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mortgage paydown and investing in taxable...my version of market timing

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  • JBME
    replied
    just an update here because this moved faster than I expected. First, I learned today the balance for a loan to be considered a jumbo really jumped this year, from $510k up to $548k. Kind of moot because for some reason the quotes I was given today gave me a better rate than if the loan wasn't a jumbo loan. I also got a better rate on a 30-year fixed compared to a 15 or 20-year loan. Strange indeed. Anyway, I secured a loan that will not punish us if we pay it off early, and it's a new 30-year fixed and the rate is 2.5%. Monthly payments will decrease by nearly $1000 per month so I'm happy, as long as we don't actually take 30 years from now to pay it off

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  • jfoxcpacfp
    replied
    Originally posted by IlliniGopher View Post
    I feel like the OP was reading my mind. Everyone is talking about refi these days.

    No student loans, tax advantaged space maximized. So I get quarterly bonuses and I side hustle for cash and with this -- I have been trying to get my mortgage down $100K a year. Got $109K done for 2020 (principal reduction). I ask myself, do I push just as hard and wipe it all away or slow down and dump money into a taxable account. One is an emotional decision, the latter the logical one. Maybe I will just see what refi options are for me now, when I get below the jumbo rate, or just do both (pay extra mortgage and dump half into taxable).
    Fortunately, doctors who keep tabs on their finances and follow some kind of plan don't always have to make the logical decision to come out ok.
    Last edited by jfoxcpacfp; 12-20-2020, 06:36 AM. Reason: Added missing word “have”

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  • IlliniGopher
    replied
    I feel like the OP was reading my mind. Everyone is talking about refi these days.

    No student loans, tax advantaged space maximized. So I get quarterly bonuses and I side hustle for cash and with this -- I have been trying to get my mortgage down $100K a year. Got $109K done for 2020 (principal reduction). I ask myself, do I push just as hard and wipe it all away or slow down and dump money into a taxable account. One is an emotional decision, the latter the logical one. Maybe I will just see what refi options are for me now, when I get below the jumbo rate, or just do both (pay extra mortgage and dump half into taxable).

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  • Balance1969
    replied
    Originally posted by JBME View Post
    for more balance
    I support that.


    Sorry...

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  • jfoxcpacfp
    replied
    [QUOTE=TXDoc21;n242134]
    Originally posted by jfoxcpacfp View Post
    Our very general goal for clients’ retirement is 1/3 each to taxable, pre-tax, and Roth. This provides tax arbitrage while also helping you focus on a long-term target and progress. We even measure the proportions annually for context. That does not have to be your goal, but you should have one and define it together with your spouse (this is the start of your IPS).

    That's interesting. Is the goal to try to achieve that annually (1/3 to each bucket)? It seems like with a high earning couple that becomes hard to do because you run out of tax deferred and Roth space quickly if you are saving 20%+ of your annual income.
    No, not to achieve annually but, asJBME said, to set a goal for retirement. Most people cannot get 1/3 to Roth during their working years, but they certainly can plan strategic conversions at retirement. So it’s a retirement benchmark intended to propel people to have a plan in place to move the ratio in retirement. In addition to having more control over your annual taxes, the purpose is to lower RMDs while setting up your estate to pass tax-free to the next generation and/or surviving spouse. I just believe that emphasizing the importance and reiterating the long-term goal during working years helps to set the expectations for next steps at retirement.

    There is no magic or documented studies for the split - it’s simply a starting point to motivate clients to review their savings allocation and consider opportunities. My goal is to inspire them to think beyond the huge pre-tax account balances they are accumulations and also to have some context for the value of taxable (brokerage) accounts.

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  • JBME
    replied
    [QUOTE=TXDoc21;n242134]
    Originally posted by jfoxcpacfp View Post
    Our very general goal for clients’ retirement is 1/3 each to taxable, pre-tax, and Roth. This provides tax arbitrage while also helping you focus on a long-term target and progress. We even measure the proportions annually for context. That does not have to be your goal, but you should have one and define it together with your spouse (this is the start of your IPS).

    That's interesting. Is the goal to try to achieve that annually (1/3 to each bucket)? It seems like with a high earning couple that becomes hard to do because you run out of tax deferred and Roth space quickly if you are saving 20%+ of your annual income.
    I think Johanna recommends this not to be done annually but when you are ready to retire you have 1/3 of investments in each bucket. As for it being hard to do with your scenario, I’ll just point out everyone is different in their circumstance. What if you have a dual income pediatrician household. Still high income but not for doctors do not lot left over when they fill two 401ks and two Roth’s and two 457 accounts . They’d have no taxable account

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  • TXDoc21
    replied
    [QUOTE=jfoxcpacfp;n242062]Our very general goal for clients’ retirement is 1/3 each to taxable, pre-tax, and Roth. This provides tax arbitrage while also helping you focus on a long-term target and progress. We even measure the proportions annually for context. That does not have to be your goal, but you should have one and define it together with your spouse (this is the start of your IPS).

    That's interesting. Is the goal to try to achieve that annually (1/3 to each bucket)? It seems like with a high earning couple that becomes hard to do because you run out of tax deferred and Roth space quickly if you are saving 20%+ of your annual income.

    Leave a comment:


  • JBME
    replied
    Yes I also have looked at 20 year loans and thanks for the reminder. Still need to get the balance down to 510. Perhaps I’ll look into refinancing as soon as we get to that number rather than by the end of 2021. Fortunately most bonus money we get will come in the first half of the year, all of which will be put towards the mortgage. So I’m thinking get the balance to 510 ASAP, refinance, throw extra to taxable by the end of the year. And if we can get a rate that is under 2.5 I’ll be incredibly happy

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  • eyecandy
    replied
    If I may suggest another option. I was in a very similar scenario w numbers. What I did last month during refi - payed mortgage down to 510K and secured lower conforming rate loan. Refinanced from 30yr at 3.75% to 20yr at 2.875%. The companies will try to steer you away from the 20 year, but I’m happy I did it bc I wanted lower rate and monthly. Interest rate is great and my monthly mortgage payment is also down $400.

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  • Lordosis
    replied
    Originally posted by JBME View Post
    I'll be honest-you're probably going to win. Serious paydown may only happen for the next 2-3 years because then we'll probably cut back a little for more balance
    I think we all won already but you might owe me a beer at wcicon 2030

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  • jfoxcpacfp
    replied
    Our very general goal for clients’ retirement is 1/3 each to taxable, pre-tax, and Roth. This provides tax arbitrage while also helping you focus on a long-term target and progress. We even measure the proportions annually for context. That does not have to be your goal, but you should have one and define it together with your spouse (this is the start of your IPS).

    You should easily be able to find a BE calculator online for when a refi makes financial sense if you’re interested only in the numbers. For many (as evidenced above) it is as much or more emotional. Physician families should have the flexibility to choose either.

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  • JBME
    replied
    I'll be honest-you're probably going to win. Serious paydown may only happen for the next 2-3 years because then we'll probably cut back a little for more balance

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  • Lordosis
    replied
    Originally posted by JBME View Post

    maybe your mortgage won't be a little smaller by the end of the year? wanna race? lol
    We even have the same rate. But I am 2 years into a 15 year. I refinanced last year and did not change my autopay amount so I am due to pay off in 11. But I am going to rush it along. Game on!

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  • JBME
    replied
    Originally posted by Lordosis View Post

    That is just a fantastic plan. If you were able to put extra towards the mortgage and also start a taxable account and max out your tax advantage accounts I say go for it. You already saving way more than is necessary and if paying off the mortgage brings you Joy so be it. I have recently decided to do something similar and I believe our oldest child is the same age and we are on the same timeline. Luckily my mortgage is just a little bit smaller. 😋
    maybe your mortgage won't be a little smaller by the end of the year? wanna race? lol

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  • Lordosis
    replied
    Originally posted by JBME View Post
    we use all tax advantaged space up currently and continue to do so going forward. That alone gets 25-30% saved up for retirement.

    This is extra. I'm definitely trying to juggle several goals all at once, and trying to bear in mind as multiple people have said, there isn't a wrong answer. At this point I'm not willing to go to a 15 year. I went with a 30 year initially and still have no regrets, so that the payments could be lower and I'd have flexibility, and if the time came, I could then throw more at the mortgage. And so here we are. I'd want to get the balance down below jumbo because yes I've seen those rates are still a bit higher than conventional. Then re-finance to a 15 year. Remember, today still the goal is paid off in 11 years so even under the re-finance we'd need to throw extra at the mortgage to get it paid off. But if I re-financed today to a 15 year the monthly payment would go up somewhere between $500-$600/mo and we're not ready to restrict our cashflow that much yet. I realize we're throwing way more than that at the mortgage next year but that's an aspirational goal and if we don't do that much, then that's okay. I just don't want to lock ourselves in....yet.

    Right now it seems like a reasonable goal to get the balance under 510 by the end of 2021 and also start up a small taxable account of $10-15k at some point in 2021. Then see where rates are in a year and decide what to do in 2022
    That is just a fantastic plan. If you were able to put extra towards the mortgage and also start a taxable account and max out your tax advantage accounts I say go for it. You already saving way more than is necessary and if paying off the mortgage brings you Joy so be it. I have recently decided to do something similar and I believe our oldest child is the same age and we are on the same timeline. Luckily my mortgage is just a little bit smaller. 😋

    Leave a comment:

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