if you really, really had to easier than you could your home equity. Finally, if the stuff hits the fan, you can simply curtail retirement contributions temporarily. (I mentally include my retirement accounts as the ultimate, last-resort emergency fund, albeit 7 figures these days, and I don't think that is bad reasoning). Flexibility and utility in life are important, at times more so than debt reduction. Regardless, you're doing great and far better than probably everyone your age whom you know. Good luck!

[namesbond]

My understanding is that since I make 50 to 55 grand a year I'm in the lowest tax bracket I'll ever be in my life. So I'm focusing on the hsa which is triple tax advantaged if used for medical expenses and the Roth IRA where I pay the tax up front. I believe these are important for tax flexibility in the end especially if I'm successful in drawing a pension which will be taxed. I do just over the four percent match because it is free money and further flexibility. So hsa 2% paid my me 1% from employer, Roth IRA 11% from me, 4% 401k by me, 13% to pension paid by employer for a total retirement savings rate of 31%. I understand that there is no rush to pay off the mortgage and that increasing my 401k contributions may be more worthwhile but I enjoy actually owning a large portion of my residence for the psychological reasons and do not feel that it is killing my retirement since it will continue to enable me to save since my mortgage commitment is so low.

Basically my plan is to keep saving for retirement as a priority but also build equity for peace of mind and to have a larger down payment or more rental income in 5 to 10 years.

Thank you all for the input! I will continue to analyze my decisions based on your feedback. I've already read a few articles about mortgages.

[Markola]

I admire your foresight immensely!👁