Mortgage vs. Savings

[KellyB]

Another round of the Mortgage pre-pay vs. Retirement savings merry go round...

Original mtg was 30 years, refinanced that down to 20 yrs at 5.5% (cut 8 yrs off payments). Now down to approx $137K with 14 years to go, I have no other debt aside from my mortgage. Figured if I paid an extra $10K/yr., I would cut the mortgage in half and be done in 7 years. I will be 55 then, which sounds much better than 62 if I take the full 14 years to pay off.

Retirement savings is moving along, partner and I both put full $16500 into 401k plus $5K Roths yearly. Plus she will do the catch up $5K starting this year as she is now 50. Total retirement savings as of now is $750K, feel we need to get this to around $2 million in order to retire comfortably on approx $80K/yr.

College savings for our 3 sons is where we want it to be. Emergency fund and "freedom" funds all strong (approx total $40K which is aoubt 8 months). Amazingly, in strong shape considering I was out of work for 7 months in 2009. Now back on track, both of us have good solid jobs and make approx $170K total.

I like the idea of having a goal, it seems to motivate me to get it paid off, whereas the savings motivates as well but is so volatile I thought paying the house is where I could at least see progress month to month. Plan is to pay $2500 quarterly, made my first Principle payment yesterday and it feels pretty good!

Not really a question, but just a general discussion of where people are in their thinking if the prepayment is a good idea or just keep throwing money into savings/stocks/investments.

Comments?

[jIM_Ohio]

Another round of the Mortgage pre-pay vs. Retirement savings merry go round...

Original mtg was 30 years, refinanced that down to 20 yrs at 5.5% (cut 8 yrs off payments). Now down to approx $137K with 14 years to go, I have no other debt aside from my mortgage. Figured if I paid an extra $10K/yr., I would cut the mortgage in half and be done in 7 years. I will be 55 then, which sounds much better than 62 if I take the full 14 years to pay off.

Retirement savings is moving along, partner and I both put full $16500 into 401k plus $5K Roths yearly. Plus she will do the catch up $5K starting this year as she is now 50. Total retirement savings as of now is $750K, feel we need to get this to around $2 million in order to retire comfortably on approx $80K/yr.

College savings for our 3 sons is where we want it to be. Emergency fund and "freedom" funds all strong (approx total $40K which is aoubt 8 months). Amazingly, in strong shape considering I was out of work for 7 months in 2009. Now back on track, both of us have good solid jobs and make approx $170K total.

I like the idea of having a goal, it seems to motivate me to get it paid off, whereas the savings motivates as well but is so volatile I thought paying the house is where I could at least see progress month to month. Plan is to pay $2500 quarterly, made my first Principle payment yesterday and it feels pretty good!

Not really a question, but just a general discussion of where people are in their thinking if the prepayment is a good idea or just keep throwing money into savings/stocks/investments.

Comments?

really depends

based on my highlighted section above, the decision appears correct if your assumption of "retirement savings is moving along" is really true.

I have no reason to doubt it is true or is not true... just saying...

You have most of your other financial goals considered (kids college, retirement, mortgage payoff) and that would imply to me you are on track financially.

So the questions I would ask:

1) is 80k per year of expenses in retirement reasonable?
2) how large is current retirement savings?
3) what are the ages of the people which will live off the retirement savings?
4) 170k income is 80k of expenses... hmmm that is less than 50% of gross pay. I would look at budget and make sure various issues are accounted for (travel and health insurance when retired would be possible discussions).

[disneysteve]

You've got about 28% of gross going to retirement savings. That's fantastic. Seeing as you have your EF, college, etc. all taken care of and still have extra money, I think prepaying the mortgage is the next logical step.

[cschin4]

Not really a question, but just a general discussion of where people are in their thinking if the prepayment is a good idea or just keep throwing money into savings/stocks/investments

Pay off your home. You won't regret it. Lots of people will spin numbers to show you why you "shouldn't" . However, I paid off my home in 5 yrs and glad of it. I put any and all extra on the principle and it was done, the freedom and psychological advantage of doing so cannot be overstated.

[MonkeyMama]

You've got about 28% of gross going to retirement savings. That's fantastic. Seeing as you have your EF, college, etc. all taken care of and still have extra money, I think prepaying the mortgage is the next logical step.

Agreed.

[segmond]

depends on person to person and financial situation. when i joined this site, i was doing really bad, and got down under in my mortgage and it wiped my savings clean and put me in debt.

now, i'm mortgage free and my house is paid for in full, and i can finally save. the problem with being mortgage free, is that it doesn't feel like it tho. lol. you still have property taxes, home insurance, electric bills, heating bills, water bills, house maintenance. but it's definitely less stressing and very liberating!

[KellyB]

JimOhio: your assumption of "retirement savings is moving along" is really true.
I have no reason to doubt it is true or is not true... just saying...


Not really sure what you mean by this...we are saving $16500 each into 401ks, and $5K each into Roth IRAs, plus an extra $5K over 50 catch up savings for partner. Putting it in is all I can do, what it's earning or what it will grow into eventually I have to work with my advisor on...


1) is 80k per year of expenses in retirement reasonable? that's our goal, if we're able to get $2M into savings by retirement it should yeild $80K in annual income under the 4% rule, correct? This does not account for any SS or small pension, just savings.

2) how large is current retirement savings? $750K cash/stocks, not counting equity etc.

3) what are the ages of the people which will live off the retirement savings?
Partner is 50 and I am 48 currently

4) 170k income is 80k of expenses... hmmm that is less than 50% of gross pay. I would look at budget and make sure various issues are accounted for (travel and health insurance when retired would be possible discussions). We'll make it work to live within/below our means, just like always...have done a lot of our travel over the last few years in case health/wealth are issues later on!


MonkeyMama, Steve, segmond, and cschin4 - Thanks for the support! We're gonna go for it and see if we can knock it out!

[jIM_Ohio]

JimOhio: your assumption of "retirement savings is moving along" is really true.
I have no reason to doubt it is true or is not true... just saying...


Not really sure what you mean by this...we are saving $16500 each into 401ks, and $5K each into Roth IRAs, plus an extra $5K over 50 catch up savings for partner. Putting it in is all I can do, what it's earning or what it will grow into eventually I have to work with my advisor on...


1) is 80k per year of expenses in retirement reasonable? that's our goal, if we're able to get $2M into savings by retirement it should yeild $80K in annual income under the 4% rule, correct? This does not account for any SS or small pension, just savings.

2) how large is current retirement savings? $750K cash/stocks, not counting equity etc.

3) what are the ages of the people which will live off the retirement savings?
Partner is 50 and I am 48 currently

4) 170k income is 80k of expenses... hmmm that is less than 50% of gross pay. I would look at budget and make sure various issues are accounted for (travel and health insurance when retired would be possible discussions). We'll make it work to live within/below our means, just like always...have done a lot of our travel over the last few years in case health/wealth are issues later on!


MonkeyMama, Steve, segmond, and cschin4 - Thanks for the support! We're gonna go for it and see if we can knock it out!

Kelly- you answered question 1 with question 2.

Saving 20%+ of gross (I think Steve said it was 50%+) is a good step. But moving along means something different.

You needed $ 2M and save about 42k per year to the goal.

If you had 100k saved, that is different than having 750k saved. Meaning you are moving along (with the added info), but with the initial post I could not tell one way or other.

4% rule is a good target (Meaning $2 M can generate 80k for 30+ years), but lots of factors can change that. As you get closer to the goal ($2 M) make sure you have done some research on draw down strategy. A down market or two or three in first 4 years of retirement can take that 4% guideline and turn into a cat food diet and cardboard box. My comment on the 80k being reasonable is that it appeared based on income to be much lower... and if expenses now are higher than 80k you will obviously be "cutting back" between now and when you retire.

PS I would be **shocked** if you did not have the $2M within 8 years. 40k contribution this year, 40k next year, double whole amount in about 6-7 years, then within a few years you have $2 M.

[zetta]

I think the question is whether you would prefer to make a guaranteed 5.5% return, or to accept more risk and potentially earn 7-9% on the money.

Here's a prepay vs invest calculator for you to play with:
Prepay vs. Invest

After guessing at your numbers I suspect you could come out slightly ahead by investing (say $5-$10k), but at that level it would be worth the peace of mind to prepay.

[KellyB]

PS I would be **shocked** if you did not have the $2M within 8 years. 40k contribution this year, 40k next year, double whole amount in about 6-7 years, then within a few years you have $2 M.[/QUOTE]


I'm hoping you're right there, but I've been saving for the last 3 years just to get back to where I was 3 years ago! Hoping there is not another big downturn, but who can tell. All I can do is save as much as possible, and try to figure out how to keep it!

[Snodog]

Its whatever you feel more comfortable doing. You may be able to come out better not paying it off but your taking on more risk. Its up to the individual.

We personally decided to max out retirement accounts because we are comfortable with the risks and have a lot of home equity.

[wfhouses]

You should have no problem reaching your goal. I would do everything I could do to get the mortgage paid off as fast as possible. But that's just me. You just never know what the future holds. One illness or injury could change your financial situation at any time.

[KellyB]

Thanks all

Thanks to all who posted. We are going to put $2500 each quarter towards extra mortgage principle. That will be $10K per year which is doable for us. Should knock our mortgage out in 7 years.

I'll let you know how it goes...

[EEinNJ]

If you had a lump sum, I would say go for it. But unless you can re-amortize as you go and lower your payment, you'd just be tying up the extra principal for 7 years with no return.

I'm thinking about this myself. I was lucky enough to re-cast my mortgage before the market crash, using a lump sum that otherwise would have been invested in equities. Saved me a lot of money. Now I could pay off the remaining balance, but I have the usual questions of liquidity, is it the best use of the money, and tax consequences.

[EconoMutt]

If I were in your financial position, I'd get aggressive on the mortgage payments.