Would you save extra money for retirement or put toward mortgage debt?

[Anonymous]

We're in mid 30s, one child not in daycare. Spouse was at home and just now returned to workforce, so family income which was previously $115k will now be $211k. Both jobs stable. Only debt is mortgage of $440k which has been tight on one salary. Ample savings.

Newly employed spouse will make full TSP contribution of $17,500 in 2014.

Would you also each contribute $5,500 to an IRA, converted to a Roth this year? Or put that money to the mortgage debt at 4.125%? It feels like borrowing from Peter to pay Paul... at the same time spouse hasn't saved much for retirement over the past 3 years while doing a small amount of consulting. We are also saving for college.

[Anonymous]

You have to calculate this because reducing mortgage interest reduces the tax deduction on your income. I thought Roth IRAs only made sense if your income is expected to be higher later on, not higher now. I'm sure others have better insight than me but I thought I'd chime in. We have the same issue.

[Anonymous]

Your after-tax return on money used to pay down mortgage (assuming 28% tax bracket) is ~3%. You need to decide whether you can get a return of >3% (no taxes on Roth) on your investment, then factor in uncertainty. Nearly all low-risk investments seem likely to return lower than this (look at 10yr Bond yields). Stock market may or may not beat this (historically has, though valuations seems high by a number of metrics) but certainly introduces risk. Either way, you need to accept lack of liquidity in return for these yields.

[Anonymous]

What about saving for college?

[Anonymous]

Personally I would pay down mortgage, on the basis that stock market valuations look high, and less risky investments are returning less than your mortgage rate even after factoring in tax deduction.

[Anonymous]

i would definitely save for retirement over paying off your mortgage. your return is going to be far better in the stock market over a 30-40 year horizon. is this guaranteed? no, but i think to assume you are going to get a worse than 3% annualized return over that period of time is overly cautious.

i would invest as much as you can, as early as you can and let that money work for you. if you spend the next 10 years paying off your mortgage and neglecting your retirement savings, you are going to be behind the eight ball.

[Anonymous]

Anonymous wrote:i would definitely save for retirement over paying off your mortgage. your return is going to be far better in the stock market over a 30-40 year horizon. is this guaranteed? no, but i think to assume you are going to get a worse than 3% annualized return over that period of time is overly cautious.

i would invest as much as you can, as early as you can and let that money work for you. if you spend the next 10 years paying off your mortgage and neglecting your retirement savings, you are going to be behind the eight ball.

+1. You can always pay off your mortgage once you retire. I say this as someone who is retired in their 40ties.

[Anonymous]

Anonymous wrote:

Anonymous wrote:i would definitely save for retirement over paying off your mortgage. your return is going to be far better in the stock market over a 30-40 year horizon. is this guaranteed? no, but i think to assume you are going to get a worse than 3% annualized return over that period of time is overly cautious.

i would invest as much as you can, as early as you can and let that money work for you. if you spend the next 10 years paying off your mortgage and neglecting your retirement savings, you are going to be behind the eight ball.

+1. You can always pay off your mortgage once you retire. I say this as someone who is retired in their 40ties.

Plus retirement protected from creditors and bankruptcy.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:i would definitely save for retirement over paying off your mortgage. your return is going to be far better in the stock market over a 30-40 year horizon. is this guaranteed? no, but i think to assume you are going to get a worse than 3% annualized return over that period of time is overly cautious.

i would invest as much as you can, as early as you can and let that money work for you. if you spend the next 10 years paying off your mortgage and neglecting your retirement savings, you are going to be behind the eight ball.

+1. You can always pay off your mortgage once you retire. I say this as someone who is retired in their 40ties.

Plus retirement protected from creditors and bankruptcy.

Huh?!? If you have creditors and have to declare backruptcy, you should get a job and not be retired.

[Anonymous]

Anonymous wrote:We're in mid 30s, one child not in daycare. Spouse was at home and just now returned to workforce, so family income which was previously $115k will now be $211k. Both jobs stable. Only debt is mortgage of $440k which has been tight on one salary. Ample savings.

Newly employed spouse will make full TSP contribution of $17,500 in 2014.

Would you also each contribute $5,500 to an IRA, converted to a Roth this year? Or put that money to the mortgage debt at 4.125%? It feels like borrowing from Peter to pay Paul... at the same time spouse hasn't saved much for retirement over the past 3 years while doing a small amount of consulting. We are also saving for college.

Put the money in the market and built up your retirement account. You can beat 4%, even with having to pay taxes.

You will never be able to find cheaper money than 4%.

We could have probably paid off half of our mortgage at this point but I just don't see a reason - we want to build up a post tax account first.

[Anonymous]

Roth all the way if you can convert, ignore the tax brackets now or later concerning Roth.
Pay the mortgage down if it's your forever home. Calculate how much extra you have to pay to pay it off in 20 years for example or whatever your goal is.
I wouldn't pay the mortgage off early, but seems like it's about some extra piece of mind for you rather than money.529s funded?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:i would definitely save for retirement over paying off your mortgage. your return is going to be far better in the stock market over a 30-40 year horizon. is this guaranteed? no, but i think to assume you are going to get a worse than 3% annualized return over that period of time is overly cautious.

i would invest as much as you can, as early as you can and let that money work for you. if you spend the next 10 years paying off your mortgage and neglecting your retirement savings, you are going to be behind the eight ball.

+1. You can always pay off your mortgage once you retire. I say this as someone who is retired in their 40ties.

Plus retirement protected from creditors and bankruptcy.

Huh?!? If you have creditors and have to declare backruptcy, you should get a job and not be retired.

you missed the point. if you get yourself in a bad situtation, creditors can't get to your retirement money but they can get to your house. so when you come out of it all, you will have your retirement $$$ intact. i don't think PP was suggesting that someone whose financial affairs are a wreck should retire.

[Anonymous]

another thing to consider is that in 30 years, your mortgage payment will be pretty low in real terms (barring zero inflation over that time). my mortgage is $2700 now. significant, but in 10 years less so, and in 20 years even less so.

[Anonymous]

I'm dealing with the same decision. Second house. Got proceeds from sale of prior house and want to use about $100k of that to pay down the mortgage (the lender will recast the payments for the remaining life of the loan for no fee). Issue is that I want this house paid off in 15 years so we don't have payments in retirement. Mortgage rate is 3.75 but we lose a lot of our deductions due to PEP /Pease and AMT so don't get the full tax benefit. Thoughts?

[Anonymous]

Anonymous wrote:I'm dealing with the same decision. Second house. Got proceeds from sale of prior house and want to use about $100k of that to pay down the mortgage (the lender will recast the payments for the remaining life of the loan for no fee). Issue is that I want this house paid off in 15 years so we don't have payments in retirement. Mortgage rate is 3.75 but we lose a lot of our deductions due to PEP /Pease and AMT so don't get the full tax benefit. Thoughts?

Agree with this. At 4%, I almost don't even consider the tax benefits of interest anymore.


If you want done in 15 years, put it in your plan and work toward it.


The only thing I will say is that there is nothing stopping you from doing a 30 year and doubling up the payments to pay it down early - if you ever got in trouble, you are only on the hook for the 30 year payment, not the 15 year payment.

I like this plan, though.