Invest more in 401(k) or pay down mortgage?

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Invest more in 401(k) or pay down mortgage?

Postby Triple digit golfer » Fri Dec 28, 2012 8:45 pm

Hi everybody,

I'm trying to decide whether to keep my retirement contributions as high as they are or instead use some of it to pay off my mortgage sooner.

I also would like to know what to do about my international allocation - details to follow.

Emergency funds: $24,000 (easy 6+ months of expenses)
Debt: Just my mortgage - $135,700 remaining, 3.375%, 30 year fixed
Tax Filing Status: Single
Tax Rate: 25% Federal, 5% State
State of Residence: IL
Age: 27
Desired Asset allocation: 75% stocks / 25% bonds with a simple total market, three fund portfolio desired, or as close as possible to it.
Desired International allocation: 30% of stocks (but tough to do with my allocation since 401(k) international options are bad so I opt for higher U.S. percentage instead of going with the expensive international option in my 401(k)...you'll see below.)

Current retirement portfolio is about $85,000. $33,000 in Roth IRA with Vanguard, $52,000 in 401(k).

Current retirement assets

Taxable
None

His 401k
61% S&P 500 index (0.83% ER)
Company match: 4%

His Roth IRA at Vanguard
14% Vanguard Total International Admiral Shares (VTIAX) (0.18% ER)
25% Vanguard Total Bond Market Index Admiral Shares(VBTLX) (0.10% ER)

Contributions

New annual Contributions
$14,850 his 401k (plus $3,960 employer match)
$5,000 his IRA/Roth IRA

I have two questions that are unrelated:

1. I am already paying 13 mortgage payments a year, so my mortgage will be paid off sooner than 30 years at this rate. However, I am putting 15% of my income into my 401(k), plus another 4% for matching, plus maxing out my Roth IRA which is another 5.05% of my income. So in total I have about 24.05% of my income going into retirement accounts. I am debating whether to lessen the 401(k) contributions to say, 10%, or 5%, or even just 4% to get the full match, and putting the additional into paying off my mortgage sooner. Still max out Roth IRA. How do I go about deciding on this?

2. My desired international allocation is 30% of stocks or 22.5% of my total portfolio. Right now it is at 18.67% of stocks and 14% of my total portfolio. The reason is because most of my money is in my 401(k) and the only good option in there is the S&P 500 index. The bond and international options are 1.75%+ ER, actively managed funds. They're not indexes, not total market funds...they're trendy growth funds that I'd like to avoid if I could. I figured the stock/bond ratio is the most important, but in order to get that right I needed a big cnunk of my IRA in bonds. What was remaining in the IRA is left for international stocks.

As my 401(k) grows (since most of my contributions are going there), this problem is going to continue.

Do I move some 401(k) money into the high expense active funds to get my domestic/international stock allocation right, or do I leave a higher percentage of my stocks in domestics to keep expenses lower?

Thanks for reading!
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Re: Invest more in 401(k) or pay down mortgage?

Postby tainted-meat » Fri Dec 28, 2012 8:51 pm

First off - you're doing great for your age :beer

I'd keep putting in the 401k in the S&P 500 (cheapest fund) even before paying off the mortgage. The ER isn't great but it isn't horrible IMO. At that interest rate, you may want to consider taxable investing before paying off the mortgage.

My fiance's best fund is the S&P 500 index so she has been using only that for her 401k contirbutions.

Good luck!
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Re: Invest more in 401(k) or pay down mortgage?

Postby shipwreck » Fri Dec 28, 2012 9:14 pm

In Re: Invest more in 401(k) or pay down mortgage

Your doing great at age 27. I didn't start getting serious about retirement until I was 30.
I would consider splitting your next raise in three parts.

1/3 : Retirement
1/3 : Pay down mortgage
1/3 : Enjoy this part

I am biased since I am the type of person that a paid off mortgage means more than the few % I MIGHT get investing it at my current age of 42.
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Re: Invest more in 401(k) or pay down mortgage?

Postby letsgobobby » Fri Dec 28, 2012 9:22 pm

I also think you are doing a very good job - congratulations.

I would not prepay mortgage until/unless both 401k and IRA were being maxed. After that, feel free.
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Re: Invest more in 401(k) or pay down mortgage?

Postby livesoft » Fri Dec 28, 2012 9:30 pm

Long time, no see.

I would not pay down the mortgage because you are guaranteed to do better investing than the rate on your mortgage.

Folks may rise up and claim: How can you say that? And it is not the same risk level anyways? They always rise up and say that. Plus they write about Peace of Mind.

Well, you have the OPTION to wait until your investments do better than the rate on your mortgage, then pay off the mortgage. Folks always blow off the value of the OPTION that you don't have to pay off your mortgage absolutely positively when you have lost money on your investments. Nope, you can keep making monthly payments until your investments have performed say twice as good or three times the rate of the interest as your mortgage. At that point, you can think about paying off your mortgage. Of course, the probability that over a 30 year investing time span your investments give you just 3.375% should be very low. Otherwise why bother to invest at all? Plus if your investments don't do better than that, you will have lots more problems than you think.

Anyways, if you wait until your investments do much better than your mortgage interest rate, you are guaranteed to do better than your mortgage interest rate investing. That's a valuable option to have.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Invest more in 401(k) or pay down mortgage?

Postby sls239 » Fri Dec 28, 2012 10:48 pm

One reason you might consider paying down the mortgage is if you suspect you might move to a location with higher housing costs or want to buy a bigger house in the future.
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Re: Invest more in 401(k) or pay down mortgage?

Postby grabiner » Sat Dec 29, 2012 12:19 am

livesoft wrote:I would not pay down the mortgage because you are guaranteed to do better investing than the rate on your mortgage.


If the 401(k) was better, then you could actually be guaranteed to come out ahead. The mortgage is 2.40% after tax, and Admiral shares of Long-Term Treasury earn 2.51%; thus, if you hold Treasuries to maturity, the US will pay you more in interest and tax savings than you pay the bank.

In the current situation, with 0.83% expenses in the 401(k), it's not a guarantee, but it's pretty close, and I would max out the 401(k) before making extra mortgage payments. The long-term benefit is that you will have more in the 401(k), and (once you change employers) more in your low-cost IRA.
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Re: Invest more in 401(k) or pay down mortgage?

Postby bdpb » Sat Dec 29, 2012 12:29 am

Triple digit golfer wrote:I'm trying to decide whether to keep my retirement contributions as high as they are or instead use some of it to pay off my mortgage sooner.

Tax Rate: 25% Federal, 5% State
State of Residence: IL

New annual Contributions
$14,850 his 401k (plus $3,960 employer match)
$5,000 his IRA/Roth IRA


At these tax rates, contribute the max to your 401k before Roth investing.

Since you live in IL and IL does not tax Roth conversions, if you are eligible you should contribute to a tax deductible IRA and convert it to a Roth. You will basically end up in the same place without paying IL state tax on the contribution.

After you are able to max your 401k and IRA contributions, then pay off your mortgage before taxable investing.

Work on that golf game. Focus on putting, it's nearly half the game and costs nothing to practice. Dump the driver and use a three wood off the tee. Just like investing, don't take too much risk. It's not usually worth it.
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Re: Invest more in 401(k) or pay down mortgage?

Postby NorCalDad » Sat Dec 29, 2012 12:44 am

Agree with others, you're doing well for your age. I wish I had done that well at age 27.

I would max out your 401(k) and Roth before paying an extra cent on your mortgage. Your interest rate is low, your mortgage balance is small compared to the income I presume you have, and you have a very long investing horizon ahead of you. Seems like you make enough to max out 401(k) and Roth and still pay down extra principal.
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Re: Invest more in 401(k) or pay down mortgage?

Postby Triple digit golfer » Sat Dec 29, 2012 10:44 am

Thank you, everybody. I won't reply to each post but I did read them all - and they all seem to be along the same theme - the interest I'd save would be less than I'm making in the 401(k). Pretty much what I figured, but just wanted some outside input.

So do you think I should stop even paying the additional one payment per year until I max out the 401(k) and Roth IRA?

bdpb wrote:Since you live in IL and IL does not tax Roth conversions, if you are eligible you should contribute to a tax deductible IRA and convert it to a Roth. You will basically end up in the same place without paying IL state tax on the contribution.


I make $99k. I think my income is too high for that.
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Re: Invest more in 401(k) or pay down mortgage?

Postby BuckyBadger » Sat Dec 29, 2012 10:47 am

I don't think anyone should prepay their mortgage if they have any tax advantaged space left to fill.

You can debate mortgage prepayment vs. taxable investing until the cows come home, but (to me) it's a no brainer to fill up tax advantaged space before prepaying the mortgage.
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Re: Invest more in 401(k) or pay down mortgage?

Postby zebrafish » Sat Dec 29, 2012 1:25 pm

livesoft wrote:I would not pay down the mortgage because you are guaranteed to do better investing than the rate on your mortgage.


:oops:

Hmmmm. I seem to remember something happening in 2008. Um, let's see. Oh yes, pretty much everyone's equity-based portfolio lost 50% of value in a matter of months. 5 years later, people who stayed in pretty much have broken even.

I would only invest money that could be used to pay the mortgage if you have the fortitude, time horizon, and are willing to take the risk of not outperforming your mortgage interest rate over a period of 5-10+ years...
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Re: Invest more in 401(k) or pay down mortgage?

Postby NorCalDad » Sat Dec 29, 2012 1:47 pm

zebrafish wrote:
livesoft wrote:I would not pay down the mortgage because you are guaranteed to do better investing than the rate on your mortgage.


:oops:

Hmmmm. I seem to remember something happening in 2008. Um, let's see. Oh yes, pretty much everyone's equity-based portfolio lost 50% of value in a matter of months. 5 years later, people who stayed in pretty much have broken even.

I would only invest money that could be used to pay the mortgage if you have the fortitude, time horizon, and are willing to take the risk of not outperforming your mortgage interest rate over a period of 5-10+ years...

He's 27 years old and has space left in a tax-advantaged retirement account. I assume his horizon there is 30-40 years, so I think it's worth the risk.
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Re: Invest more in 401(k) or pay down mortgage?

Postby jbran99 » Sat Dec 29, 2012 1:50 pm

zebrafish wrote:Hmmmm. I seem to remember something happening in 2008. Um, let's see. Oh yes, pretty much everyone's equity-based portfolio lost 50% of value in a matter of months. 5 years later, people who stayed in pretty much have broken even.

If it took you 5 years to break even, you likely didn't stick to your AA and rebalance/tax-loss-harvest through that downturn. Also, livesoft didn't say "equity-based portfolio", he said "investing".

Based on weekly closing numbers (because I'm too lazy to look up dailys, but my point would remain), VTSAX peaked on May 16, 2008 at $34.60 / share. By April 29, 2011 VTSAX peaked at $34.44 / share. That's less than 3 years to (nearly) break even (not 5), and that doesn't include dividends, re-balancing, or tax-loss-harvesting - all things that would likely mean an investment in VTSAX was actually above 2008 levels within 3 years. If the bond portion of your investment was in VBTLX, you would also have gains from that fund in that same timeline.

zebrafish wrote:I would only invest money that could be used to pay the mortgage if you have the fortitude, time horizon, and are willing to take the risk of not outperforming your mortgage interest rate over a period of 5-10+ years...

In livesoft's post, he talked about a 30-year time horizon because the OP was talking about a 30-year mortgage. I tend to agree with livesoft; at mortgage rates below 3.5% for 30-years, I would prefer the OPTION of waiting for my investment to outperform my mortgage.
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Re: Invest more in 401(k) or pay down mortgage?

Postby Buckeye » Sat Dec 29, 2012 2:00 pm

I would consider paying more towards mortgage (several more extra payments a year) and adjust your investments so that you are closer to your desired AA

I think being closer to your desired AA while lightening up a little on an overpriced 401k is at least something to consider.
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Re: Invest more in 401(k) or pay down mortgage?

Postby Triple digit golfer » Sat Dec 29, 2012 2:04 pm

How about this one: Let's say it's 2038, I'm 53 years old, have four years left on the mortgage, and enough money in retirement accounts to pay off my mortgage, retire, and live a happy 40 years in retirement with my 20 year-old supermodel wife.

HOWEVER, I can't start drawing on my retirement money yet, but in order to pay the last four years of the mortgage, I need to access my retirement accounts or earn income from a job.

So I probably can't retire...not because I don't have enough money, but because I can't get it (unless I pay penalties, etc.).

Does this "what if" change things at all?
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Re: Invest more in 401(k) or pay down mortgage?

Postby livesoft » Sat Dec 29, 2012 2:20 pm

It doesn't change anything for me because I know how to access retirement accounts before age 59.5 without penalty.

As for the supermodel, there was this lengthy thread that you probably missed: viewtopic.php?f=2&t=106680
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Invest more in 401(k) or pay down mortgage?

Postby grabiner » Sat Dec 29, 2012 2:37 pm

Triple digit golfer wrote:How about this one: Let's say it's 2038, I'm 53 years old, have four years left on the mortgage, and enough money in retirement accounts to pay off my mortgage, retire, and live a happy 40 years in retirement with my 20 year-old supermodel wife.

HOWEVER, I can't start drawing on my retirement money yet, but in order to pay the last four years of the mortgage, I need to access my retirement accounts or earn income from a job.

So I probably can't retire...not because I don't have enough money, but because I can't get it (unless I pay penalties, etc.).


There are several ways to get at your retirement accounts in an early retirement. You can withdraw from an IRA in Substantially Equal Periodic Payments without penalty. You can withdraw contributions from a Roth IRA at any time, and also conversions which were made more than five years ago. And if you have a small or no mortgage, you could do a cash-out refinance or take out a home-equity loan to cover the next few years' payments.
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Re: Invest more in 401(k) or pay down mortgage?

Postby retiredjg » Sat Dec 29, 2012 2:56 pm

-Your problem would be solved if you had a decent bond fund in your 401k. Apparently, you don't have one, but have you checked to see if there is a stable value fund? Sometimes these are an excellent substitute for bonds. You could have overlooked it or it might even be separate from the list of mutual funds. You might want to see if one is available.

-Another possible solution might be a brokerage window in your 401k. However, I suspect you've already checked for that or have rejected the idea because of extra fees.

-Compromise: if you moved even a 5% slice of your bonds into the 401k, that would free up a 5% slice in your Roth IRA that you could fill with international. Or consider moving even a 10% slice. I don't think paying a high expense ratio for 5% or 10% of your portfolio is going to hurt that much. I'm not all that excited about this option, but I'm suggesting you should consider it at least enough to get your percentage of international up to 20% of stocks (15% of portfolio) and to maintain it there.

-Save more. :D If you saved more and had some money to put into a taxable account, this could be invested in international, freeing up Roth IRA space for bonds, thus relieving the need for high cost bonds in your 401k. This suggestion is a bit of a joke because you are not quite filling all your tax-advantaged space anyway. However, as you move through your career with increases in salary, this option might be the natural solution to your problem.

-Save less. :D Again, a bit of a joke, but if you saved less in the 401k, you wouldn't have this problem. I suppose you could put that money into your mortgage....which brings us back to the other original question. But at the low interest rate, I'm not much in favor of accelerating the payment on your mortgage. I think getting the tax-deferral, even if you have to pay a high expense ratio for it, is the better idea.

So my suggestion is to not pay extra on the mortgage (although I don't think that one payment hurts much) and to use the high cost bond in the 401k at least enough to maintain your international at 20% of stocks (15% of portfolio at your current stock to bond ratio). It's a pig with lipstick, but it's better than no pig at all. :happy
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Re: Invest more in 401(k) or pay down mortgage?

Postby Triple digit golfer » Sat Dec 29, 2012 4:09 pm

Wow, you guys are great. I've said it before, this forum has the most intelligent, kind posters on the internet, period.

I think what Retiredjg is saying makes sense for me. The one extra payment on the mortgage won't hurt, and it's a nice "help me sleep at night" thing even though it may not be the best financially. As for the bond funds in the 401(k) so free up the international slice in my IRA, the only options I have are:

Intermediate Term Bonds
American Century Ginnie Mae (1.14% ER)
American Century Inflation Adjusted (1.06% ER)
Calvert Income (1.68% ER)

High Yield Bonds
Pioneer High Yield (1.69% ER)
Prudential High Yield (1.21% ER)

There is also a fixed interest account paying 1.50%. No expense ratio on it.

How about the Ginnie Mae? Would I be making a mistake if for practical purposes I just pretended it was "Total Bond Market" and used it to get my allocation in balance?

Heading out for the afternoon. Thanks to everybody for your input.
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Re: Invest more in 401(k) or pay down mortgage?

Postby market timer » Sat Dec 29, 2012 4:16 pm

Triple digit golfer wrote:There is also a fixed interest account paying 1.50%. No expense ratio on it.

I'd use this one.
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Re: Invest more in 401(k) or pay down mortgage?

Postby retiredjg » Sat Dec 29, 2012 4:27 pm

Triple digit golfer wrote:American Century Ginnie Mae (1.14% ER)
American Century Inflation Adjusted (1.06% ER)
There is also a fixed interest account paying 1.50%. No expense ratio on it.

None of these would be bad choices considering your situation. The fixed interest account is paying 1.5% after expenses so that would be an expense ratio of 0% for purposes of comparing it to the others (that's how I understand it at least). In this climate, that's not a bad return at all. Certainly better than not filling your 401k or not having as much international as you want.

How about the Ginnie Mae? Would I be making a mistake if for practical purposes I just pretended it was "Total Bond Market" and used it to get my allocation in balance?

Ginnie Mae bonds are fine, but don't pretend it is a total bond market - it isn't. However, it's a bond fund and it will do (as will the other two).

In fact, now that we see the actual choices, they are bad, but not as bad as it seemed in your earlier post. I'd say not to hesitate to use your 401k to the max before considering paying down the mortgage (other than maybe that harmless 1 payment a year).
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Re: Invest more in 401(k) or pay down mortgage?

Postby market timer » Sat Dec 29, 2012 4:35 pm

retiredjg wrote:The fixed interest account is paying 1.5% after expenses so that would be an expense ratio of 0% for purposes of comparing it to the others (that's how I understand it at least).

Vanguard Prime Money Market account pays a 0.03% yield and has a 0.16% expense ratio. This fund pays 1.50% and presumably has same credit and duration risk, so I'd ballpark its expense ratio at negative 1.31% (a free lunch).
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Re: Invest more in 401(k) or pay down mortgage?

Postby NYBoglehead » Sat Dec 29, 2012 5:10 pm

I would max out the 401k, continue to max out the Roth, and with any leftover extra cash flow split it 50/50 between taxable investing and making additional mortgage payments.
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Re: Invest more in 401(k) or pay down mortgage?

Postby Watty » Sat Dec 29, 2012 5:46 pm

I agree that until all the deductable retirement accounts are maxed out that they are a better choice than the mortgage for your extra money.

One thing to consider is that instead of making an extra mortgage payment is that you could save up the money then when you have a larger amount then you can check with your lender to see if they will "recast your mortgage" (Google this) if you make a large pre-payment. If you can do this then you they will reduce your mortgage payment based on how much you pre-pay, but the length and interest rate remain the same. If you make a normal repayment then it just reduces the length of your loan. For example if you pre-paid 20% of your loan and have it recast then your required monthly mortgage payment will be reduced by 20%. This is important if (when?) interest rates and inflation get higher, since having as long a loan as possible will make it worth a lot more to you.
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Re: Invest more in 401(k) or pay down mortgage?

Postby zebrafish » Sat Dec 29, 2012 8:02 pm

jbran99 wrote:If it took you 5 years to break even, you likely didn't stick to your AA ...


5 year return of Vanguard TSM index is 1.4%. 10 year is about 7%. Investing in a non tax sheltered account (rather than paying down a mortgage) leaves you at a loss at 5 years and only marginally ahead at 10 years...
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Re: Invest more in 401(k) or pay down mortgage?

Postby Triple digit golfer » Sun Dec 30, 2012 12:00 pm

I think I am going to rebalance as follows (ballpark figures assuming I have exactly $52k in 401k and $33k in IRA - close enough):

401k:
56.25% $47,813 S&P 500 index (0.83% ER)
4.93% $4,187 American Century Ginnie Mae (1.14% ER)

Roth IRA:
18.75% $15,938 Vanguard Total International Admiral Shares (VTIAX) (0.18% ER)
20.07% $17,062 Vanguard Total Bond Market Index Admiral Shares(VBTLX) (0.10% ER)

This gets me to 25% of stocks as international which I am comfortable with.

Future contributions ($14,850 to 401k plus $3,960 employer match = $18,810, plus $5,500 IRA = $24,310 total 2013 contributions, at least at current rate):

401k:
$13,674 S&P 500 index (0.83% ER)
$5,136 American Century Ginnie Mae (1.14% ER)

Roth IRA:
$4,558 Vanguard Total International Admiral Shares (VTIAX) (0.18% ER)
$942 Vanguard Total Bond Market Index Admiral Shares(VBTLX) (0.10% ER)

Balances at end of 2013 assuming no gain/loss on investments :) :

401k:
56.25% $61,487 S&P 500 index (0.83% ER)
8.53% $9,323 American Century Ginnie Mae (1.14% ER)

Roth IRA:
18.75% $20,496 Vanguard Total International Admiral Shares (VTIAX) (0.18% ER)
16.47% $18,004 Vanguard Total Bond Market Index Admiral Shares(VBTLX) (0.10% ER)
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Re: Invest more in 401(k) or pay down mortgage?

Postby Triple digit golfer » Sun Dec 30, 2012 12:26 pm

Or...another option.

Use one of the crappy international funds in my 401k and reduce international in IRA, and therefore I'll be able to keep all my bonds in Total Bond Market:

Thornburg International Value (1.57% ER) - large growth
American Funds Capital World Growth and Income (1.28% ER) - large blend - however this one has 33% of its holdings in U.S. stocks

I guess the question is this:

Which is the better option? Using the crappy Thornburg international fund above but keeping all bonds in TBM, or using a bond fund that really isn't TBM to round out bonds while keeping all my international in Total International?

Basically, am I better off using Ginnie Mae to round out my bonds or am I better off using Thornburg international to round out international stocks?
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Re: Invest more in 401(k) or pay down mortgage?

Postby cherijoh » Sun Dec 30, 2012 1:21 pm

I am very impressed by your financial discipline, but extremely unimpressed by your 401k choices! Yikes - those are high expense ratios. But even with the high expenses, I agree that filling up your tax advantaged space should be a priority. At the rate you are going, I would expect some time in the future you will have more money to invest than you can put into tax-advantaged accounts. That would be the time to revisit the pay-down-the-mortgage scenario. However, at that point your mortgage rate might look incredible good and your bank could be begging you to pay it off! Many people forget that if inflation raises its ugly head, it is highly likely that you could earn after-tax interest rates much higher than your current mortgage rate. My parents held a 4 3/4% mortgage from the early 60's for the entire 30 years - including the 70's and early 80's when nominal interest rates on FDIC insured CDs were in the double digits. In my opinion, holding an ultra-low fixed rate mortgage is one of the best inflation hedges out there.

Another thing to keep in mind is that your age it is highly unlikely that you will stay your entire career at this one company. When you move on, you will have the option of rolling your account over into an IRA or potentially your next employer's 401k. This would give you a multitude of choices. (One caveat about an IRA rollover is that it would make it more expensive to do a back-door ROTH conversion, since all IRAs are pooled when calculating taxes on a conversion). I know when I got a new job 3 years ago the recruiter I was dealing with seemed surprised by the detailed questions I asked about the 401K - not just the conpany match rate, but options and expense ratios. But this can have a much bigger influence on your long-term financial future than an extra $1K in starting salary.

C
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Re: Invest more in 401(k) or pay down mortgage?

Postby retiredjg » Sun Dec 30, 2012 1:25 pm

Don't use any international in your 401k. This is a no-brainer. It would raise your overall costs and lower your international diversification.

There is no harm at all in using the GNMA or stable value (or one of the other choices) in your 401k as part of your bond allocation. Don't get so fixated on TBM that you don't see the value of other types of bonds.
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Re: Invest more in 401(k) or pay down mortgage?

Postby Triple digit golfer » Sun Dec 30, 2012 2:02 pm

retiredjg wrote: Don't use any international in your 401k. This is a no-brainer. It would raise your overall costs and lower your international diversification.

There is no harm at all in using the GNMA or stable value (or one of the other choices) in your 401k as part of your bond allocation. Don't get so fixated on TBM that you don't see the value of other types of bonds.


It's not that I don't see the value of them, I was just concerned about diversification. The more I contribute and and the older I get, the more that is going to go to bonds, which means the more that will go into the GNMA fund (since so much is going to 401k compared to IRA). Do you see an issue with having, say, 75% of my bonds in GNMA at some point or is it no big deal?

Thanks.
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Re: Invest more in 401(k) or pay down mortgage?

Postby letsgobobby » Sun Dec 30, 2012 2:14 pm

I think that is a big deal and wouldn't do it.

What about that stable value fund? It doesn't pay much, but it's an option.

You could also contribute less to your 401k and buy I-bonds with some of that money. They have the drawback of becoming taxable in 30 years, perhaps when you are making a lot of money. On the other hand, if you think you'll retire early with your supermodel wife girlfriend, they could be great. What could be sexier than an early retiree with I bonds?
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Re: Invest more in 401(k) or pay down mortgage?

Postby retiredjg » Sun Dec 30, 2012 2:20 pm

Triple digit golfer wrote: Do you see an issue with having, say, 75% of my bonds in GNMA at some point or is it no big deal? Thanks.

No, I probably would not put 75% of my bonds in one sector. But that's not your only choice. If 75% of your bonds do end up in your 401k (yet to be seen and may not ever happen for a number of reasons), you could make your own diversification using:

    American Century Ginnie Mae (1.14% ER)
    American Century Inflation Adjusted (1.06% ER)
    There is also a fixed interest account paying 1.50%.
plus the total bond market in your IRA.
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Re: Invest more in 401(k) or pay down mortgage?

Postby Triple digit golfer » Sun Dec 30, 2012 2:40 pm

Thanks, retiredjg. That sounds good.

The way I have it now, here will be my balances at the end of 2013 if I just add in current portfolio plus new contributions:

401k:
56.25% $61,487 S&P 500 index (0.83% ER)
8.53% $9,323 American Century Ginnie Mae (1.14% ER)

Roth IRA:
18.75% $20,496 Vanguard Total International Admiral Shares (VTIAX) (0.18% ER)
16.47% $18,004 Vanguard Total Bond Market Index Admiral Shares(VBTLX) (0.10% ER)

So GNMAs will be 34% of bonds.

If and when that number hits about 50%, then I will move 25% to TIPS so that my bond allocation will be 50% TBM, 25% GNMAs, 25% TIPS.

The only concern there is that if TIPS had just done well and GNMAs had just done poorly around the time I'm making that move, then I'll be selling GNMAs low and buying TIPS high.

But bonds are not as volatile as stocks so even if that happens, the potential damage I'm doing probably really isn't all that much.

Is there another way to do it?

Am I completely overthinking this?
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Re: Invest more in 401(k) or pay down mortgage?

Postby retiredjg » Sun Dec 30, 2012 3:07 pm

Triple digit golfer wrote:Am I completely overthinking this?

I think maybe you are, a little.

It is easy to get into our minds just what we want and that makes everything else seem sub-standard. But you need to rearrange your brain to think of in a different way. Rather than trying to pick the perfect portfolio (if all things were possible), concentrate on building the best portfolio you can with the building blocks at hand. You have a limited supply of TBM, so look around for whatever you have that will work almost as well. The TIPS fund and the stable value fund complement the Ginnie Mae fund and could easily be used.

Concentrate on the best thing you can do with what you have, rather than keeping your eye on what you could have in a perfect world. Glass half full/half empty sort of thing. :happy
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Re: Invest more in 401(k) or pay down mortgage?

Postby Triple digit golfer » Sun Dec 30, 2012 3:14 pm

retiredjg wrote:
Triple digit golfer wrote:Am I completely overthinking this?

I think maybe you are, a little.

It is easy to get into our minds just what we want and that makes everything else seem sub-standard. But you need to rearrange your brain to think of in a different way. Rather than trying to pick the perfect portfolio (if all things were possible), concentrate on building the best portfolio you can with the building blocks at hand. You have a limited supply of TBM, so look around for whatever you have that will work almost as well. The TIPS fund and the stable value fund complement the Ginnie Mae fund and could easily be used.

Concentrate on the best thing you can do with what you have, rather than keeping your eye on what you could have in a perfect world. Glass half full/half empty sort of thing. :happy


Thank you for the perspective.

I think I'll use TBM as much as I could, and then fill in the rest of my bonds with a 50/50 split of GNMA and TIPS in the 401k. Set it, forget it, and keep it this way as long as possible or until circumstances change.

It's been a couple years since I've had one of these micromanaging my portfolio episodes, so maybe I was due for one.

Again the Bogleheads force common sense into me and bring me back. :)
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Re: Invest more in 401(k) or pay down mortgage?

Postby grabiner » Sun Dec 30, 2012 9:31 pm

retiredjg wrote:
Triple digit golfer wrote: Do you see an issue with having, say, 75% of my bonds in GNMA at some point or is it no big deal? Thanks.

No, I probably would not put 75% of my bonds in one sector. But that's not your only choice. If 75% of your bonds do end up in your 401k (yet to be seen and may not ever happen for a number of reasons), you could make your own diversification using:

    American Century Ginnie Mae (1.14% ER)
    American Century Inflation Adjusted (1.06% ER)
    There is also a fixed interest account paying 1.50%.
plus the total bond market in your IRA.


Actually, with these bond funds, you have plenty of government bonds, so you would probably use Intermediate-Term Investment-Grade in your IRA.
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Re: Invest more in 401(k) or pay down mortgage?

Postby I-spy » Mon Jul 22, 2013 7:20 am

I think that there is a broader point that nobody here is mentioning.
Horizon.


Look at the stock market over the past 120 years. Has there ever been a 40 year period where stocks were out gained by anything? I think not.

With your extended time horizon, it might be 'smartest' to dump money into low cost index funds, that are pure stocks. In a few years when the horizon changes it would be smarter to add new money into a more diversified portfolio. But keep the old money in the stock only index funds. If you remove them from there then you would be putting a stop on that monies horizon.


I cannot emphasize this enough, your horizon allows for some very creative solutions that are relatively low risk.
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