Try To Talk Me Out of Raiding My Emergency Fund

[almost_there]

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?

 

[athena53]

If you raid your 401(k) for emergencies, withdrawals are taxed as ordinary income. Liquidating a savings account for an emergency would cost you nothing in taxes. Since you're still working you're probably in a fairly high tax bracket. It's better to withdraw from after-tax savings when your tax bracket is lower.

 

[Big_Hitter]

^^ agreed. I wouldn't do it. I like to keep my emergency fund equal to about a two year's take home.

 

[Greg V]

Some questions to help me understand your analysis and choice of this strategy so I can better assess your choice:

1. What is the principal amount, interest rate and term remaining on your mortgage and size of the emergency fund?

2. What drives your current 2 year goal for paying off the mortgage?

3. How much money would you save by paying off the mortgage early?

4. Are your retirement savings currently sufficient to support your projected retirement lifestyle?

5. If they are, if you have to tap them in lieu of your emergency fund within the next 2 years, are they still sufficient? Be sure and take into account the fact that accessing your current retirement fund is not a taxable event and using your retirement accounts as your emergency fund is taxable at the same rate as ordinary income.

6. Married or single?

If I'm asking for too much info...sorry and I have no intent to intrude. I just don't feel I can give a helpful response without additional data. Thanks.

 

[Katsmeow]

I agree with athena53. I am actually not a fan of throwing extra money at a mortgage unless you can throw enough to pay it off.

You never know what will happen. Think about people who were paying extra on a mortgage when the housing bubble collapsed and then something happened and they had a house they couldn't sell. If they got foreclosed on, they had basically given away that extra money they had paid.

If it was me, I would save up enough to pay off the mortgage and then pay it off (if I wanted to pay it off -- with a mortgage at 3.49% we are in no hurry to pay it off, retirement or not).

 

[Davis65]

I always had trouble with the idea of receiving negligible interest on a savings account while paying higher interest on a mortgge. i used a line of credit as my emergency fund, and never had to tap it. It is true that if I had, I would have been paying a higher rate of interest than on the mortgage.

Compare the mortage savings (i.e., the mortgage interest rate) to the expected cost of borrowing on the line of credit (the higher interest rate times the chance of needing to use it). If the likelihood of using the of credit is low, then paying off the mortgage makes more sense. If your likelihood of using the line of credit is high, then you wouldn't pay off the mortgage, and you'd keep your savings account emergency fund.

 

[dallas27]

I would just look into setting up a HELOC, and if you need the cash pull the trigger. If you are good with that, dump the emergency into the house, pay it off, then start building back up your cash buffer.

 

[almost_there]

Wow, lots of things that I had not considered. Thanks for all the responses so far.
This is a link to my "hi" posting from Feb 2014 where I embarked on this plan.
http://www.early-retirement.org/for...d-go-tomorrow-except-for-one-thing-70822.html

Since this posting the balance on the mortgage is 232k. My job situation has stabilized considerably and the market has been very nice to my retirement accounts.

The interest rate on my mortgage is 2.89%. I understand the argument for not paying off the mortgage. There is an emotional aspect to me for wanting to pay it off. I simply will not consider myself FI while I am in debt for 232k even if all the financial calculators assure me that I am.

The mortgage term was 10 years but is now down to about 8.5 years because of the pre-payments. The emergency fund is about 10k. I have at least 75k of available credit that I can tap from credit cards at any time (I have never carried a balance on these cards). I also have about 25k in a ROTH IRA that I believe I could tap with no tax consequences.

I would save somewhere around 30k if I meet my 2 year pay-off goal. I believe my retirement funds are sufficient to maintain my life style in almost any event at this point although as I've stated I would sleep a lot better without that mortgage.

At this point my revised thinking is that it is OK to tap the emergency fund for pre-paying the mortgage but to NOT tap the 401K or IRAs for emergencies. Rather consider borrowing or using the ROTH.

For the record, I would only utilize the emergency fund if I get behind on my self-imposed pre-payment schedule. I am trying to maintain the schedule mostly via cost-cutting and the occasional bonus that comes along from the improving conditions where I work.

 

[Big_Hitter]

I would just look into setting up a HELOC, and if you need the cash pull the trigger. If you are good with that, dump the emergency into the house, pay it off, then start building back up your cash buffer.

I doubt I'll ever get another HELOC after my experience

 

[Dash man]

I am a fan of paying off a mortgage, but not at the expense of having an emergency fund.
I don't believe it's a good alternative to use an HELOC because banks can freeze those as many found out in 2008. I have a relative who used the HELOC and when the market crashed he also found the HELOC was cut off. He lost his job and eventually his house.
Leverage is great until it isn't.


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[mystang52]

If you owed $10,000 on your mortgage, then maybe raiding that emergency fund would make sense. You could then re-fund that emergency account with your now-absent mortgage payment. But to throw $10,000 at a $232,000 mortgage doesn't seem logical.
You'll still have a mortgage payment to make, but no emergency fund.

 

[Texas Proud]

I am not a fan of paying off debt that is so cheap.... my mortgage balance is much lower than you..... and my rate is a bit higher at 3.125.... I do not plan to pay off this loan a single month early....

My average return is higher... so why do it


Here is what is likely to happen.... you pay off your emergency fund.... then with your psychology you start to worry that you do NOT have that fund there anymore.... you will do something to fill it back up which will take money away from better investments.... you lose because your money is not earning as much.... and from what I can tell you still have a mortgage since you do not have enough money to pay it off (unless I am reading wrong)...

 

[daylatedollarshort]

Mentally paying off the mortgage sounds like a great idea. Financially, maybe not so much, especially if you have a low interest fixed rate by historical standards. That could be a real gold mine some day.

 

[Big_Hitter]

not to thread jack but I've got a 400K conventional loan at 4.5% - think it's worth a refi? I really don't feel like messing with this again since we just bought the house last year.

 

[Meadbh]

I don't get it. You plan to deplete your $10,000 emergency fund to reduce your mortgage principal from $232,000 to $222,000. Your mortgage payments continue for another 8+ years. So there is no immediate payback. You say this move will save you $30,000, but I don't see that happening unless you find another $222,000 to put against the principal within the next two years. Where will that come from? At what cost?

Your mortgage interest rate of 2.89% would be the envy of many. This is cheap money, especially given that your mortgage interest is tax deductible.

IMHO the economics of your plan, as described, do not make any sense, and neither does the risk management. The psychology is another matter.

 

[daylatedollarshort]

not to thread jack but I've got a 400K conventional loan at 4.5% - think it's worth a refi?

Yes, most likely. Personally, we refinance with a no cost, no fee 30 year fixed every time rates go down. I think my record is 3 times in one year.

 

[martyb]

We consider our Roth IRA our emergency fund. Invested in Vanguard 2015 Retirement account, the contributions are always available to withdraw tax free & penalty free, even before age 59 1/2. We are earning way more in the Roth than if it were sitting in a regular savings account. If I needed the funds, they would be sitting in my checking account in 3 days.

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[almost_there]

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.

 

[martyb]

not to thread jack but I've got a 400K conventional loan at 4.5% - think it's worth a refi? I really don't feel like messing with this again since we just bought the house last year.

We re-fi'd a couple of months ago, from a 4.25 VA to a 3.5 VA. Total cost to us (mortgage co. paid some fees & VA had a special deal going) was around $1500 out of pocket at closing. Our payments dropped $100 per month. Totally worth it even for a reduction of just .75%.

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[gauss]

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

 

[38Chevy454]

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.

 

[almost_there]

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.

 

[Meadbh]

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.

 

[Gumby]

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.

 

[pb4uski]

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.