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Mortgage VS Taxable Retirement Account?

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  • Mortgage VS Taxable Retirement Account?

    Thank you very much in advance whoever will grace me with some advice. Just recently start following the forum and trying to catch up.
    Me: Single, late 30s, no child. AGI 97K.

    Have Disability and Life Insurance

    No debt/loan for car, credit card, student loan etc

    10 months of Emergency saving at online saving bank

    Retirement accounts:

    old 403(b) with 80 stock/20 bond at Fidelity: $19K + $0 per year

    current 403(b) with 80 stock/20 bond at Vanguard: $210K + $18K per year

    Roth IRA with 100% REIT Index Fund (VGSIX): $0 + $5500 per year

    Pension from work/Cash Balance Account: $73K  + $0 per year


    Mortgage: 190K at 3.625% 30 years fixed till 2043

    Goal is early retirement if possible, but otherwise totally content with saving and investing enough for retirement

    Was saving up for kitchen/bathroom renovation but decided to suck it up and be frugal, so now have 50K and wondering should I pay down some mortgage or invest in taxable retirement account?

    Please kindly let me know if I post at the wrong forum. Again, really appreciate any thoughts/ideas

  • #2
    If your goal is early retirement, it would be great to not need to be paying a mortgage at that point.  Your interest rate on the 30 year is low enough, I wouldn't bother refinancing the 190K or be in a rush to lump sum pay it.  Just calculate what you need to add to your monthly payment starting now to be done with it by whatever your early retirement date is. Of course, be sure you have no prepayment penalty.  And, be sure they apply the amount to principal.  Then anything else invest in taxable monthly.  BTW...It is fine to spend some of it to upgrade the house especially if it helps you stay in it longer term or helps its resale.  But 50K sounds like alot for a kitchen and a bath. Maybe you could dial the upgrade back a bit?  Good luck.


    • #3
      Thank you so much Dr Mom! I will definitely go check out about the prepayment penalty. I live in NYC and was thinking a gut renovation hence the 50K budget I set earlier. I definitely think I need the renovation when I'm ready to sell. Thank you for your advice!!! Have a great weekend!


      • #4
        I am a big fan of funding a taxable account.  It gives you flexibility since the money can be accessed in early retirement easily.  I would prepay the mortgage an extra payment or two per year. Be careful not to overallocate to reits.


        • #5
          Thank you hatton1! I just open the Roth IRA recently and most of the the Vanguard funds has $3000 minimum. Will be "weaning off" the REITS when there is more money in the account to invest on something else. Thanks again!


          • #6
            There should be lots of spirited discussion on this topic if one searches. If thinking FIRE, I'd lean taxable but no wrong answer.


            • #7
              I'd say if you think the market is overvalued, pay your debt down. If you think the market is undervalued, buy equities. And no, I do not know where the market is at the moment unfortunately ;-)


              • #8
                Mortgage comes last in priority of investable funds almost every time. Build your taxable, and when it's big enough and when you feel like it, use it for the mortgage. Call it a "mortgage payoff fund" if you want.

                As it pertains to the use of lump sums to pay off simple amortizing debt, in order for investing to "earn" you as little as the finance charges you'd save from paying the debt, your CAGR on the investment would have to be about half the APR which, in your case, after tax savings from mortgage interest deduction, would literally be like 1.4%.

                However, markets have risk, and there can be very good reasons to pay your low-rate debts instead of there's no wrong answer. Why not do both?


                • #9
                  You have to live somewhere. A house is not an investment, but a mortgage is. A long term, low interest rate mortgage (I didn't say big mortgage) is a beautiful thing...asset protected, inflation protected, tax deductible asset.  Probably a mortgage is best considered a negative bond for purposes of asset allocation.

                  Here's a plan: invest these pay-off funds in a taxable account with low dividend and/or tax free Funds. When the Market goes up. pay off the mortgage with funds liquidated at 0% LTCG rates. If the Market doesn't go up, don't pay off the mortgage and continue to pay a historically low, tax deductible rate. High earners benefit more from paying mortgage interest.

                  "Paying off the mortgage" is for a different  generation.


                  • #10
                    Wow, thank you all so very much! There are so many good points, great information, fantastic advice. It's both inspiring and educational for me at the same time. Hope everyone enjoying the Fall weather! Thanks again!


                    • #11
                      Nicely and simply said refindoc. Totally agree.


                      • #12
                        I agree with DMFA, do a little bit of both.  I'm in a somewhat similar situation as you now in that I'm choosing to pay down low interest student loan debt instead of funding my taxable account.  I feel like the market is due for a correction soon and so I'd rather be putting more money into debt pay off now so that when the next correction comes I'll have more freedom to invest in stocks when they are "on sale."

                        I am still funding it slightly though at the same time.  I'm also still contributing to 401k and Roth's of course.  I would suggest a similar approach in your situation.  Do a little of both that way you're getting the best of both worlds.  You have a great mortgage at the moment so I wouldn't be in any rush to pay it off, especially if you think you might sell the house.  As far as the renovations go, again if you're just planning on turning around and selling it, then I wouldn't spend too much on that.  Do what you need to do to sell and be done with it.


                        • #13
                          There is no right answer to this question, because it involves market timing and predicting the future.

                          If the market is going to go up substantially for the next several years, then better to invest the extra money in taxable investment accounts.  If the market is going to tank 20 % or 40% over the next 2 years, then better to pay down the mortgage.

                          Since we cannot predict the future, and therefore it is unknown what the best answer is, I do some of both.  But my retirement horizon is maybe 5 to 15 years off.  (I am sort of semi-retired now, but I still have substantial excess monthly income.)  The longer your retirement horizon, the more likely the taxable investments will do better than paying down the mortgage to save interest.  But as the wisest of investors say, "Past performance is not a guarantee of future results."

                          Each month, I allocate 75% of excess monthly cash to taxable investments.  The other 25% I put to paying down the mortgage.