Pay off now or wait

[xprinter]

My wife and I are both 52 and we at a quandry as to what we should do in the next few years. My wife has been working for the same company for 31 years. As of her 55 birthday she can retire with full pension. This is around 2000 per month or $400 k in cash value. We also have about 400k in 401ks and roths. We have a 15 year mortgage with about 11 years left. We owe 122k on it and it has an interest rate of 4.875.

My problem is we can't afford to retire till the house is paid for or we move to a less expensive home. We are funding our retirement plans at about 30k per year and only paying the normal mortgage payment. Should we pay off the mortgage early and not fund our retirement accounts (except the 3% match) or should we just continue to do what we are doing for a while longer? I know that financialy the interest on the mortgage is very little, but I would hate to work till 63.

 

[LOL!]

Your mortgage is similar to ours. You probably pay about $1000 a month for the payment, of which about $500 is interest. We are not paying off our mortgage early because it is tax deductible for us and even money market accounts pay more interest than the mortgage costs us.

So, there is no quandary. Don't pay off mortgage and come back in 3 years and ask your question again.

 

[laurence]

I'm a little unclear here. Net Worth is Assets - Liabilities, so how is throwing the money in one bucket going to get you to retirement faster than another? What are you investing your 401k money in?

That is a fantastic rate on your mortgage, don't you think you could get a better return on your money in the market? You'll just have to run the numbers. How much do you need to live (well) per month once the mortgage is paid off? If your wife is bringing in 2k a month, and your Principle and interest payment is about $1,200 (estimating here), that still leaves you with $800 from her pension. Using the 72t rule, you should be able to pull about 20k from your 401k a year right now. So that leaves you with ~2500 a month after you've paid PITI on the house.

When do you want to retire? If paying off the house is how you'd like to do it, just use an early payment calculator and figure out your goal date, divert the extra payments from what you are putting in the 401k.

 

[xprinter]

I want to retire by the time I turn 58 about 6 years. Our 401ks are spread in AF European Growth, Delaware Trend Instit., Fidelity Balanced, Fidelity Equity Income, and TRP Small Cap Stock. Our house is worth about 420k so we could take the equity and move to a less expensive home at retirement.

 

[Arif]

Our house is worth about 420k so we could take the equity and move to a less expensive home at retirement.

Seems like this would be the key to cracking the ER code for you. If you weren't tied to your house you could pay cash for a home in many parts of the US and end up with no mortgage. Then that pension and the use of the 72t rule would put you in the clear.

 

[spideyrdpd]

If he sold the house he probaly wouldnt need to deal with the 72t . Since she will have retired at after 55.
I might cut back expenses a little and throw in an extra principle payment if your really concerned. That would cut back the lengh of the mortgage if your keeping the house. Then I would only do the match in the 401k and invest the rest somewhere other than the house.
Oh you can also access the funds that you put in the roth with no taxes no penalties.....

 

[saluki9]

I want to retire by the time I turn 58 about 6 years. Our 401ks are spread in AF European Growth, Delaware Trend Instit., Fidelity Balanced, Fidelity Equity Income, and TRP Small Cap Stock. Our house is worth about 420k so we could take the equity and move to a less expensive home at retirement.

Well if that's the plan this seems pretty cut and dried.

Refi into either a 7-10 year interest only or a conventional 30 year mortgage, and put as much as possible into your retirement assets

 

[FinanceDude]

Well if that's the plan this seems pretty cut and dried.

Refi into either a 7-10 year interest only or a conventional 30 year mortgage, and put as much as possible into your retirement assets

Other than interest only, sounds good..........

 

[spideyrdpd]

Why does what they say sound good ?
He has a very low rate and would refi into a higher rate
You would be better off investing the money and then when its time to retire you can take your investment money and then pay off the loan or use that money to buy the retirement castle err house

 

[xprinter]

I think for now I'm going to keep the mortgage, make the regular payment, and sock away as much as I can.

 

[SteveR]

Keep the mortgage. Your interest rate is lower than what you can earn on ever a short term CD.

If you pay more on the house and the value of the home drops when you are ready to sell it all the money you put into it at an accelerated rate would be "lost". If you put that some amount into conservative investments VG MM or ING MM etc. you would be ahead. It all comes down to risk of change over the next few years.

Maybe a part time job would help. You could continue to have income while your investments grow yet you don't have to contribute to them because you won't be using them to live on. Run the numbers and see what works for you.

We plan on keeping the mortgage into retirement; at least until we downsize in 5-10 years. Then we will not have a mortgage at all. We like the house and don't want to move yet so for us it is a personal choice. Our income in ER will easily fund the mortgage as well as the other stuff we want to do. But, if we were not so lucky we would be selling the house now and downsizing where we would not have to carry a mortgage. It is all about cash flow.

 

[Craig]

xprinter, I agree with your decision.  The interest rate is key.  We go through similar thoughts, and we have a 5.625% fixed, 30 year.  I've concluded my drive to pay off the DOT is emotional, not logical.  Better to have the liquidity of savings, instead of everything buried in the home.

 

[mathjak107]

Right now with mortgages at around 6-25-6.50 we are deciding whether to pay as much cash as we can towards our next home or take a bigger mortgage.
I think with rates at this level even after tax deductions i would have to get at least 5 to 5-1/2 % after taxes in a virtually super safe guaranteed cd,money market enviornment to equal the guarantee of paying more cash towards the house.Since i cant do that yet at current levels paying cash is the best deal .

 

[spideyrdpd]

Of course I disagree.

For most people on this site they already have lots of money in a fix account. Or a high exposure to bonds which is basically what a mortgage is. So I disagree with it must be a safe secure guaranteed account. Its just something that overtime (like a house) has to get a average higher than the rate your paying on the home loan.

 

[mathjak107]

Well its all about alternate returns on the money vs risk on that money.While you can get 7-10% in the markets  the risk level becomes very high.Paying that cash on the house instead yields an after tax risk free reward of 5-5-1/2 % right now.Thats with noooooooo risk.I dont think many of us would borrow money with a loan to put in the stock markets at this point.Effectively thats what you are doing by borrowing the money for the house instead of using your own,and instead putting your own in riskier investments to get that higher return than your mortgage..Does this make sense?

 

[spideyrdpd]

It makes sense. I just dont think its cut and dry.

I cant spend money invested into my house unless I borrow it out. I have to admit that I am willing to earn less to keep some of that money liquid.

Most people here seem to think that 8% is a reasonable return that you can get safely by having a diversified (ugh) portfolio.

Many will already have a % of their money in a guaranteed/fixed account and an exposure to bonds.

We also didnt ask if they were maxing out their roth accts ? So there money would grow tax free.

There is also the time value of money issue. Your now paying a mortgage with todays dollars. While I like the idea of paying my mortgage back with tomorrows deflated dollars.


Of course if its raining money or your living below your means enuff. I guess you can do a little of everything. Invest in that balanced portfolio maxing out the retirement accts and pay down the mortgage.

 

[mathjak107]

I got a feeling the interest you pay on a mortgage more than negates the pay it back in cheaper dollars thought. the interest is way above the inflation rate so although i didnt actually run the numbers somehow i dont think that will pan out to be a reason.

 

[Craig]

He has a rate of 4.875% ... are we discussing his situation, or the hypothetical? I can't imagine paying off that loan, unless it's an ARM, and he gave the impression it is a fixed rate.

 

[FinanceDude]

Don't pay it off.............it's a good rate.

Sock away money for retirement...........can't have enough of that...........

 

[xprinter]

We have already maxed out our roths plus catch ups. My new job has a 2 year wait till I can get a 3% match on contributions. I decided to up my wife's 401k contribution to 40% from 20%.
Since 2003 I have been investing my roths and simple ira with a financial group. They invest mostly in covered calls and our return has been about 4% gain per year. I am debating if I should just do it myself at Vanguard with index funds. I don't know how to go about leaving my advisor because of these covered calls.

 

[FIRE'd@51]

Move it to Vanguard and index it. Since January 1, 2003, the S&P 500 has been up 14% compounded annually. IMHO covered call writing is a bad strategy (unless you think you can time volatility). Why sell off the upside of the return distribution and while keeping yourself to the downside?

 

[FIRE'd@51]

Sorry, last sentence of previous post should read "Why sell off the upside of the return distribution, while keeping yourself exposed to the downside?"

 

[FinanceDude]

Of course I disagree.    

As I expected you would..........