Pay down Mortgage or Increase Taxable Account?

[nadnerb]

I'm 59 1/2 and plan on retiring at 62 or earlier. Nearly all of my investment savings is is in my 401k and pension, so I will owe taxes on withdrawals. I recently became concerned that I don't have enough in a taxable account that I can draw from for spending to lower my income in retirement and hedge against pulling money out in a downturn. I started putting additional $1200 a month cash aside in my emergency savings to build up the taxable account.

Our only debt is 13 years remaining on a 30 year ARM mortgage (balance is about $120K and current rate is 2.85%). So the question is, should I continue to put cash aside, or pay down the mortgage, or perhaps split the two?

 

[RunningBum]

It's unclear what your goal is. You are trying to build up your taxable account, but then you are considering using much or all of it to pay off your mortgage? Those seem to be at odds with each other.

 

[nadnerb]

It's unclear what your goal is. You are trying to build up your taxable account, but then you are considering using much or all of it to pay off your mortgage? Those seem to be at odds with each other.

Not sure why you think they are at odds. I have $1200 a month and am deciding what to do with it. I can either put the money aside to be able to use to lower my taxable income when I retire or I can pay down my mortgage with it.

 

[CSdot]

What is a 30 year ARM with 13 years left? How often does the interest rate adjust? Do you expect rates to go up or go down in the future? With $1.9T being tacked on to the $4T already pumped into the system 2020, many are guessing rates will increase.

Should you refinance on a 10 or 15 year fixed?

 

[nadnerb]

What is a 30 year ARM with 13 years left? How often does the interest rate adjust? Do you expect rates to go up or go down in the future? With $1.9T being tacked on to the $4T already pumped into the system 2020, many are guessing rates will increase.

Should you refinance on a 10 or 15 year fixed?

I've looked at it. Our ARM adjusts annually. Locked in for 2021 at 2.875 I would incur about $3K in closing costs to lock in at a rate very close to where I am now - maybe get 2.5% instead of 2.875. One thing we are looking at is refinancing to make some improvements - but not sure if this is our "forever home" or not. If we make that call in the next few months, we'll probably do that. Even if we refi, and have a similar mortgage payment, the question will still remain.

 

[dirtbiker]

I've looked at it. I would incur about $3K in closing costs to lock in at a rate very close to where I am now - maybe get 2.5% instead of 2.875. One thing we are looking at is refinancing to make some improvements - but not sure if this is our "forever home" or not. If we make that call in the next few months, we'll probably do that. Even if we refi, and have a similar mortgage payment, the question will still remain.

The adjustable rate part would really concern me. There's no question rates are going up. The only question is how high and how fast. I'd either refinance to a fixed or use the money to pay down the mortgage, that way if the rates do go up, it won't hurt so bad with a highly paid down mortgage.

 

[SnowballCamper]

I have $1200 a month and am deciding what to do with it. I can either put the money aside to be able to use to lower my taxable income when I retire or I can pay down my mortgage with it.

Paying the mortgage is a guaranteed return of your APR, so not that great.

If putting it aside is a savings account, then that is worse.

Three years of market risk is pretty high (short term) to roll the dice in an index fund.

Lowering your taxable income when you retire (before RMDs) just pushes the taxes out to RMD time. So the choice to put the $1200/month in savings only delays taxes. I say take the guaranteed APR return for the three years by paying down the mortgage.

 

[rk911]

I'm a "no-debt-is-a-good-thing" believer. eliminate/reduce risk whenever possible.

 

[nadnerb]

Lowering your taxable income when you retire (before RMDs) just pushes the taxes out to RMD time. So the choice to put the $1200/month in savings only delays taxes. I say take the guaranteed APR return for the three years by paying down the mortgage.

It doesn't just push out the taxes I believe. It also potentially lowers the taxes we would pay in the early years, so with the time value of money that would leave more in the investment portfolio for a longer period. Also, would it not allow us a safer place to withdraw in a market downturn, so we would be able to avoid taking those losses?

 

[Out-to-Lunch]

I recently became concerned that I don't have enough in a taxable account that I can draw from for spending to lower my income in retirement and hedge against pulling money out in a downturn.

It doesn't just push out the taxes I believe. It also potentially lowers the taxes we would pay in the early years, so with the time value of money that would leave more in the investment portfolio for a longer period. Also, would it not allow us a safer place to withdraw in a market downturn, so we would be able to avoid taking those losses?

I think you may be conflating two different things. If you say you are concerned about "pulling money out in a downturn," I think that this means that your 401(k) monies are in equities. And I think you are assuming that your taxable-account monies would be in more liquid funds. But it needn't be that way; you could have money in your 401(k) in a money market or a ultrashort bond fund that would have minimal risk of "pulling money out in a downturn."

You haven't mentioned a Roth. What about using the extra $1200 to pay taxes to move the money in your 410(k) to a Roth via Roth conversions? Then you would have money to "draw from for spending to lower (your) income." You could also withdraw (without tax consequences) it to pay down your mortgage if circumstances warranted this.

 

[nadnerb]

I think you may be conflating two different things. If you say you are concerned about "pulling money out in a downturn," I think that this means that your 401(k) monies are in equities. And I think you are assuming that your taxable-account monies would be in more liquid funds. But it needn't be that way; you could have money in your 401(k) in a money market or a ultrashort bond fund that would have minimal risk of "pulling money out in a downturn."

You haven't mentioned a Roth. What about using the extra $1200 to pay taxes to move the money in your 410(k) to a Roth via Roth conversions? Then you would have money to "draw from for spending to lower (your) income." You could also withdraw (without tax consequences) it to pay down your mortgage if circumstances warranted this.

Great point. You're correct I was conflating the two. And last night as I was considering the other responses to the thread, my mind went to Roth IRA. I need to investigate the Roth Conversion. Thanks.

 

[mrfeh]

The adjustable rate part would really concern me.

+1

I realize I'm avoiding the original question, but my first order of business would be to lock in a rate now.

 

[Jeffman52]

I'm a "no-debt-is-a-good-thing" believer. eliminate/reduce risk whenever possible.

+1

 

[nadnerb]

+1

I realize I'm avoiding the original question, but my first order of business would be to lock in a rate now.

I agree - but only if we plan on staying beyond 4-5 years. We won't save enough in interest payments to pay the closing costs over the short term.

 

[bclover]

I'm a "no-debt-is-a-good-thing" believer. eliminate/reduce risk whenever possible.

I am the exact opposite, I'm more of an increase overall wealth. Right now my rate is 3.0% I've got 185K left on my mortgage. no way am I pulling out that cash to pay off such a low rate. I guess I'm more of a "more" cash is a good thing believer.

all good, both approaches work

 

[dmpi]

It depends where you are in life. Do you need or want to hit a home run in the stock market? Or are you at the point where you want to play defense and play it safe? Paying off your 2.85% mortgage is far better than the current CD & Bond rates. I would look at it that way.

 

[Finance Dave]

I'm a "no-debt-is-a-good-thing" believer. eliminate/reduce risk whenever possible.

+1

 

[Austin704]

I've elected to increase my taxable accounts AND pay down the mortgage at the same time.

Like the OP, I have most of my net worth tied up in tax-deferred retirement accounts. I'm in year two of converting a traditional IRA to a Roth and paying the taxes from a taxable account. I no longer contribute to tax-deferred accounts.

Most of my discretionary income has been diverted to taxable accounts. Beyond saving for Roth taxes, I'm building my cash position and stock mutual funds. Aiming for 15% of NW in cash and already at 10%. I like the security of substantial liquidity, even though I'm losing money to inflation on that cash.

I hate debt too, and I have decided to divert a modest amount to prepay mortgage principal. I have a very low rate but I like whittling away at that balance and increasing my net worth.

This approach lets me prioritize cash buildup and taxable investments but also reduce debt simultaneously. I feel satisfied that I'm covering the bases. That said, I would prioritize cash buildup over mortgage prepayment were I not already in a pretty strong position.

 

[Sunset]

The adjustable rate part would really concern me......

+1

OP - Since you cannot decide if you are staying or going, for now deposit the $1,200 into extremely short term things. Even online bank CD's
It's the safer bet.

Problem with paying down the mortgage is with $120K remaining, even after 2 years the extra $1,200 x 24 = $28,800 leaving you with ~$91,000 mortgage.

Should you decide to stay in your house it would be best to lock into a 15 mortgage, and possibly use the savings to have a smaller mortgage.

 

[mrfeh]

I've elected to increase my taxable accounts AND pay down the mortgage at the same time.

We don't have a mortgage, but when we did, this is the route we took. Throw extra at the mortgage and invest in taxable account.

Doesn't have to be either/or.

 

[Closet_Gamer]

I'm 59 1/2 and plan on retiring at 62 or earlier. Nearly all of my investment savings is is in my 401k and pension, so I will owe taxes on withdrawals. I recently became concerned that I don't have enough in a taxable account that I can draw from for spending to lower my income in retirement and hedge against pulling money out in a downturn. I started putting additional $1200 a month cash aside in my emergency savings to build up the taxable account.

Our only debt is 13 years remaining on a 30 year ARM mortgage (balance is about $120K and current rate is 2.85%). So the question is, should I continue to put cash aside, or pay down the mortgage, or perhaps split the two?

This is fundamentally a liquidity question. You're trying to balance cleaning off the balance sheet with ready, tax-efficient access to cash.

I paid off my mortgage many years ago but I don't think that's the right answer here.

I used an online calculator and it said that with the extra payments, you'd be done paying it off in 7 year 8 mos. So until that time, you'd have fixed cost of your mortgage as a minimum monthly obligation and you won't have built up a cash reserve. You don't get the reduced expense obligation until its 100% gone.

With only a 2.8% carrying cost on the mortgage, I would toss the $1200/mo aside into a short term structure until you've got a year or so of expenses at hand. This gives you access to liquid cash. Then turn the hose on the mortgage to pay it down.

My $0.02.

 

[Badger]

Once my mortgage interest was no longer enough to help me with itemizing on my taxes i started making an additional monthly payment on the principle to get it paid off early. At the same time I was contributing to my IRA. When the mortgage was paid off in a few years I contributed those dollars to max out our tIRA, RothIRA, with dollars left over to go to MF investments.
I'm not saying that it was the best plan. I don't know, but it worked for us. With our continued frugal lifestyle we will never have to worry about money again while leaving a substantial inheritance for the 2 grown children once the bucket is kicked.


Cheers!

 

[njhowie]

I am the exact opposite, I'm more of an increase overall wealth. Right now my rate is 3.0% I've got 185K left on my mortgage. no way am I pulling out that cash to pay off such a low rate. I guess I'm more of a "more" cash is a good thing believer.

Unless you plan on doing something with that cash and earning more than the interest rate on the mortgage, then you are paying for having it. If you are investing the cash, then it's no longer cash. If it's sitting in some deposit account, you're earning almost nothing on it.

Bottom line, as long as you have debt outstanding with a higher interest rate than the yield you're earning on the cash, you're paying for the comfort of having it.

There's nothing wrong with that point of view, so long as you realize what you're doing.

Lastly, increasing overall wealth happens only if you're doing something with the cash to earn more than the interest rate on the mortgage. Again, as "cash", you're earning almost nothing today, so by not paying down the mortgage, all else being equal, your overall wealth goes down.

 

[CSdot]

While I am younger than you, I decided to pay the $170,000 I had left on my mortgage last year. I know you don’t have the cash to stroke one big check, but my rationale might also apply to your situation.

I didn’t want the $170,000 to magically turn into a boat, followed by a new Tahoe, which could happen whether you have an extra $170,000 from a good year at work, or if you realize that you have an extra $1,200 month.


My preference was to be able to look back ten years from now and say I made a smart choice.

 

[Athermos4u]

Do both. Put the money into a taxable account earning an average eight percent as equities until the balance equals the mortgage balance. Then pay off the mortgage.