27, married and semi-obsessed with retiring early

[captain_krunk]

I've found this forum a few months ago and have been avidly reading people's opinions.

Without getting into too much detail (althoug I will if I need to) I want to hear what your opinions are on saving for retirement or just killing off mortgage debt.

I purchased a duplex in 2003 inside the beltway in the DC area for 232k and it could probably now sell for 360+.

I would love to retire early, but I'm wondering about whether paying off the home would be better than maxing out all 401k/IRA options. Being (completely) out of debt excites me because of the freedom I'd have from a monthly noose around my neck and I'd feel more free to pursue a job I love more than a job that pays well.

I'm guessing that most answers will be that its up to my desire and financial situation, but I want to see if anyone has any strong feelings about it.

 

[maddythebeagle]

You will get 2 answers, so you will have to pick one I personally like the idea of not having a mortgage in FIRE (frees up cash flow and less to bother with), but up to that point, I would probably max out the investments first (401k, etc.).

 

[dunc0029]

Unless you have a really high mortgage rate, it probably makes most financial sense to max out retirement accounts.  The psychological factor is harder to quantify.  A couple years ago, I paid off the remaining balance on an auto loan (about 1 year of payments) in full with my annual bonus so I could be completely debt-free, even though it was effectively a small loss by not investing the money.

 

[Jay_Gatsby]

You will get 2 answers, so you will have to pick one  I personally like the idea of not having a mortgage in FIRE (frees up cash flow and less to bother with), but up to that point, I would probably max out the investments first (401k, etc.).

Agreed.  Why turn down the ability to save tax deferred (or grow tax free in the case of a Roth), as well as the mortgage deduction?  I'm sure that the mortgage is manageable for you, otherwise you wouldn't have bought the property, so the idea of forgoing time in the market doesn't really make much sense.

 

[TromboneAl]

Wrong, Maddy, he's going to get three answers , and here's the third one.

It doesn't have to be an all or none decision! Make assumptions about returns, evaluate the two options, and if the choice isn't clear, go 50/50. That is, kill off some of the mortgage debt, and invest some.

 

[captain_krunk]

Good info.

I was ecstatic to pay off my car loan and I'm eyeing my wife's school loans in a similar way, but those have such a low rate that it wouldn't make much sense to pay off compared to things like my mortgage.

Perhaps I want to pay it off because I know its something that's within my control, whereas with investing I'm a blind man learning to see.

The 50/50 idea is good. I guess I'm the type of person who just wants to get one thing done well and then move on, but this discussion is enlightening and I've still got plenty of studying to do.

 

[maddythebeagle]

It doesn't have to be an all or none decision! Make assumptions about returns, evaluate the two options, and if the choice isn't clear, go 50/50. That is, kill off some of the mortgage debt, and invest some.

Good idea. I know a few people that got to the point that their mortage interest deduction wasnt great anymore and paid off, too toward the end. I am getting to that point since I have used a lot of cash toward my house.

 

[MooreBonds]

Good info.

I was ecstatic to pay off my car loan and I'm eyeing my wife's school loans in a similar way, but those have such a low rate that it wouldn't make much sense to pay off compared to things like my mortgage.

Perhaps I want to pay it off because I know its something that's within my control, whereas with investing I'm a blind man learning to see.

The 50/50 idea is good. I guess I'm the type of person who just wants to get one thing done well and then move on, but this discussion is enlightening and I've still got plenty of studying to do.

I understand the idea of paying off one debt completely because of the feelings it provides...however, it doesn't make fiscal sense.

So, how about if, instead, you keep sending money only to your highest after-tax debt, and just focus on your total debt outstanding, and seeing it drop? That way, you can still get some warm fuzzies at seeing your debt drop by 10%/20%/30%, as well as maximizing your net worth.

Or, how about focusing on the amount in interest that you're saving by paying off the high rate debt first, rather than looking at the balances/debts left?

--Peter

 

[SteveR]

So, how about if, instead, you keep sending money only to your highest after-tax debt, and just focus on your total debt outstanding, and seeing it drop? That way, you can still get some warm fuzzies at seeing your debt drop by 10%/20%/30%, as well as maximizing your net worth.

Or, how about focusing on the amount in interest that you're saving by paying off the high rate debt first, rather than looking at the balances/debts left?

--Peter

The way I see it is, reduce (eliminate) the highest non-deductable debt first. Debt from a home equity loan would be way down the list but CC debt would be at the top. Car loans maybe next followed by student loans and then any other loans that you can't deduct the interest paid. The interest rate and amount as you said, would then dictate which to pay on the most until it is gone.

The "good" interest loans like the home equity and investment loans would go last. Mortgages sort of fall near the bottom but it all depends on where you are in the loan as well as your overall tax situation. Each person might need to do it differently based on their personal circumstances.

Personal experience note: after my divorce, I was granted the task to pay off all the CC debt my wife had run up. It was a staggering amount and was spread over many CC and individual store CCs. The total number of accounts was like 15-20. I was also paying alimony and child support at the time and was rasing one for the two kids myself. No money in the bank and everything still had a credit balance.

I put together a plan to pay off all this crap while still keeping a roof over my head and food on the table. CC credit sucks... and can drag you deeper and deeper in the hole. It took 3+ years to climb out and I have not carried a CC balance in over 15 years. That is also when I got serious about saving and investing.

 

[Mr._johngalt]

Personal experience note:  after my divorce, I was granted the task to pay off all the CC debt my wife had run up.  It was a staggering amount and was spread over many CC and individual store CCs.  The total number of accounts was like 15-20.  I was also paying alimony and child support at the time and was rasing one for the two kids myself.  No money in the bank and everything still had a credit balance.   

"Alimony, child support, CC debt"...............I feel your pain man.

When my divorce was "in the works" I was in an elevator with
my wife, her attorney and my attorney. I told my audience that
while I agreed that child support was certainly fair, if I got
stuck for alimony the next time any of them heard from me, it
would be a post card from Brazil. I was not kidding.

JG

 

[SteveR]

"Alimony, child support, CC debt"...............I feel your pain man.

When my divorce was "in the works" I was in an elevator with
my wife, her attorney and my attorney.  I told my audience that
while I agreed that child support was certainly fair, if I got
stuck for alimony the next time any of them heard from me, it
would be a post card from  Brazil.  I was not kidding.

JG

It was painful but the long term rewards were well with the pain. I got rid of a major drain on my net worth and my sanity. It forced me back into a frugal life style and made me save. It made me look out into my future and see that I was going to have to work the rest of my life if I did not do something.

I think I did pretty well. I made a bunch of mistakes and still do but overall my net worth went from a pretty nasty negative one to where I am today. Not bad in 15 years despite some big losses in my company stock and some investments that went south.

As for not paying alimony, I was stuck with spousal blackmail with visitation rights for my younger child. I was raising my 12 year old so we switched kids on alternating weekends and holidays. After I moved it was even worse because of the distance. I did not want to screw up the visitation so I paid. She did finally get married after a few years so that stopped. The child support stopped 3 years ago but now I am funding college for him.

The divorce laws here are just like CA so I lost half my retirement to her too. The good news was that I did not have hardly anything in the accounts for obvious reasons, but giving away 1/2 of my pension, even as small as it is, was painful. Oh well, you deal with the hand you got dealt I guess.

 

[Gone4Good]

To summarize what other people have said, the "correct" financial choice is easy. Compare the after-tax cost of your mortgage versus the expected after-tax return of your investments and put money toward whichever is higher.

Some other considerations:
1) Non-deductible debt that carries a higher interest rate than your mortgage should be the first target.

2) Keep in mind that you know for certain the return you are getting by paying down the mortgage whereas your portfolio returns are unknown - if it's a close call I'd choose paying down the mortgage.

3) Financial flexibility is extremely important and should be your first consideration. Make sure you have enough liquid savings to last you a few months in the event you find yourself out of work. Some people have taken out home equity lines of credit for this purpose - that is not my personal choice, but it's what others here have done.


The feeling of being debt free is great. But I think you will find that the psychological benefit of a large portfolio is equally great. I think you will find that carrying a mortgage is less of a burden when you know you have the financial resources to pay it off. For this reason I would choose the path that makes the most financial sense, and the warm fuzzy feeling will follow.

 

[Andre1969]

Back in 1995-1996, I went through a bad marriage and divorce that left me $27,000 in debt. I went on CCCS and they put me on a 5 year plan to pay it off, at around $500 per month.

Just before we split up, I was starting to get a handle on the slide into oblivion, by picking up a part time job delivering pizzas. I ended up paying off that debt in about 2 1/2 years, by working my butt off and putting as much as I could toward those credit cards.

Looking back though, if I had it to do over again, I think I would've stayed with the 5 year plan, or close to it, and tried to invest more into my 401k and Roth IRAs at the time. It would've given me a few more years in the market, and a few more years to accumulate savings and compound.

But, if nothing else, the peace-of-mind feeling in getting that debt paid off was incredible.

One thing I really regret when I look back is that I didn't participate in my company's 401k when I first started at the age of 22. I worked for McDonnell-Douglas, and back then their stock was selling for around $30 per share. Well, over time it did a 3:1 split, then a 2:1 split, and when Boeing bought us out, a 1.3:1 split. And right now Boeing is going for around $68-70 per share. So my 401k would be setting pretty right now.

But, in the end I think I still turned out pretty okay. As they say, hindsight is always 20-20.

 

[brewer12345]

I am on the fence as to whether to pay off a car loan. Its 3.9% money for another 4.25 years. I'll be getting a bonus in January that will dump more than enough cash in my lap to kill the loan. This is my mst expensiive debt, and its pretty cheap money. Hmmm...

 

[Mr._johngalt]

I am on the fence as to whether to pay off a car loan.  Its 3.9% money for another 4.25 years.  I'll be getting a bonus in January that will dump more than enough cash in my lap to kill the loan.  This is my mst expensiive debt, and its pretty cheap money.  Hmmm...

Don't know if this will help, but it's pretty easy to get over 3.9%
by investing at the bank. You need to factor in the tax implications.

JG

 

[SteveR]

Back in 1995-1996, I went through a bad marriage and divorce that left me $27,000 in debt.  I went on CCCS and they put me on a 5 year plan to pay it off, at around $500 per month.

But, if nothing else, the peace-of-mind feeling in getting that debt paid off was incredible.

One thing I really regret when I look back is that I didn't participate in my company's 401k when I first started at the age of 22.  I worked for McDonnell-Douglas, and back then their stock was selling for around $30 per share.  Well, over time it did a 3:1 split, then a 2:1 split, and when Boeing bought us out, a 1.3:1 split.  And right now Boeing is going for around $68-70 per share.  So my 401k would be setting pretty right now.

But, in the end I think I still turned out pretty okay.  As they say, hindsight is always 20-20.

I feel your pain and have walked many miles in shoes like yours. In my first marriage, DW did not understand that someday we would need to send our kids to college and live on our retirement funds. She spent more than we both made and maxed out all the credit accounts. We could only afford to pay the minimums on these and we had at most $500 in saving and nothing in checking at the end of the month. I put in next to nothing in my 401(k) for years because we needed the $$ to stay even with the debt. I hated that and lived that way for 15 years.

Once the CC debt was gone it was time to get serious about my 401(k) and after-tax $$$ for college funding. As a result, I put one son through college and am 3/5 there with the other one.

Anyway, being debt free is a wonderfully feeling after drowing in it for years. My mortgage is my only long term dept and as soon as I stop getting a decent tax deduction on it, I will pay it off too.

 

[KB]

Factor in the freedom feeling along with looking at the numbers.

Debt free feels wonderful. One less thing to worry about.

 

[Jay_Gatsby]

Factor in the freedom feeling along with looking at the numbers. 

Debt free feels wonderful.  One less thing to worry about.

The feeling one gets from being debt free is great, but you must be careful not to let other expenses take the place of the eliminated debt. This is why certain low-interest debts, like mortgages, student loans, etc...paid automatically from one's bank account, can act as a governor on spending.

 

[SteveR]

The feeling one gets from being debt free is great, but you must be careful not to let other expenses take the place of the eliminated debt.  This is why certain low-interest debts, like mortgages, student loans, etc...paid automatically from one's bank account, can act as a governor on spending.

I don't see this as much of a concern for most of the folks here. My assumption would be that once the debt is gone those funds would then flow into some sort of savings/investment account to fund FI and ER.

I don't see a lot of free spending from most people on this board so the "governor" for spending would be saving for those working on FI and ER or who are already in ER.

 

[brewer12345]

The feeling one gets from being debt free is great, but you must be careful not to let other expenses take the place of the eliminated debt.  This is why certain low-interest debts, like mortgages, student loans, etc...paid automatically from one's bank account, can act as a governor on spending.

The problem with both the spending discipline and the feeling of freedom is that you are potentially letting emotions drive financial decisions. Usually not the greatest way to get ahead.

 

[Outtahere]

I paid off my mortgage last year, it was a great feeling to not have that debt or any debt for that matter.  All that money was directed elsewhere like 401K, money market funds, a new account at Emigrant Direct.  There was no way I wanted to fall into the trap of having that money to play with every month.

 

[Nords]

Its 3.9% money for another 4.25 years.  I'll be getting a bonus in January that will dump more than enough cash in my lap to kill the loan.  This is my mst expensiive debt, and its pretty cheap money.  Hmmm...

Geez, brewer, if you've been paying the loan from cash flow so far, then wouldn't you want to dump the bonus into a 4- or 5-year CD (or even a short-term bond fund) and keep paying the loan?

 

[bow-tie]

The problem with both the spending discipline and the feeling of freedom is that you are potentially letting emotions drive financial decisions.  Usually not the greatest way to get ahead.

You're abosolutely right, Brewer.  But it seems to me, people being people, that emotions are the order of the day.  So much volatility in the markets is driven by not fundamentals, but fear and greed.  Fundamentals may win out long-term, but oftentimes, here in the now...

I consider myself rational and level-headed when it comes to monetary decisions, but I'm busting butt to pay our house off early.  It's "good" debt supposedly, but the feeling of being debt-free will totally rule.  That combined with the financial flexibility a paid-off mortgage allows.

 

[brewer12345]

Geez, brewer, if you've been paying the loan from cash flow so far, then wouldn't you want to dump the bonus into a 4- or 5-year CD (or even a short-term bond fund) and keep paying the loan?

Yes, except its not all that dfferent from taking a 0% credit card cash advance and plowing it into a savings account, and I can't be bothered to do that either.  And iftruth be told, cash flow could be a bit richer on a month to month basis.

 

[Nords]

Yes, except its not all that dfferent from taking a 0% credit card cash advance and plowing it into a savings account, and I can't be bothered to do that either.  And iftruth be told, cash flow could be a bit richer on a month to month basis.

Yep, then you're absolutely right. And you'll sleep better at work night, too.