topic Re: Thoughts on mortgage and retirement in Personal Finance

Thoughts on mortgage and retirement

MrDisco99 — Sat, 12 Jun 2021 13:51:14 GMT

I'm about 20 years from retirement.

I've got a couple years worth of income in my 401k now. I started a bit late. I'm cofortably contributing 10% of income plus 6% employee match. It's all going to a target fund for near my retirement year.

I just refinanced my mortgage earlier this year and got my rate down to 2.25%. At the rate I'm currently paying I'll likely pay it off just barely in time for retirement. Again, did the house thing a bit late.

Thinking about what I should do when my car is paid off or when my income increases. Should I put more towards the 401k or try to pay the mortgage off earlier? Or should I do neither and brace for inflation? What's the general consensus among people who aren't trying to get my money?

Re: Thoughts on mortgage and retirement

Horseshoez — Sat, 12 Jun 2021 14:07:51 GMT

@MrDisco99 wrote:
I'm about 20 years from retirement.

I've got a few years worth of income in my 401k now. I started a bit late. I'm cofortably contributing 10% of income plus 5% employee match.

I just refinanced my mortgage earlier this year and got my rate down to 2.25%. At the rate I'm currently paying I'll likely pay it off just barely in time for retirement. Again, did the house thing a bit late.

Thinking about what I should do when my car is paid off or when my income increases. Should I put more towards the 401k or try to pay the mortgage off earlier? Or should I do neither and brace for inflation? What's the general consensus among people who aren't trying to get my money?

I'm kind of in the same boat as you, but MUCH worse off. The short version is, my wife and I both suffered business failures in our mid to late fifties and had to file for bankruptcy; basically at the ripe old age of 57 we didn't have a spare dime as all of our (not insignificant) retirement accounts had been (stupidly) used to try and stave off bankruptcy. We're now in our mid-sixties and figure we'll be retiring at the end of the decade when we're in our early seventies. The one thing which has saved me is the company I went to work for when I left my business behind, is the fact they have a 4% core contribution in addition to a 6% match for all 401(K) funds, plus the fact I dialed up my contributions to the IRS maximum four or five years ago.

My Chapter 13 will drop off my credit reports early next year and then we're going to be in house hunting mode (I'm thinking maybe a 15 year, maybe even a 10 year mortgage) as soon as my credit scores bump up. Needless to say, the cost benefit analysis we've been through regarding where to put our money is not very different from what you're going through now.

Were I in your shoes, I'd leave the low interest mortgage alone; pay it on schedule and call it good. Paying it off early will not really benefit you all that much after you retire. The flip side is your 401(K); I'd max that sucker out to the tune of $26,000 assuming you're over 50, $19,500 if you're not, this year and whatever the max is going forward. In addition, there is another investment option which I only discovered I could take advantage of last year (kicking myself for not researching it years ago); namely a Roth IRA, even if you're maxing out your 401(K), you can still contribute another $6,000 per year per person into a Roth IRA, if you're not working, and $7,000 if you are. In our case, my wife isn't currently working so our 2021 Roth IRA contributions will total $13,000.

I'm interested to see what you decide to do, so please keep us posted.

Re: Thoughts on mortgage and retirement

SouthJamaica — Sat, 12 Jun 2021 14:23:50 GMT

@MrDisco99 wrote:
I'm about 20 years from retirement.

I've got a couple years worth of income in my 401k now. I started a bit late. I'm cofortably contributing 10% of income plus 6% employee match. It's all going to a target fund for near my retirement year.

I just refinanced my mortgage earlier this year and got my rate down to 2.25%. At the rate I'm currently paying I'll likely pay it off just barely in time for retirement. Again, did the house thing a bit late.

Thinking about what I should do when my car is paid off or when my income increases. Should I put more towards the 401k or try to pay the mortgage off earlier? Or should I do neither and brace for inflation? What's the general consensus among people who aren't trying to get my money?

I can only tell you what I would do.... pay the mortgage off. The sooner you're debt free, the better you will feel.

I would not increase the 401k payment unless I had a lot of other money sitting somewhere.

Re: Thoughts on mortgage and retirement

Horseshoez — Sat, 12 Jun 2021 15:03:43 GMT

@SouthJamaica wrote:
@MrDisco99 wrote:
I'm about 20 years from retirement.

I've got a couple years worth of income in my 401k now. I started a bit late. I'm cofortably contributing 10% of income plus 6% employee match. It's all going to a target fund for near my retirement year.

I just refinanced my mortgage earlier this year and got my rate down to 2.25%. At the rate I'm currently paying I'll likely pay it off just barely in time for retirement. Again, did the house thing a bit late.

Thinking about what I should do when my car is paid off or when my income increases. Should I put more towards the 401k or try to pay the mortgage off earlier? Or should I do neither and brace for inflation? What's the general consensus among people who aren't trying to get my money?
I can only tell you what I would do.... pay the mortgage off. The sooner you're debt free, the better you will feel.

I would not increase the 401k payment unless I had a lot of other money sitting somewhere.

I totally don't understand that kind of advice; the 401(K) will waaaaay outperform any benefit of paying down a 2.25% mortgage.

Re: Thoughts on mortgage and retirement

OmarR — Sat, 12 Jun 2021 20:38:43 GMT

@Horseshoez wrote:
My Chapter 13 will drop off my credit reports early next year and then we're going to be in house hunting mode (I'm thinking maybe a 15 year, maybe even a 10 year mortgage) as soon as my credit scores bump up.

Paying off the mortgage in 10yr or 15yrs or sooner is the same thing SJ is suggesting.

Re: Thoughts on mortgage and retirement

Horseshoez — Sat, 12 Jun 2021 20:47:59 GMT

@OmarR wrote:
@Horseshoez wrote:
My Chapter 13 will drop off my credit reports early next year and then we're going to be in house hunting mode (I'm thinking maybe a 15 year, maybe even a 10 year mortgage) as soon as my credit scores bump up.

Paying off the mortgage in 10yr or 15yrs or sooner is the same thing SJ is suggesting.

No, not the same; at least not for me. My order of priorty is this:

Max out 401(K) contributions (which for those of us over 50 is currently $26,000 per year)
Max out Roth IRA contributions (which for those of us over 50 is currently $7,000 per year)
Then, and only then, start accelerating the paydown of one's mortgage.

Re: Thoughts on mortgage and retirement

KatSoDak — Sat, 12 Jun 2021 21:53:01 GMT

I'm retired. No mortgage. No current car payments but that will change as vehicles age and purchasing fuel for combustion engines becomes verbotten I imagine.

You know I'm just not sure what I would do with "extra" money if I were you.

Consider that expenses really don't change all that much once you switch to an entirely fixed income. Sure, I may not drive to work everyday but it's surprising how often I need to go somewhere. And I live 12 miles from town. Work clothes are no longer purchase a but clothes definitely are. And shoes of course!

Will you be able to let your 401k sit untouched until the mandatory distribution age? Who knows.

DH and I have pensions. Mine is lol and his is decent. We both collect social security and again mine is lol and his is decent. We are better off than many because of C.O.L. where we live regarding property insurance and taxes, along with no mortgage, plus we drive middle aged, paid for vehicles.

Houses age too and need updates. Appliances die and roofs wear out. Hoping our steel roof lives as long as we do!

I would say It depends on what your overall plans for retirement are. With a decent retirement income but no plans to spend much money then having a mortgage payment probably won't matter much. But if you adhere to my husband's motto of money not spent is money wasted, then being mortgage free allows for lots of old motorcycles and tools to enter the garage.

Before we both retired I anticipated locking the door during the winter, draining the pipes, turning off the heat and spending the money saved by not heating the house on gasoline and RV hookups. Our 5th wheel is paid for also. Older but functional. We've done that twice. Now DH would rather leave the heat on and take short trips or hold down the fort and wave bye to me. No savings in this plan!

Well I'm rambling but you get the drift. Lots of things to consider.

Re: Thoughts on mortgage and retirement

OmarR — Sat, 12 Jun 2021 22:32:35 GMT

@Horseshoez wrote:
@OmarR wrote:
@Horseshoez wrote:
My Chapter 13 will drop off my credit reports early next year and then we're going to be in house hunting mode (I'm thinking maybe a 15 year, maybe even a 10 year mortgage) as soon as my credit scores bump up.

Paying off the mortgage in 10yr or 15yrs or sooner is the same thing SJ is suggesting.
No, not the same; at least not for me. My order of priorty is this:
Max out 401(K) contributions (which for those of us over 50 is currently $26,000 per year)
Max out Roth IRA contributions (which for those of us over 50 is currently $7,000 per year)
Then, and only then, start accelerating the paydown of one's mortgage.

You're using the (likely) performance of greater than 2%-4% to disagree with paying off a mortgage early. So why not go for the 30yr mortgage, and invest the difference in the market, outside of 401k, 403b, or IRA's?

Why cap yourself if greater returns are out there?

OP, it's going to be a risk vs. reward, not a right/wrong answer. Leveraging and debt are ALWAYS going to carry inherent risk. You just have to ask yourself if you are willing to take that risk.

Re: Thoughts on mortgage and retirement

tacpoly — Sat, 12 Jun 2021 22:55:48 GMT

@MrDisco99 wrote:
I'm about 20 years from retirement.

I've got a couple years worth of income in my 401k now. I started a bit late. I'm cofortably contributing 10% of income plus 6% employee match. It's all going to a target fund for near my retirement year.

I just refinanced my mortgage earlier this year and got my rate down to 2.25%. At the rate I'm currently paying I'll likely pay it off just barely in time for retirement. Again, did the house thing a bit late.

Thinking about what I should do when my car is paid off or when my income increases. Should I put more towards the 401k or try to pay the mortgage off earlier? Or should I do neither and brace for inflation? What's the general consensus among people who aren't trying to get my money?

I don't know what income level you're talking about but in general the benefit of tax-free contributions to your 401k increases as your income increases. Mortage interest can be deducted for mortgages below $750K ($1M if you're grandfathered in). So I would recommend maxing out your 401k contribution first. If you still have extra money, it doesn't hurt to make at least an extra payment towards your mortgage -- one or two extra payments give the biggest bang in terms of shortening your mortgage by 5-8 years.

Re: Thoughts on mortgage and retirement

Anonymous — Sun, 13 Jun 2021 04:09:27 GMT

In 2017, we had about $150K left on our mortgage at 2.875% (a very good rate at that time!), approaching retirement and we asked our financial advisor whether to pay it off or not. Her view was that she advises clients not to do that, as relatively safe investment returns can be sufficiently greater, but some clients prefer knowing the mortgage is paid off, and that has some large, but non-quantifiable, value as well.

We decided that we felt in to that latter camp, and paid it off. Was that the right decision? Well, hasn't hurt us yet, but until I fully tune my multiple-possible-world-tracker (patent pending) I don't know how the other way would have gone!

Re: Thoughts on mortgage and retirement

MrDisco99 — Sun, 13 Jun 2021 12:57:16 GMT

Good point on the tax savings. That's a factor I hadn't thought much about but should be obvious.

I guess it's down to what I think the future will look like, which can lead to some pretty existential thinking. Putting more in savings would likely outperform my low interest and result in a more comfortable life later, but getting the mortgage paid would be the sure thing, and who knows how long I'll even be around. It's that kind of speculation that demands we save in the first place. I could just pay off my mortgage now with the money in my 401k, but I think we all agree that would be stupid.

I guess I should just be glad I have more options. I could even split the difference.

Thanks a bunch for sharing your experiences.

Re: Thoughts on mortgage and retirement

Shooting-For-800 — Sun, 13 Jun 2021 13:33:45 GMT

I would pay the minimum possible towards your mortgage at that interest rate.

Property values will go up and your balance will go down automatically.

If you ever need a loan for anything, it will be at that rate or higher.

I would build up savings and 401k.

GL!

Re: Thoughts on mortgage and retirement

Anonymous — Sun, 13 Jun 2021 14:48:16 GMT

@Shooting-For-800 wrote:
I would pay the minimum possible towards your mortgage at that interest rate.
Property values will go up and your balance will go down automatically.
If you ever need a loan for anything, it will be at that rate or higher.
I would build up savings and 401k.
GL!

It really depends on your risk tolerance. As we all know, at various times and in various places, property values can crater, sometimes for an extended period of time, so you can't rely on being able to get a loan from your house or be able to sell it and clear any mortgage balance. Similarly no guarantees that adding to your 401(k) will be net positive at the time you need it.

Paying off the mortgage (of course when possible) does have a guarantee, you no longer have the non-tax part of the mortgage payment and you should be able to get some loan (maybe at a poor rate). But you are tying up money that you may need for other purposes at some point.

So certainly no hard and fast answers, just like most investing.

Re: Thoughts on mortgage and retirement

OmarR — Sun, 13 Jun 2021 18:46:56 GMT

@Anonymous wrote:
@Shooting-For-800 wrote:
I would pay the minimum possible towards your mortgage at that interest rate.
Property values will go up and your balance will go down automatically.
If you ever need a loan for anything, it will be at that rate or higher.
I would build up savings and 401k.
GL!
It really depends on your risk tolerance. As we all know, at various times and in various places, property values can crater, sometimes for an extended period of time, so you can't rely on being able to get a loan from your house or be able to sell it and clear any mortgage balance. Similarly no guarantees that adding to your 401(k) will be net positive at the time you need it.

Paying off the mortgage (of course when possible) does have a guarantee, you no longer have the non-tax part of the mortgage payment and you should be able to get some loan (maybe at a poor rate). But you are tying up money that you may need for other purposes at some point.

So certainly no hard and fast answers, just like most investing.

There is a married couple that live in a very affluent part of my city. They both quit their jobs about 10 years ago to run their AirBnb's. They would make great money every year, and leverage it with purchasing new properties. They acquired somewhere between 15-20 properties. Each with a mortgage. Than 2020 hit. Last I heard, they were just trying to save their primary residence. Was 2020 an anomaly? Arguably yes. But it did happen.

I'm personally throwing everything extra I have at my mortgage. In additon, since I take the standard deduction on my taxes, the mortgage interest that I pay no longer applies. Besides, I would never artificially keep an expense around just so I can get 1/5 of it back thru a deduction. In addition, everything I contribute to is Roth, so no lower tax brackets for me. I realize that I am the oddball exception and not the rule.

But like Lurker said, I'll see in 20 years how I have fared compared to my peers.

Re: Thoughts on mortgage and retirement

Horseshoez — Sun, 13 Jun 2021 19:31:50 GMT

@OmarR, if your Roth contributions are through your employer, and if said employer has a match, then you have conventional 401(K) holdings as well.

As for pre-tax vs. post-tax; that too is a crap shoot. If you are planning on retiring with $200,000 or more per year in retirement income, yeah, a Roth 401(K) and/or Roth IRA is a lead-pipe cinch. Anything between $100,000 and $200,000 is a crap shoot as to which, pre-tax or post-tax, will serve better in the long run. If you plan on pulling less than $100,000 per year from your retirement accounts, then you're probably best off going with pre-tax savings unless you're really young. Speaking of which, if one is young, then piling the money into a post-tax Roth fund is also a no brainer. For those of us who were already old before we started (or re-started in my case) saving for retirement, maximizing growth is paramount, hence only about 20% of my contributions go to into a Roth IRA, even then, only because I've long since been maxing out what I can put into my 401(K).

Re: Thoughts on mortgage and retirement

Anonymous — Sun, 13 Jun 2021 20:00:38 GMT

@Horseshoez wrote:

As for pre-tax vs. post-tax; that too is a crap shoot. If you are planning on retiring with $200,000 or more per year in retirement income, yeah, a Roth 401(K) and/or Roth IRA is a lead-pipe cinch. Anything between $100,000 and $200,000 is a crap shoot as to which, pre-tax or post-tax, will serve better in the long run.

What is the basis for those figures? Seems to me to be too many variables (e.g. if you are earning a lot now, pretax on the contribution is worth more than if you are earning less) and tax brackets (never mind rates) can also be very different in the future (so, unlikely but if the first $300,000 of income is untaxed, a roth isn't winning!)

Re: Thoughts on mortgage and retirement

Horseshoez — Sun, 13 Jun 2021 20:08:52 GMT

@Anonymous wrote:
@Horseshoez wrote:

As for pre-tax vs. post-tax; that too is a crap shoot. If you are planning on retiring with $200,000 or more per year in retirement income, yeah, a Roth 401(K) and/or Roth IRA is a lead-pipe cinch. Anything between $100,000 and $200,000 is a crap shoot as to which, pre-tax or post-tax, will serve better in the long run.
What is the basis for those figures? Seems to me to be too many variables (e.g. if you are earning a lot now, pretax on the contribution is worth more than if you are earning less) and tax brackets (never mind rates) can also be very different in the future (so, unlikely but if the first $300,000 of income is untaxed, a roth isn't winning!)

I just resigned my position from a large financial institution (not credit or banking) a month ago, the company has literally hundreds of billions of 401(K) money in their portfolio which they manage for their client companies, and the figures I posted were "Cliff's Notes" born from the extensive research and documentation that company made available to us employees. That said, you are correct, there are a lot of variables, which is why there is no one correct answer, this in turn is why I have qualified my statements in this thread.

Re: Thoughts on mortgage and retirement

Shooting-For-800 — Mon, 14 Jun 2021 00:53:41 GMT

@Anonymous wrote:
@Shooting-For-800 wrote:
I would pay the minimum possible towards your mortgage at that interest rate.
Property values will go up and your balance will go down automatically.
If you ever need a loan for anything, it will be at that rate or higher.
I would build up savings and 401k.
GL!
It really depends on your risk tolerance. As we all know, at various times and in various places, property values can crater, sometimes for an extended period of time, so you can't rely on being able to get a loan from your house or be able to sell it and clear any mortgage balance. Similarly no guarantees that adding to your 401(k) will be net positive at the time you need it.

Paying off the mortgage (of course when possible) does have a guarantee, you no longer have the non-tax part of the mortgage payment and you should be able to get some loan (maybe at a poor rate). But you are tying up money that you may need for other purposes at some point.

So certainly no hard and fast answers, just like most investing.

Um, yea.

That would be the pay the minimum mortgage payment and build up your savings account part.

Re: Thoughts on mortgage and retirement

iced — Mon, 14 Jun 2021 18:06:22 GMT

@MrDisco99 wrote:
I'm about 20 years from retirement.

I've got a couple years worth of income in my 401k now. I started a bit late. I'm cofortably contributing 10% of income plus 6% employee match. It's all going to a target fund for near my retirement year.

I just refinanced my mortgage earlier this year and got my rate down to 2.25%. At the rate I'm currently paying I'll likely pay it off just barely in time for retirement. Again, did the house thing a bit late.

Thinking about what I should do when my car is paid off or when my income increases. Should I put more towards the 401k or try to pay the mortgage off earlier? Or should I do neither and brace for inflation? What's the general consensus among people who aren't trying to get my money?

Holding cash in anticipation of inflation is the worst thing you can do with cash if inflation actually happens. Get it out of dollars and into assets like stocks/real estate if that's a concern.

I wouldn't sweat the mortgage either. 2.25% is a lower rate than you'll get in returns investing that money. The only reason to pay it down faster is if its payments are more than you can handle comfortably and you want to reduce the monthly payment and/or eliminate the payment altogether.

Throw more in your retirement or after-tax brokerage. If you need the money well before retirement, go brokerage. If your tax situation is favorable, consider a Roth; if not, grow the 401k.

Re: Thoughts on mortgage and retirement

loyalsudz — Mon, 14 Jun 2021 18:37:43 GMT

While, this is just my two cents albeit on the mortgage vs. retirement in my humble opinion it is not a either or situation at all. It is not one size fits all, as personal finance is just that personal. The basis for answering questions of focus continues to be that as with all matters considered whether you start late or not is to take a page from the Dave Ramsey's page on order/priority. As always, it is completely something you must decide by assessing the risks, constraints, along with Maribel (wants, ie, world travel, destination wedding) and Murphy (needs - storms, dry seasons of unexpected early retirement due to health or life crisis), for yourself.

Here's the list of the 7 baby steps:

!) Save a Baby Emergency Fund of $1000 (more or less depending on your annual salary (anything less than $20K you save $500)

2) Pay off Debt except the mortgage including HELOC, PLOC, and BLOC and student loan debts

3) Create a fully funded Emergency Fund of 3 to 6 months worth of your current monthly expenses

4) Invest 15% of your income into Retirement (Roth IRA max, the rest to 401K or 403b~ the Roth IRA after 5 years is liquid sans penalties automatically without repayments, the 401K and 403b both allow hardship withdrawals for emergencies larger than the 3 to 6 months emergency fund and all accounts allow for funds to be used towards housing down payments without penalties in the US as it encourages home ownership. The rule of investment planning is the rule of 72 which is how long it will take with the power of compound interest to double your money. That will address most people's security glands though as most people point out risk is certainly something that is best addressed with the consideration of an amalgamation of factors, such as are all your investments in one corporate stock (i.e, think Enron) or factor in that most accounts are managed by an investment manager and thus, it is prudent to check the fees as if each $1.00 stock cost $.35 cents to be managed or $.40 cents to be managed then perhaps in this example you are only making $.60 even with the average 12% APR over the stock market gain. Risks involve searching for matching in your current company as well as, utilizing a third-party brokerage firm which only requires say $.25 cents or .0 if you self-manage your accounts and really know what you are doing.

5) Set up college fund for each child for which you are responsible for starting early in something like a 529 college fund or in a taxable divendend -income producing account. (Most people honestly just set aside $10K and then let it build over the 18 to 19 years)

6) Pay off your mortgage

7) Build, Save and Share the Wealth - With the house paid off you can use a back door Roth to add to your retirement bottom line and thus be able to take the mortgage payment and move that into retirement. Sharing just means that after the retirement is churning and you can even at this present time FIRE -Financially Independent and Retire Early (for the late comer Retire Earlier than the proposed 15 to 20 year mark for later investors and enthusiasts who cut expenses thus only requiring $300 to $400 or less to live full lives, i.e. RVing or downsizing with minimalism and environmentalists outlook with a smaller earth footprint.

The order is 1, then 2, then 3.

Then 4, 5, and 6 together performed next, hence the 15%.

Then 7 which allows for more investment options and opportunities, along with options for those who are interested in more philanthropic goals.

As for business people who do Airbnb outside the primary residence and covid-19 backed loans that do not have to be paid back, check the qualifications as business loans could have been acquired if business owners met the minimum qualifications of having a business account separate from their personal accounts, along with correct IRA business tax filings and correct paychecks amount per employee or business owner which would have allowed the business owners both an opportunity to take in a salary of similar kind prior to Covid provided they submitted applications in time. The other items are to consider is paying off the primary residence and only performing arbitration rental agreements with a business continuity's clause set with the binding agreement for Acts of God, ie Acts of God's children or investing in a REIT. The other option is to obtain separate business insurance that covers each property above the Airbnb insurance which only covers damage to the property and provide some type of security. This along with a good home warranty that covers all appliances, water to the main line and major systems so that you are not bankrupt by service and maintenance charges. The fees are small and it adds consistent products in the offering of each property which lessen the guesswork of upgrades so people are not taken advantage of in the market place. And professional installation is provided along with the appliance at a lesser cost or as a part of the monthly fee. It is also helpful to have a mix of offerings in rental agreements of 30 days or longer, which prohibits people from renting with out basic renter's insurance with a jobless clause to prevent it from affecting homeowners or property investor's bottom lines. Risk adverse may even require that tenants must be ready in the event of a fire or other disaster. Remember that not all renters understand if the house is set on fire, the homeowner receives the insurance check but if your items and personal goods are not covered by your own renter's insurance, then the tenant receive absolutely nothing. That insurance can also set the tenant up with rental money for a similar place that is nearby the zip in those events so they are not left homeless. At each level of prosperity, as you gain financial security, you may be able to self-loan for certain events, the difference may just be finding the happy medium in insurances and being risk adverse until you and your family reach that next step.