Posted on 10/27/2010 1:25:57 PM PDT by Kaslin
Dear Carrie: I'm 60 and will probably retire between age 66 and 70. I currently have $375,000 in IRA/401(k) funds and I'm adding 8 percent of my income annually. My employer matches a portion. I still have a mortgage of over $165,000 at 4.75 percent.
I'm wondering... should I stop my 401(k) contributions and apply that money in extra principal on my mortgage? If I do, I'd pay my house off in about 10 years, making life a lot easier when I retire. But I'd lose the tax advantages as well as the employer match. One idea is to contribute enough to get the match and put the difference toward the mortgage. I'm swimming in possibilities! -- A Reader
Dear Reader: First let me congratulate you on doing some smart thinking in exploring the alternatives for paying off your mortgage. Not having a mortgage in retirement can be a real plus.
But first things first: Under any circumstances, I absolutely agree that you should keep contributing at least enough to your 401(k) to capture the employer match. At your age -- and with possibly 10 years before you retire -- it's crucial to keep saving. In fact, the real crux of the matter is: How close are you to your retirement goal?
Decreasing your retirement savings to pay off your mortgage is a trade-off that takes money from one pocket to put into another. Before you make this decision, I think you should step back and take a more holistic view of your financial situation. Here are some things to consider:
HAVE YOU SAVED ENOUGH FOR RETIREMENT?
Now would be a good time to realistically assess how much money you think you're going to need when you retire. It's a simple formula.
-- First, determine what your annual expenses will be. It's probably safe to assume that you're going to need basically the same amount in retirement as you're living on now.
-- Next, subtract your projected annual Social Security benefit (plus any other source of income you may have, such as rent) from your spending needs.
-- The result is the amount you'll need to withdraw yearly from your retirement savings to cover your expenses.
Now take a hard look at your savings. Will $375,000 -- even assuming a 5 percent annual growth rate for the next six to 10 years -- be enough to give you the type of retirement you want? Industry experts suggest that you withdraw no more than 4 percent of your portfolio in your first year of retirement, adjusted annually for inflation, to comfortably fund a 30-year retirement. Since you plan to retire after age 65, you might increase your first-year withdrawal rate to 5 percent.
So let's say your current nest egg grows to $600,000 by the time you retire. Withdrawing 5 percent would give you an annual income from your portfolio of approximately $30,000. Considering other sources of income, could you live on this? Or do you need to save more? Figuring this out will help you decide how much you can reduce your retirement savings to put toward your mortgage.
WHAT IS YOUR MORTGAGE REALLY COSTING YOU?
This is another important consideration. Mortgage interest is tax-deductible. For instance, if you're in a combined federal/state 30 percent marginal income tax bracket, your loan at 4.75 percent really only costs you a little over 3 percent (assuming full deductibility). Now compare this with what you're averaging on your 401(k) investments. Granted, investing carries risk (as we all know well!) and there's no guarantee that your investments will make a steady return over the next several years, but it could make more sense to keep saving and growing your money now.
On the other hand, paying down your mortgage will reduce your monthly expenses. Once again, it's a trade-off.
WOULD THIS AFFECT YOUR INCOME TAX BRACKET?
You mention losing the 401(k) tax benefit. If you stop or decrease your 401(k) pre-tax contribution, you'll be adding to your taxable income. This could increase your annual income tax bill. Don't forget to factor this in.
WHAT MAKES YOU SLEEP THE BEST?
Crunching the numbers will help you decide what makes the most economic sense. But sometimes it comes down to what gives you the greatest peace of mind. By all means, take steps to pay down your mortgage. Just make sure you don't short-change your retirement savings by diverting too much to your mortgage now.
You might even consider continuing to save at the same rate in your 401(k) and applying any future raises or bonuses to your mortgage. As you say, there are lots of possibilities. I suggest you talk to an adviser to help you make the best choice for both the present and the future.
Actually, in the current situation, there is no right answer. If you manage to get up to 600,000 in your retirement account, you’ll be lucky to get enough income out of it to live on, because stocks are extremely risky and bonds pay practically nothing, and are risky, too.
And Obama might steal your IRA.
On the other hand, it seems silly to blow all your retirement funds on paying off the mortgage, when your neighbors are getting by on not making any mortgage payments at all.
And who knows what that will result in? The bank unable to foreclose because no one knows where the mortgage is any more? The bank foreclosing? Obama sending you a little prezzie and paying it off with your neighbors taxes?
There no longer are any rules or certainties.
Going into retirement with a mortgage is a bad idea. People need to pay off their mortgage before they retire.
I'm in the process of checking on the title now. We owe less than $90K on a SF Bay Area semi-rural home with acreage, and yes, it's a conforming loan. MERS lists the FDIC as the "investor."
Heartwarming, isn't it?
“As a rule of thumb I tell people that if you’re still paying a mortgage past the age of 50, you’re doing it wrong.”
Agreed.
I think when I was growing up, people in general always had the home paid off by or before 50.
The question is more complicated. If you can get or have a very low mortgage rate say around 3.5 to 4%, then hanging onto to you mortgage is essentially a hedge against inflation. I am in fact thinking of remortgaging my home to position myself to benefit from the increase in interest rates that is bound to come.
At the same time, the persistence of these very low interest rates is essentially transferring wealth and income from savers to borrowers. This is an old style Soviet play, whereby the state essentially takes money from those with savings - mostly retirees - to fund grossly ineffective and inefficient government programs.
The Tea Party folks clearly have a handle on what is actually happening.
With inflation coming,
paying off your mortgage in today’s dollars would be foolish.
Wait and pay off your mortgage with worth-less dollars later.
Unless, of course, you don’t think this incredible level of spending and “monetizing” the debt won’t lead to inflation.
NO. She is vastly underfunded in her retirement savings. She needs to keep working until the house is paid off and keep funding the retirement account.
Option #2 would be to buy a functional time machine and travel backwards in time to the late 70’s; and invest $50,000 in Apple Computer or Microsoft.
I would only pay off a house if I was going to live in it until I died. Which I am and did by the way.
I would put extra money first in stuff that I will need at some point in my life. The govt. will steal the 401K and the house will be worth half it’s present value in two more years.
I truly believe that anyone who thinks they are going to “retire” 5 years from now to anything other than selling apples on the street corner is deluded. Hoping to be wrong, but fear I am not.
Extremely few people will stay in their current house after retirement. The King’s Land Rents, also known as proeprty taxes, will usually cause people to sell and move to a lower tax district.
A caller asked this question of Dave Ramsey. His answer to that caller was “hang on to your retirement. Doesn’t make sense to be out of debt, but have nothing to live on.”
Tough call, especially for those of us in our 60’s.
“should I stop my 401(k) contributions and apply that money in extra principal on my mortgage? If I do, I’d pay my house off in about 10 years, making life a lot easier when I retire. But I’d lose the tax advantages as well as the employer match. “
A: ABOLUTELY NOT — you would lose two tax deductions and would just pay more taxes, instead of really saving much, why donate to the government, if you don’t have to.
You can always pay the mortgage off AFTER you retire, with the money you saved in your 401K — if you so choose.
Max out your 401K and be happy about the low interest rate on your mortgage.
How are things in the great beyond? I've always wondered about that, lol.
Jimmy the Greek’s answer is the correct answer.
Buy a gym membership for your sons and son in laws, and any nephews and any of their friends you can find. And martial arts training, and firearms training.
Then put the rest of the money on the street and make a 8% a week vig, end up owning a bunch of distressed businesses and properties in your area.
Jimmy was a smart man.
....
For the rest of us... by this time next year, we’ll have 30 yr bond rates at either 1% or 8% ... and now that TIPS as an investment class has failed... the chances that 600k can provide enough interest and tax free fixed investment income to live off of is no longer a reasonable retirement strategy.
Investment acumen here will provide the answer. IT takes a boom to create wealth, and a depression to consolidate it, if you have a strong hand in investment knowledge, do not pay off loans at a low rate such as the example above.. but if you do, you didn’t need an anonymous freeper to tell you that. If you have to ask... best to pay down the mortgage unless you are willing to gamble on the performance of an investment advisor.
Those of us with a state pension can put less towards retirement and more towards debt. Of course, we make a lot less too.
gotta look at interest too. if you’re paying less in interest on your mortgage than you’re earning on your 401k, keep the money in the 401k.
pay of debts with the highest interest first, then work your way down.
Dave Ramsey is spot on.
Why not pull 160K out of your IRA, take the tax hit, and pay your mortgage off completely, and then save money for retirement, with a totally paid off house?
Then, your home will never be taken away, unless you can’t pay your property taxes, which you will have to pay, either way.
Carrying debt is just not good, especially if you have funds stashed somewhere. Debt is for poor people, not folks with $$!
Examining interest paid, and tax deduction, vs how much IRA is appreciating, looks good on paper, appealing to a persons inflated sense of his own wisdom and street smarts, and that type of thinking might make you money, if you are Goldman Sachs, but it doesn’t really work for normal middle class folks.
In fact, I would state that this type of thinking, being so comfortable with debt, is the ruin of the present generation, and what got us into the mess, temporally speaking.
Also, there is the larger question of the IRA, and what types of investments the gov’t allows you to make in this context. IDK much about it, but I wonder if you can buy gold, or commodities with an IRA? Directly?
Me, I would rather have the house paid off, cash in my wallet, or where ever I choose to spend/save it, than letting the gov’t manipulate me into subsidizing Wall Street thru the tax code.
who would do the collections? Furio Giunta?
PING
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