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Old 01-28-2015, 04:14 PM   #21
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Assuming you itemize Schedule A for your taxes, Uncle Sam also helps pay some of that mortgage interest, so your effective cost is even less than 2.89% which means even less reason to pay it off while you are still working.

I assume you can get better than 3% return on investments, which would also lean towards not paying off the mortgage.

Above is all the logical aspects. For emotional peace, if you want it paid off, wait until you are not working, then you can use some of that pre-tax money without as much tax cost.
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Old 01-28-2015, 04:15 PM   #22
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If anyone is looking to refi, may I suggest you take a look at Third Federal Savings. Not sure what areas they operate in. I am in Florida. Specifically look at their 10 yr rate.
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Old 01-28-2015, 04:27 PM   #23
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Originally Posted by pjm123a View Post
When I made my original posting the mortgage balance was 300k. It is now 232k. (there was a re-fi in there which got me my 2.89 rate). So I have paid down 68k since the post. It averages out to about a 6k reduction in principal per month. I intend to up that to somewhere around 9k per month to hit my 2 year goal. The majority of the money to make this monthly payment comes from current income sources. I can generally make it if my expenses for a given month are low enough. Occasionally I kick in some extra money to try to maintain my momentum. For instance, I recently sold some stock in my after-tax brokerage account and threw it at the mortgage. This was caused somewhat by a holiday spending hangover. The gist of my question is whether the emergency fund could be used as a source for maintaining the momentum in a month where my expenses were higher than normal. The thinking was that being 60 meant that my IRA or 401k made the emergency fund unnecessary for emergency purposes. I had not thought about the tax consequences. The 30k savings would be realized over the 2 years (or a lesser savings if it takes more than 2 years but less than the 8.5 left). Hopefully that clears things up.
Thanks, that does make it clearer. You are already scrimping and saving and LBYMing to aggressively pay down the principal. The raiding of the emergency fund and the liquidation of equities are aimed at reaching your self imposed debt repayment schedule.

It seems quite reasonable to use surplus income to reduce the mortgage principal. However, selling high performing assets and/or incurring extra taxes to meet an arbitrary goal of eliminating debt from the balance sheet before retirement is still not the best financial decision with a tax-deductible mortgage at 2.89%.

Let's say you continue to LBYM and to put surplus income against the mortgage principal. Let's say you ER in two years with $X left on the mortgage. What value of X would you feel comfortable with? $100,000? $50,000? $0?

If the answer really is $0, then perhaps you could consider working a bit longer.
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Old 01-28-2015, 06:07 PM   #24
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I was waiting to pay off our HELOC until DW retirees for good in a few years. The current payoff date with PenFed is the same year that she plans to retire.

One of the reasons that I like this approach (in addition to the 1.9% interest rate) is that it will be psychologically comforting.

By that I mean that the same year that we trade DW's wage income for pension income (ie ~50% reduction gross) we will also finish up the hose payments. The lack of a house payment will tend to smooth the transition. If we paid it off early (which we easily could) we would get use to the lower expenses with the higher income now and experience more of a shock in cash flow when the retirement of DW occurs.

-gauss
We also have a 1.99% home equity loan from PenFed. It will be paid off in 28 months. Our plan is to retire either one or two years after that occurs. We'll use the freed up mortgage payments to build up our cash bucket prior to retirement.
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Old 01-28-2015, 07:03 PM   #25
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I am 60 yrs old. My goal is to pay off the mortgage on my primary residence within the next 2 years then consider myself FI. Each month I seek to "throw" extra money at the mortgage so as to eventually meet the 2 year goal. Currently, I fully fund my 401k and a spousal IRA. The rest goes towards the mortgage. I have maintained an emergency fund over the years. It is in a simple savings account. I have always viewed this as an emergency safeguard that prevented unwanted tapping of retirement money thus avoiding the 10% penalty. Now that I am 60 though (> 59.5) why should I not raid the emergency fund and throw the money at the mortgage? After all if there is an emergency I can now tap my retirement savings without penalty?

Thoughts?
My thought is that you are too fixated on being mortgage free. I would not bother to pay a 2.89% loan quickly. Rather than throwing more money at a 2.89% mortgage, build a taxable account with your favorite equity or balanced fund. While there are no guarantees, it is more likely than not that you will come out ahead given a 8 year time horizon and you will always have the flexibility to sell the taxable account and use the proceeds to pay off your mortgage.
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Old 01-28-2015, 09:09 PM   #26
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Sigh - My head says to take pb4uski's advice and my heart says to take that of Meadbh. I think I'm going to follow the plan for the rest of this year and re-evaluate after that. What got me into this focused LBYM and pay-it-off-ASAP schedule initially was my tenuous job situation. While I can't say I will definitely be able to bow out on my own terms things have stabilized quite a bit.
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Old 01-28-2015, 09:33 PM   #27
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Maximizing net worth is often similar to the advice given to pilots - trust your instruments, not your gut. Their instruments are more likely to be correct. In this case trust your spreadsheets and not your instinct. But if you really want to pay off your mortgage, maybe the peace of mind would be worth it to you even if it may not hold the highest probability of maximizing your future net worth.
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Old 01-28-2015, 10:18 PM   #28
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If you invest the $68K/yr or whatever the extra principal payments you are making, while continuing your normal mortgage payments, you'll likely be able to pay off the mortgage in 3-4 years anyway, without depleting your emergency fund.

On the other hand, if the stock market has a down year or two...


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Old 01-29-2015, 10:35 AM   #29
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Every time this topic comes up, several people frame the issue as a choice between:

A. Following the obvious financial conclusion, or
B. Sleeping better at night.

It's not that simple.

First, the financial conclusion is not so obvious. It all depends on the future, which by definition is impossible to predict with any certainty. What if the US experiences 20 years of Japan-style deflation? What if the markets go sideways for the next 10 years? What if your interest rate is 5.25%, your balance is too low, and term too short, to justify refinancing? Each case is different. You can plug your mortgage numbers into FIRECalc to quantify the potential success rate of holding a mortgage; and while it may be high under certain parameters, it is certainly not 100%. And... there are lots of valid reasons (discussed in previous threads) why the FIRECalc history may be overstating success rates on the hold-a-mortgage decision analysis.

More importantly, it seems to me that a heavily-leveraged balance sheet in retirement is simply an inappropriate capital structure for that stage of life. Especially if you've already got the ways and means to support your desired lifestyle without taking that risk. I'm now in a mode of minimizing uncertainty and risk of failure, not maximizing net worth. If you are COUNTING on the market outperforming your mortgage to enable ER, that's even worse. OTOH, if you are inherently risk averse, and just want to build a bigger legacy for your kids, then go for it. The odds are decent that you'll come out a couple points ahead, especially if you have a really low rate and a long term remaining.

But don't frame this decision as thinkers versus sleepers. I'm the former, not the latter, and I happily paid off my mortgage at ER using funds from my taxable account, and the rationale registered above.
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Old 01-29-2015, 11:06 AM   #30
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The cool thing with fixed rate mortgages is if rates go down, one can usually refinance with a no fee, no cost loan. And if rates go up you get to keep the low rates and invest the difference. It is a good bet if you have the cash flow. For us if we had paid off our mortgage, we might not have the after tax cash to live on to keep our AGI low enough to qualify for ACA subsidies and grant money for the kids for college, which is 5 figures a year for us.

Additionally, I live in a state with high housing costs and low asset protection for personal residences, so we have already decided we would always keep a good chunk of our equity stripped out of the house and put into something with more asset protection, unless we really downsize to something relatively inexpensive.
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Old 01-29-2015, 11:20 AM   #31
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We do not have an emergency fund nor any money in a savings account nor in CDs. Our portfolio serves as one of our sources of spending money. If an emergency came, we would just sell something and get the cash to spend. We have it set up that this would cost us no taxes and no penalties. Also it would not matter if equities were down or up.

I thought this was the way that all financially independent folks did things. They don't need an emergency fund.
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Old 01-29-2015, 11:33 AM   #32
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We do not have an emergency fund nor any money in a savings account nor in CDs. Our portfolio serves as one of our sources of spending money. If an emergency came, we would just sell something and get the cash to spend. We have it set up that this would cost us no taxes and no penalties. Also it would not matter if equities were down or up.

I thought this was the way that all financially independent folks did things. They don't need an emergency fund.
Can you explain how this works?
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Old 01-29-2015, 11:38 AM   #33
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Sure. We have only equities in our taxable accounts, so if we need cash, we sell them. We would sell the equities with the highest cost basis first. If we sell at a loss, we would simply buy similar (but not substantially identical) equities in our retirement accounts by exchanging from a bond fund. If we sell at a gain, then we have enough carryover losses to net the gain out to zero.

Thus no taxes and no penalties. And it doesn't matter if equities are low or high because we would have no net change in equities if we sold low since we would buy low, too. If we sold high, we would buy high, too.
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Old 01-29-2015, 01:15 PM   #34
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Interesting approach given the carryover losses which you (and I also) have.

I was concerned at first about getting your AA out of whack, but this approach would tend to bring the AA back into alignment (assuming you are heavy in stocks when you sell at a gain, or light in stocks if you sell at a loss.)

-gauss
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Old 01-29-2015, 03:14 PM   #35
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For the OP:

IMO, your Emergency Fund is not so large in relation to the remaining loan balance that it would make much difference in paying off your mortgage and is of greater value to you in its current form. Also, if your job situation gets uncertain again, a cash cushion can give some comfort.

Lots of great ideas have already been aired in the thread concerning whether to pay off the mortgage or not, including financially beneficial ways to structure either choice. I can't improve on them. Sometimes the psychic value of having your home paid for trumps any financial considerations...only you can weigh those priorities.

As to the idea that financially independent folks don't need an Emergency Fund...I see the logic, but maybe some FI folks want one anyway. In my case, that fund is not only a way to mitigate unexpected expenses, but an easy way for my Spouse to tap immediate cash in the event of my death. I tend to do the investment management for us and want to make it very easy for DW to access money while she goes through the decisions/actions that come with the passing of a Spouse...not add buying, selling, tax considerations, etc to the many choices she'll already have to make. There are time delays involved with changing pensions into survivor annuities, updating accounts, etc. and our Emergency Fund is an important tool to minimize problems those items could cause.

Just another POV to add to the mix...enjoyed reading different approaches to the topic.
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