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The Dreaded mortgage vs IRA saga
Old 05-11-2010, 06:58 PM   #1
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The Dreaded mortgage vs IRA saga

Hi everyone,
I have been lurking quite a while on here, but this is finally my first post:

I am a 25 yr old with my eyes set on FIRE tentatively in my late 30's...I purchased my first home in the fall(with my girl friend) and find myself having a tough time deciding on my FI investing strategy. We are financially capable of paying off the mortgage in 5 years while still sacking away a combined 16-20k per yr towards our respective 401k plans.
I am by no means ignorant to equity markets and their potential for high returns but am becoming somewhat risk adverse in the current market conditions- though I did snagg a healthy chunk of aapl in 100's.

So with that backgound - Im looking for ideas to better my $$ position in the coming 10 years... paying down the mortgage so come my 30th birhday I reduce"roof over my head" expenses to property taxes, potentially pursuing more real estate investments - or should I be loading up on the more traditional diversified equity funds? I am honestly not so concerned about maxxing my 401k due simply to the fact that I have a good 40 hrs for that to be compounding away before I will be chewing in to it.
Essentially with what I have told you all - what is some advice for FIRE or semi FIRE in my 30's..
Btw- me and the old lady have fairly to very stable careers.

Thanks to all of you from who I have been so inspired!!
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Old 05-11-2010, 11:35 PM   #2
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I would max the 401K and next Roth. Last would be paying off any mortgage with recent interest rates. You have already paid the closing costs, just sit back and enjoy the destruction of the USD. At least with a mortgage, that will not be perceiverd as all bad by you.

Other suggestion- don't call your wife the old lady. Soon enough she will be, enjoy her youth while you can.

Ha
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Old 05-11-2010, 11:51 PM   #3
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So many questions that would affect my answer...:

What kind of mortgage do you have? Rate? Term? Fixed/Variable?
What is your and your SO's asset allocation? Risk tolerance?
What is your combined marginal tax rate?
How secure are your jobs?
What are your plans for kids?
How much equity do you have in your home?
Do you live in an area affected by the housing bubble?
Any plans to move?

And questions about one thing you didn't ask questions about:

What is your legal arrangement with your girlfriend and your house?
...Is she on the title? If so, how?
...Is she on the mortgage(s)?
What are your state's laws regarding common law marriage?
Do you live in a community property state?

2Cor521
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Old 05-12-2010, 07:40 AM   #4
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In response to the questions:

Mortgage: fixed 5.00%, 30yr note.
SO is VERY risk adverse person - it is instilled in her, and is not going to change
Combined Marginal Tax will be 28% for 2010
Job security - Very, very good(Both in high demand positions)
Comparable homes in neighborhood are selling roughly 10+% higher then my closing price(My purchase timing benefited from downturn)
Plans to purchase another house with some property in 3-5yrs - possible renting of current house(rents in my area at a minimum would COVER current mortgage payments)

As far as the house and girl friend are concerned...We are co-owners(mortgage and both on the note) - this is really the least of my concerns as we are extremely happy together have lived under one roof(renting) for a few years-just haven’t taken the steps to marriage(soon enough)...and no, common law marriage is not recognized in my state.

well that should cover the relationship/home info...

As for me - I would consider myself fairly risk tolerant - I have traded a small <$20k account through the 08' crash and still haven't lost faith in the market - I just cant imagine throwing everything at it in these wildly unstable times...in my free time besides dabbling in equities I have partnered on a flip project that ended up being quite lucrative and wouldn't mind one day getting more active in the RE business(just lack time right now)...
Btw - I rarely if ever see my take on this one: Shouldn't the concern to max a 401k right now be reduced dramatically in favor of short term(<15yr) investment vehichles...If someone wants to early-retire in their 30-40's they need other means to provide for income till "retirement age"....I have 40 years till I will be able to access a 401k, and I'm sure between now and then the penalties for early distribution will be steeper than today. I'd like to hear some of you who are contributing to the retire by 38, take on this part!...Thank you all.



Whelp - I look forward to hearing your take. some "if I was in your shoes" 2 cents.
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Old 05-12-2010, 11:16 AM   #5
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if i were in your shoes, i would do exactly what ha says. assuming all debt sans that house is paid off.

I heard in that last post, "not enough time," "trading," "girlfriend," "flipping," "good job security." i would tie up the loose ends, prioritize, find out what you really want to do with your life and do it. if you want to flip houses, go flip houses. also i would do some research on 401k's and their rules when it comes to withdrawing funds.

as i am only 2 years older than you, i wish you luck. my philosophy is much different than yours. i am interested in seeing other responses.
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Old 05-12-2010, 12:12 PM   #6
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You are only 25 years old so life still has a lot of surprises in store for you.

I think you should max out your 401K and IRA's before you start paying off your mortgage. Then as your income rises you will eventually be able to do both. As it rises even further you can do all of that and also amass a taxable portfolio outside of 401K and IRA.

But really no matter which of these you do, you will be ahead of most other people because you will be making significant contributions to your future.
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Old 05-12-2010, 12:54 PM   #7
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I agree that you should max out the 401k and Roth's first, then if you still have free cash flow apply that toward your debt.

I asked a similar question a few years back. I was already maxing out my 401k but asked whether I should take the extra $1,000 per month that was free cash flow and apply that toward my mortgage or invest it in the market. The advice I received was all over the board. One person suggested I split the difference and put $500 extra on the mortgage and invest $500. I ended up doing this and have been happy with it. I get the satisfaction of paying extra on the mortgage plus feel like I am already investing and not missing out on a potential "big run" in the markets.
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Old 05-12-2010, 01:07 PM   #8
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Rono' - are we really that drastically different in our investment philosophy? You paid std loans early where I am to pay down Mortgage early.

I thought I would never be on the pay down mortgage bandwagon because I do feel it is very "cheap" money.. but in the coming years of what are expected sideways markets, garanteed 5% + appreciation doesn't sound to bad...

This sites contributors tend to be very convincing so I will need to really re-evaluate my short and long term plans.
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Old 05-12-2010, 01:52 PM   #9
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i would say we have different philosophies at this point. which isn't a bad thing, as my philosophy could be wrong or could be wrong for you.

i paid down my student loans (which were at or under 3% interest) after a maxed 401k, roth IRA (some years) and stashing away a little each month to build an emergency fund. I would rather put as much as possible into my 401k now while I am young, as the largest impacts are the biggest investments made sooner.
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Old 05-13-2010, 07:31 PM   #10
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If the GF is risk adverse, I'd either payoff the house or build up cash to pay it off. I say that, but I actually maxed retirement when I was your age. So you pick, do as I say, or do as I did.

I think kids are the big variable. If you think that is in the cards, you need to prepare for the possibility that you might go single income. A paid off house could be a big plus in that instance.
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Old 05-14-2010, 05:24 AM   #11
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I would absolutely keeping saving money for retirement, but without a doubt I would pay of the mortgage as soon as possible. I paid mine of 3 years into 30 year mortgage, 10 years ago, and have never, ever, regretted it for one second.

There is no way, anyone, can tell you were to put your money that will be safer investments than paying off your house...there are all kinds of charts, graphs,projects and experts that will say otherwise.

The only *but* with my advice is, if you are not planning on staying in your house (forever, or for a long time), than maybe my advice would be different, having a paid off house that might go up or down 20-30-40-50% in value from year to year, is not all that much better than having a pile of equities that might do the same.

In my case, once I bought a piece of land I knew I would always own, it was a nobrainer to own it free any clear.
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Old 05-14-2010, 10:38 AM   #12
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Here is my take....

Max out the 401(k) only as long as you already have your extra money needed sitting aroung (debate of 3 month, 6 months etc.. you decide)... AND you do not drop into the 15% tax bracket... I can not recommend for someone to put in money saving 15% now and probably paying higher taxes years from now...

Put money into a ROTH.... as much as you can!!! To me this is the best investment option... (I am saying this based on the taxes now... if we get a VAT, it is not as good... but hey, all money spent will have a VAT attached... so... nevermind)....

Next... your 5% loan is cheap... live with it... I got 4.5% and do not plan on paying anything extra on the balance (well, until the wife gets involved with the finances and starts in on me to pay it off)....

Investing in a taxable account can be good... and profitable... don't knock it to much...
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Old 05-14-2010, 11:04 AM   #13
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Quote:
Originally Posted by nvr2early View Post
Plans to purchase another house with some property in 3-5yrs - possible renting of current house(rents in my area at a minimum would COVER current mortgage payments)
...in my free time besides dtheabbling in equities I have partnered on a flip project that ended up being quite lucrative and wouldn't mind one day getting more active in the RE business(just lack time right now)...
Shouldn't the concern to max a 401k right now be reduced dramatically in favor of short term(<15yr) investment vehichles...If someone wants to early-retire in their 30-40's they need other means to provide for income till "retirement age"....I have 40 years till I will be able to access a 401k, and I'm sure between now and then the penalties for early distribution will be steeper than today. I'd like to hear some of you who are contributing to the retire by 38, take on this part!...Thank you all.
We might be drifting away from the basics here.

You two are in a higher tax bracket today (with salaries) than you'll be in ER. Shielding taxable income is a good thing where possible. Conventional wisdom is to max a 401(K) to the match (perhaps even higher if expense ratios are low) and then to max IRAs (conventional or Roth, whichever you can contribute to). Then you're taking advantage of tax-deferred compounding and perhaps even lowering your current tax burden.

Next, it sounds as if you're developing a landlord/flipper business. Why starve it of capital to pay down the mortgage? Use your excess cash flow and your residence's "dead equity" to provide the capital for down payments on your rental/flip properties. Eventually you'll build your business to the point where it'll sustain future purchases, and then you could consider paying off your home mortgage. Or you could start looking at apartment complexes. Perhaps in 5-10 years you'll be able to choose between going to your job or making real estate your job.

To tap a 401(k) before age 59.5, you can roll it to a conventional IRA and use a 72(t) withdrawal. When you're in a lower tax bracket you could also decide whether it's worth converting the 401(k)/IRA to a Roth to reduce RMDs.

As for short-term investment vehicles: diversify your holdings to produce income (or cap gains) for the short term and higher returns for the longer term. If you build the RE business you may decide that rental income pays your cash flow needs without having to tap your ER portfolio. At that point you could invest the ER portfolio into a combination of dividend-paying bonds & stocks and attempt to live off the income without consuming principal.

The finances are not rocket science, but it may be tough to decide whether it's worth giving up your day job. That decision is perhaps just as much personal/emotional as financial.
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Old 06-27-2010, 06:46 PM   #14
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I definitely agree with what everyone is saying about taking care of tax- free / deferred stuff first. It all makes sense contingent upon the expectation that the investments in financial instruments are consistently in the upward direction.

I'm not too good with the specifics of the US tax code, but can contributions be carried forward? For example, if you don't max out the contribution to a 401K, can you deposit in following years? The only reason I bring it up is that if one doesn't think that the investments in financial securities are going to go up in the immediate future, it's nice to get the mortgage off ones back as soon as possible. If the readers of my ramblings just happen to be wizard financial traders who generate risk-adjusted total returns that consistently crush a paltry mortgage rate then please ignore the last point.

I only bring up the point for random situations like someone who may have been busy dollar-cost-averaging the S&P from 2004. I haven’t done the math, but from a quick glance I think it may have benefited a person like that to pay down the mortgage instead during that time (at least to now).

Quote:
Originally Posted by Nords View Post
The finances are not rocket science, but it may be tough to decide whether it's worth giving up your day job. That decision is perhaps just as much personal/emotional as financial.


Amen.
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