Analysis Paralysis -- 403b or Kill the Mortgage?

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getthatmarshmallow
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Analysis Paralysis -- 403b or Kill the Mortgage?

Post by getthatmarshmallow » Tue Jan 30, 2018 1:32 pm

I have been going around in circles, and need some advice on what to do.

Income (combined): $130-140K
Mortgage: $116K, 3.5%, 15 year term (summer 2017 refi) $850/month,
Age: late 30s

A little background: household income until recently has been in the low 80s, 90s; long grad school made for a late launch for me. Spouse immigrated, earned a degree, and changed careers. Retirement portfolio is about $100K so we have ground to make up (but I know we will), but as you can see minimal debt. LCOL area. Over a year's expenses in emergency funds; another $30K in taxable. Both jobs very stable. Two young kids, minimal contributions to their 529s. We're uncertain if we'll stay in the house forever, but at least another 10 years -- we're near the elementary school we like.

Currently 10% into his 401K; 15% deferred compensation into my 401a; maxing my 457b; maxing two Roth IRAs. (We're doing Roths as I can't see myself retiring early, and I like the flexibility.) Roth 403b also available, but I can contribute to it only by withholding from my paycheck.

We are LBYM, quite comfortable with our expenses, and in the good position of having extra money every month even given our savings rate and not being sure what to do with it.

1) Option 1: work toward maxing out the Roth 403b.
Pros: Investing tax-free makes more sense w.r.t. numbers than paying down a short, easily affordable mortgage given likely market returns.
Cons: money in a 403b isn't easily accessible, plus decision has to be made by withholding.
2) Option 2: aggressively pay off the mortgage (we can probably do it in 3.5.)
Pros: Guaranteed return, psychologically satisfying.
Cons: The math isn't in our favor UNLESS the market crashes and nobody knows nothing.
3) Option 3: figure out how to work in the 529s into all this. We'd like to be able to pay for the flagship state school; kids are likely bright enough to be Ivy material but they'd need scholarships. Or do we bother with the 529s at all given the 403b?

Now I'm in analysis paralysis. We have a lot of tax-advantaged space relative to our income. We don't have much left on the mortgage,but we're behind on retirement (relative to Bogles.) These are good problems to have but I have NO idea what we should be doing.

Thoughts? Other things I should consider?

mortfree
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Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by mortfree » Tue Jan 30, 2018 1:38 pm

round up your mortgage payment to $1000/month.

save/invest the rest across the various accounts available to you.

then you're doing some acceleration on the mortgage and also adding to the retirement accounts to not lose the contribution space for a given tax year.

Edit to add: Use some of your 12 month EF to lump a payment to the mortgage - say 10-15k? or get it down to 100k or 99k for psychological benefits.

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CyclingDuo
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Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by CyclingDuo » Tue Jan 30, 2018 2:00 pm

getthatmarshmallow wrote:
Tue Jan 30, 2018 1:32 pm
I have been going around in circles, and need some advice on what to do.

Income (combined): $130-140K
Mortgage: $116K, 3.5%, 15 year term (summer 2017 refi) $850/month,
Age: late 30s

A little background: household income until recently has been in the low 80s, 90s; long grad school made for a late launch for me. Spouse immigrated, earned a degree, and changed careers. Retirement portfolio is about $100K so we have ground to make up (but I know we will), but as you can see minimal debt. LCOL area. Over a year's expenses in emergency funds; another $30K in taxable. Both jobs very stable. Two young kids, minimal contributions to their 529s. We're uncertain if we'll stay in the house forever, but at least another 10 years -- we're near the elementary school we like.
Road sign #1 - save up 1x your annual salary by age 30, 1.5X by age 35, and 3x by age 40. You've $100K in retirement portfolio, plus $30K in taxable. That's $130K or the equivalent of 1x your salary at age 30. Not bad, but a little catch up required to hit that road sign at age 40 of 3x your income.

Image
getthatmarshmallow wrote:
Tue Jan 30, 2018 1:32 pm
Currently 10% into his 401K; 15% deferred compensation into my 401a; maxing my 457b; maxing two Roth IRAs. (We're doing Roths as I can't see myself retiring early, and I like the flexibility.) Roth 403b also available, but I can contribute to it only by withholding from my paycheck.
So $32,500 going into the 401K/401a combo, $18,500 into 457b, $11,000 into 2 Roth IRA's for a total of $62,000. That will go a long way towards keeping you on track to make it to 4x income by age 45 road sign and you will just about be "caught back up". The 403b as well as taxable as well as 529's are all options to direct some more money.
getthatmarshmallow wrote:
Tue Jan 30, 2018 1:32 pm
We are LBYM, quite comfortable with our expenses, and in the good position of having extra money every month even given our savings rate and not being sure what to do with it.

1) Option 1: work toward maxing out the Roth 403b.
Pros: Investing tax-free makes more sense w.r.t. numbers than paying down a short, easily affordable mortgage given likely market returns.
Cons: money in a 403b isn't easily accessible, plus decision has to be made by withholding.
2) Option 2: aggressively pay off the mortgage (we can probably do it in 3.5.)
Pros: Guaranteed return, psychologically satisfying.
Cons: The math isn't in our favor UNLESS the market crashes and nobody knows nothing.
3) Option 3: figure out how to work in the 529s into all this. We'd like to be able to pay for the flagship state school; kids are likely bright enough to be Ivy material but they'd need scholarships. Or do we bother with the 529s at all given the 403b?

Now I'm in analysis paralysis. We have a lot of tax-advantaged space relative to our income. We don't have much left on the mortgage,but we're behind on retirement (relative to Bogles.) These are good problems to have but I have NO idea what we should be doing.
All of the options are good, plus the option of more taxable investing for those things that "come along" in life before retirement. You could divide the extra money you mention you have every month and send some to each of those options (some in the 403b, some in extra principal on the mortgage, some in the 529's, some in taxable).

If we were in your position and had some leftover, that's probably how we would address it as you are covering all of your bases that way. The exception for us would be the mortgage. It is such a low interest rate, and payments so low - we'd leave it as is to use that capital as leverage while hitting your other targets of retirement, taxable, and 529's which, over the life of your 15 year loan have a good chance of better return.
"Everywhere is within walking distance if you have the time." ~ Steven Wright

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Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by Nate79 » Tue Jan 30, 2018 2:14 pm

I would:
1) Continue the savings rate in your existing accounts
2) Start funding 529
3) Throw extra money at the mortgage.

You already have a phenomenal savings rate and I think that 403b would be overkill. Pay off the mortgage can be kind of a risk reduction to help with future cash flow. This can be especially important to help in funding any shortfall for college education.

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Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by mega317 » Tue Jan 30, 2018 2:32 pm

Option 1: work toward maxing out the Roth 403b.
Why Roth? It looks like you're in the 22% bracket now and have a good chance of paying minimal or no taxes in retirement. I would defer.
plus decision has to be made by withholding.
Why is this a factor? Can't you change the withholding every month if you want?
maxing my 457b
You can get this money out after separating from the employer, no? So you will have flexibility for early retirement.
psychologically satisfying.
wrt the mortgage. How satisfying? That has value even when the numbers don't look right. But I would keep it. You always reserve the right to change your mind.
figure out how to work in the 529s into all this
I don't love 529s for young kids--too many unknowns. I prefer to pile money into retirement accounts and taxable, then when you reach your "number" stop contributing to retirement and save for or cash flow college. If your state offers a deduction it's probably worth contributing enough to take advantage of that.

In general my opinion is you can't go wrong here. You have a great savings rate. As long as you continue that, everything will be just fine.
We're uncertain if we'll stay in the house forever, but at least another 10 years -- we're near the elementary school we like.
This isn't what you asked but I would be hesitant to change schools/districts with pre-teens. If you don't like the high school it would at least be worth considering a move sooner.

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Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by soccerrules » Tue Jan 30, 2018 3:41 pm

I would choose option #1.

IMO you should be focusing more on saving as much as possible toward retirement and taking advantage of the tax-deferred space each year. As you indicated you have some catching up to do-- START NOW.
If you have additional funds , then go taxable at that point, which can also be used for college if needed.

If your income increases in the future, you could put some toward the mortgage, otherwise paying it out as is you will be done by early 50's. You could then move the $850/mo to retirement and/or taxable. Also remember when you hit 50 your 401/403 allow for additional $6,500 per person (that may increase, not change or decrease in the next 10-12 years )
Don't let your outflow exceed your income or your upkeep will be your downfall.

getthatmarshmallow
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Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by getthatmarshmallow » Tue Jan 30, 2018 3:49 pm

Thanks! You guys are so helpful. Additional responses/more info to follow.

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Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by getthatmarshmallow » Tue Jan 30, 2018 3:53 pm

CyclingDuo wrote:
Tue Jan 30, 2018 2:00 pm

Road sign #1 - save up 1x your annual salary by age 30, 1.5X by age 35, and 3x by age 40. You've $100K in retirement portfolio, plus $30K in taxable. That's $130K or the equivalent of 1x your salary at age 30. Not bad, but a little catch up required to hit that road sign at age 40 of 3x your income.
Thanks -- that chart's really helpful. I finished grad school at age 29, and for a while I was the sole breadwinner. So while we're behind now and need to catch up, in a way we are less behind, if that makes sense -- most of that savings happened on about $65K per year. So we have good habits, at least. But this is really helpful -- knowing rough milestones makes hitting the goals easier.

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Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by Meg77 » Tue Jan 30, 2018 3:56 pm

You guys are doing great! A couple of thoughts I have:

1. Why are you putting 15% into a 401a if you have other tax advantaged space available? My husband defers into his 401a, but only because we've maxed everything else out. The distribution restrictions are usually very tight compared to 401k/403b, and if you leave your company for any reason prior to retirement age you can get hammered with realizing all that money in one tax year. I might back that way down until/unless you're maxing out everything else available (including a Health Savings Account).

2. Just because you have the space available in retirement doesn't mean you have to use it. I've always been in the mindset to max out all tax advantaged space until my husband got access to a 401a - in which he can put 100% of his comp. Suddenly when we COULD put all the money we want away for retirement, it did NOT seem like the best idea ever. You're going to have other goals - kids' college, a house upgrade, early retirement, starting a business, RE investing, etc. - so you don't want to lock up all your money in retirement accounts, even if you can.

3. Maybe Pick a percentage (I'd say 25% max) and invest that toward retirement. Put something away for kids' college (maybe $5k each per year) in 529 plans. Dump any excess on your mortgage since you already have a fat emergency fund. Once the mortgage is gone, ramp up 529s and max out everything if you want. But there's nothing wrong with some taxable investing too, especially if real estate interests you at all.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by runner3081 » Tue Jan 30, 2018 3:58 pm

Option 1, save more for retirement now.

getthatmarshmallow
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Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by getthatmarshmallow » Tue Jan 30, 2018 4:04 pm

mega317 wrote:
Tue Jan 30, 2018 2:32 pm
Why Roth? It looks like you're in the 22% bracket now and have a good chance of paying minimal or no taxes in retirement. I would defer.

1. Why Roth? I'm likely to keep working for a long time (tenured academic, love my job), so while I want to be financially independent at or about 60, I anticipate that I will be working for quite a while, as my job is compatible with most of what I'd want to do in early retirement.


2. Why is this a factor? Can't you change the withholding every month if you want?

HR requires a form and two weeks' processing time, so it makes it hard to manage by the month.

4. I think owning the house outright by my 42nd birthday would be very cool. Spouse also really wanted to kill the mortgage first until I explained the numbers to him, so I had been thinking it would be an easier sell than more retirement. After our discussion he agreed to be on board with whatever I decided (I'm the family CFO.)

5. " In general my opinion is you can't go wrong here. You have a great savings rate. As long as you continue that, everything will be just fine." Thanks -- that's very reassuring.

6. This isn't what you asked but I would be hesitant to change schools/districts with pre-teens. If you don't like the high school it would at least be worth considering a move sooner.

Oh, good point, but we'd be staying in the same district -- we're just a block away from our elementary school and I love the idea of the kids walking to and from school. They'll either be at the local public high, one of the charter academies, or the private school -- but we'll stay in the same city/district.

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Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by camillus » Tue Jan 30, 2018 4:08 pm

If early retirement is in the works, I would study several articles over at Mad Fientist on how to withdraw retirement funds early and without penalty:
https://www.madfientist.com/how-to-acce ... nds-early/

The 401k/403b is perhaps more powerful than the Roth if early retirement is a possibility. See the article above. Tax deferred becomes tax free.
mega317 wrote:
Tue Jan 30, 2018 2:32 pm
Option 1: work toward maxing out the Roth 403b.
Why Roth?
+1

The Roth IRA/403b is a mental game. If folks "felt" the tax they were paying now for the privilege of investing in a Roth - say writing a check to the IRS every time you made a Roth contribution - the Roth would be a lot less popular. Yet this is reality.

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Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by getthatmarshmallow » Tue Jan 30, 2018 4:11 pm

Meg77 wrote:
Tue Jan 30, 2018 3:56 pm
You guys are doing great! A couple of thoughts I have:

1. Why are you putting 15% into a 401a if you have other tax advantaged space available? My husband defers into his 401a, but only because we've maxed everything else out. The distribution restrictions are usually very tight compared to 401k/403b, and if you leave your company for any reason prior to retirement age you can get hammered with realizing all that money in one tax year. I might back that way down until/unless you're maxing out everything else available (including a Health Savings Account).

2. Just because you have the space available in retirement doesn't mean you have to use it. I've always been in the mindset to max out all tax advantaged space until my husband got access to a 401a - in which he can put 100% of his comp. Suddenly when we COULD put all the money we want away for retirement, it did NOT seem like the best idea ever. You're going to have other goals - kids' college, a house upgrade, early retirement, starting a business, RE investing, etc. - so you don't want to lock up all your money in retirement accounts, even if you can.

3. Maybe Pick a percentage (I'd say 25% max) and invest that toward retirement. Put something away for kids' college (maybe $5k each per year) in 529 plans. Dump any excess on your mortgage since you already have a fat emergency fund. Once the mortgage is gone, ramp up 529s and max out everything if you want. But there's nothing wrong with some taxable investing too, especially if real estate interests you at all.
1. The 401a happens automatically -- it's deferred compensation but it essentially replaced the old pension. So while I could withdraw at a penalty, I can't control how much goes in. Fortunately we have Vanguard funds so it's been a great vehicle. The 457b/403b are for whatever else we can hold.

2. That's what I'm struggling with -- I think the advice to max retirement accounts either assumes a much higher income or much less tax advantaged space. But I'm an A student! Shouldn't I get an A in retirement? :twisted:

3. That might be a good compromise. I think I have to think in terms of percentages because I have to figure out how to balance current needs and wants and spending, too. A target would help me set and forget it.

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camillus
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Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by camillus » Tue Jan 30, 2018 4:21 pm

Upon reading your OP more closely, I see you are already doing a great deal of tax deferred investing. Two Roth IRAs seems like a good proportion of retirement savings in Roth. Something that can magnify the power of the Roth is holding the "high flying" parts of your asset allocation there - small caps, TSM, etc. Bonds in deferred. That way, you can buy a nice big boat with Roth money when you turn 60 and are still on the faculty.

Another thought: You have a huge emergency fund. Having a huge emergency fund while paying down a low-rate mortgage seems doubly, perhaps excessively cautious. If you were to pay off the mortgage, perhaps accelerate with using 1/2 of the emergency fund? Or 3/4?

Another benefit of Roth IRAs is that the contributions can be withdrawn as an effective emergency fund.

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Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by CyclingDuo » Tue Jan 30, 2018 4:28 pm

getthatmarshmallow wrote:
Tue Jan 30, 2018 3:53 pm
CyclingDuo wrote:
Tue Jan 30, 2018 2:00 pm

Road sign #1 - save up 1x your annual salary by age 30, 1.5X by age 35, and 3x by age 40. You've $100K in retirement portfolio, plus $30K in taxable. That's $130K or the equivalent of 1x your salary at age 30. Not bad, but a little catch up required to hit that road sign at age 40 of 3x your income.
Thanks -- that chart's really helpful. I finished grad school at age 29, and for a while I was the sole breadwinner. So while we're behind now and need to catch up, in a way we are less behind, if that makes sense -- most of that savings happened on about $65K per year. So we have good habits, at least. But this is really helpful -- knowing rough milestones makes hitting the goals easier.
I hear you. Couple in the factor that salaries rise or fluctuate over your career, which moves the road signs out a bit each time as you adjust to the new multiple.

We've been through two periods of me being the sole breadwinner as well (5 years when our kids were born, and 2-3 years when we relocated back to the USA). So the multiples fluctuate based on the household income.

403b/457b/401a - are you college professor, teacher, government, state employee?
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Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by Meg77 » Tue Jan 30, 2018 4:30 pm

getthatmarshmallow wrote:
Tue Jan 30, 2018 4:11 pm
Meg77 wrote:
Tue Jan 30, 2018 3:56 pm
You guys are doing great! A couple of thoughts I have:

1. Why are you putting 15% into a 401a if you have other tax advantaged space available? My husband defers into his 401a, but only because we've maxed everything else out. The distribution restrictions are usually very tight compared to 401k/403b, and if you leave your company for any reason prior to retirement age you can get hammered with realizing all that money in one tax year. I might back that way down until/unless you're maxing out everything else available (including a Health Savings Account).

2. Just because you have the space available in retirement doesn't mean you have to use it. I've always been in the mindset to max out all tax advantaged space until my husband got access to a 401a - in which he can put 100% of his comp. Suddenly when we COULD put all the money we want away for retirement, it did NOT seem like the best idea ever. You're going to have other goals - kids' college, a house upgrade, early retirement, starting a business, RE investing, etc. - so you don't want to lock up all your money in retirement accounts, even if you can.

3. Maybe Pick a percentage (I'd say 25% max) and invest that toward retirement. Put something away for kids' college (maybe $5k each per year) in 529 plans. Dump any excess on your mortgage since you already have a fat emergency fund. Once the mortgage is gone, ramp up 529s and max out everything if you want. But there's nothing wrong with some taxable investing too, especially if real estate interests you at all.
1. The 401a happens automatically -- it's deferred compensation but it essentially replaced the old pension. So while I could withdraw at a penalty, I can't control how much goes in. Fortunately we have Vanguard funds so it's been a great vehicle. The 457b/403b are for whatever else we can hold.

Ah, this makes sense.

2. That's what I'm struggling with -- I think the advice to max retirement accounts either assumes a much higher income or much less tax advantaged space. But I'm an A student! Shouldn't I get an A in retirement? :twisted:

I know, I am with you! We may revisit next year, but for now we are only putting 9% of DH's salary into the 401a (5% of joint gross). Our total retirement contributions including HSA are 18% of gross, but we save another 23% in taxable (mostly RE partnerships) each year as well. I plan to retire before 59.5 though so I like the flexibility of taxable. (No kids, but if we had them we'd probably front load 529s for a few years and lower taxable investing).

3. That might be a good compromise. I think I have to think in terms of percentages because I have to figure out how to balance current needs and wants and spending, too. A target would help me set and forget it.

Yeah percentages really work well I think unless your income is extreme (under $50k or over $500k for example). One target you may not be thinking of is related to spending and even giving. Strive to spend a certain amount on fun/life and on giving, even if it cuts into saving a bit. One example is 50% committed expenses, 25% savings/debt repayment, 15% fun/lifestyle and 10% giving. It's easier to allocate raises and bonuses when you have a framework like that. Some years it forces you to pay down the mortgage, other years it may force you to take a cruise or give it away. :beer
"An investment in knowledge pays the best interest." - Benjamin Franklin

getthatmarshmallow
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Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by getthatmarshmallow » Tue Jan 30, 2018 4:35 pm

CyclingDuo wrote:
Tue Jan 30, 2018 4:28 pm
getthatmarshmallow wrote:
Tue Jan 30, 2018 3:53 pm
CyclingDuo wrote:
Tue Jan 30, 2018 2:00 pm

Road sign #1 - save up 1x your annual salary by age 30, 1.5X by age 35, and 3x by age 40. You've $100K in retirement portfolio, plus $30K in taxable. That's $130K or the equivalent of 1x your salary at age 30. Not bad, but a little catch up required to hit that road sign at age 40 of 3x your income.
Thanks -- that chart's really helpful. I finished grad school at age 29, and for a while I was the sole breadwinner. So while we're behind now and need to catch up, in a way we are less behind, if that makes sense -- most of that savings happened on about $65K per year. So we have good habits, at least. But this is really helpful -- knowing rough milestones makes hitting the goals easier.
I hear you. Couple in the factor that salaries rise or fluctuate over your career, which moves the road signs out a bit each time as you adjust to the new multiple.

We've been through two periods of me being the sole breadwinner as well (5 years when our kids were born, and 2-3 years when we relocated back to the USA). So the multiples fluctuate based on the household income.

403b/457b/401a - are you college professor, teacher, government, state employee?
College prof. It's been a crazy past few years but it's a heck of a great way to make a living if it all works out.

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Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by CyclingDuo » Tue Jan 30, 2018 6:08 pm

getthatmarshmallow wrote:
Tue Jan 30, 2018 4:35 pm
College prof. It's been a crazy past few years but it's a heck of a great way to make a living if it all works out.
Yup. I'm one myself. Huge benefit with the Summers, Holiday Break, Spring Break, Fall Break - which I hope you enjoy the next few decades. At this point in our lives (ages 56 and 60) we treat each Summer as a miniature retirement rehearsal. :beer
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Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by Olemiss540 » Tue Jan 30, 2018 7:49 pm

Personally i would run your taxes to see how you could get into the 12% bracket. This would be my first goal in your situation and allows you to be paying low tax rates with the after tax money you are putting into your Roth and using to pay the mortgage down. What state do you live in? What is your marginal state and federal tax rate? How far away are you from getting your taxable income into the 12% bracket?

Being behind is when you should be using pretax investments to juice your contributions ASAP. Once you have caught up you can look at mortgage pay down or increasing Roth percentages but your plan to work until you are 70 may or may not work out in the end.....

What if there is a health issue or serious financial issue which causes issue with your employment or an otherwise long term financial drain? "Man/Woman plans and God laughs" or something along those lines.
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Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by Grt2bOutdoors » Tue Jan 30, 2018 8:42 pm

CyclingDuo wrote:
Tue Jan 30, 2018 6:08 pm
getthatmarshmallow wrote:
Tue Jan 30, 2018 4:35 pm
College prof. It's been a crazy past few years but it's a heck of a great way to make a living if it all works out.
Yup. I'm one myself. Huge benefit with the Summers, Holiday Break, Spring Break, Fall Break - which I hope you enjoy the next few decades. At this point in our lives (ages 56 and 60) we treat each Summer as a miniature retirement rehearsal. :beer
Not to throw thread off course - aren't you supposed to publish research papers? So it can't all be that much vacation, though I wouldn't necessarily say raising kids is a vacation all of the time. :wink:

I also vote for funding retirement first. As far as college, if kids are Ivy league material and they get accepted, chances are they will either get aid or will go to as good a school with excellent reputation. Retirement first, college savings next, house mortgage payment acceleration last unless mortgage rate is onerous in today's low rate environment. I can see accelerating a 5% mortgage, but with a steady job your dollars would accumulate a higher compounded rate of return in the retirement plan because they will be working much longer - late 30's and potentially living into early mid 90's, that's nearly 60 years. The college planning window is shorter but sufficiently long enough to get some tax-free benefit out of it and lessen need for loans later on.
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Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by KlangFool » Tue Jan 30, 2018 8:49 pm

OP,

I assume that you are contributing 11K to Roth IRAs every year. You have access to that money anytime. So, why would you keep 30K in the taxable account?

KlangFool

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Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by inbox788 » Tue Jan 30, 2018 9:04 pm

getthatmarshmallow wrote:
Tue Jan 30, 2018 1:32 pm
1) Option 1: work toward maxing out the Roth 403b.
Pros: Investing tax-free makes more sense w.r.t. numbers than paying down a short, easily affordable mortgage given likely market returns.
Cons: money in a 403b isn't easily accessible, plus decision has to be made by withholding.
2) Option 2: aggressively pay off the mortgage (we can probably do it in 3.5.)
Pros: Guaranteed return, psychologically satisfying.
Cons: The math isn't in our favor UNLESS the market crashes and nobody knows nothing.
3) Option 3: figure out how to work in the 529s into all this. We'd like to be able to pay for the flagship state school; kids are likely bright enough to be Ivy material but they'd need scholarships. Or do we bother with the 529s at all given the 403b?
Let me look at it from another vantage. The Roth vs tIRA is a question of tax bracket. Low tax bracket favors Roth and high tax bracket favors tIRA, with mid-brackets leaning towards paying the tax later too. The 529 is similar to the Roth, but has a shorter window of savings and use, which is a double edge sword. More immediate benefit, but less time average to take risk. Still, with a 10+ year window, if you're in a low tax bracket, and all the other obvious (e.g. emergency fund, 401k match, HSA, etc.) are filled, then I'd consider giving up some tax deferred (remember low tax rate only) for paying tax now and getting tax-free gains in the intermediate term.
With regards to the mortgage question, it's a risk/reward that's rate dependent. You've got to consider tax consequences for either choice, but 3-4% (with tax benefit 2-3%) rate is about the point of ambivalence for me. Any lower, and I'm happy to risk it, and much higher and I'm risk averse. While I have a "negative bond" that pays 3-4%, I don't buy bonds that pay less.
So in your shoes, at 3.5% fixed mortgage, I'd just take my time paying it off and invest 100% in Total Market Index Fund. I would max out tax deferred (403b) if I could, or if I got down to the teens tax margin, I'd fund the 529.

User avatar
CyclingDuo
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Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by CyclingDuo » Wed Jan 31, 2018 12:21 am

Grt2bOutdoors wrote:
Tue Jan 30, 2018 8:42 pm
Not to throw thread off course - aren't you supposed to publish research papers? So it can't all be that much vacation, though I wouldn't necessarily say raising kids is a vacation all of the time. :wink:
Presenting papers, writing grants, traveling for research, preparing a new course(s) for the upcoming academic year, teaching summer sessions, performing (for those in the arts), registration/orientation of incoming freshmen, can all be part or none of one's June/July/August. Depends on one's discipline, field of expertise, contract at the institution, etc... .
"Everywhere is within walking distance if you have the time." ~ Steven Wright

getthatmarshmallow
Posts: 205
Joined: Mon Dec 04, 2017 9:43 am

Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by getthatmarshmallow » Wed Jan 31, 2018 12:18 pm

KlangFool wrote:
Tue Jan 30, 2018 8:49 pm
OP,

I assume that you are contributing 11K to Roth IRAs every year. You have access to that money anytime. So, why would you keep 30K in the taxable account?

KlangFool
I'm afraid I'm not following. I can't put the money that's in there now into a Roth IRA -- we are putting money into Roths going forward but that money is from past savings. It's sitting there because I don't know what to do with it.

-
CyclingDuo wrote:
Wed Jan 31, 2018 12:21 am
Grt2bOutdoors wrote:
Tue Jan 30, 2018 8:42 pm
Not to throw thread off course - aren't you supposed to publish research papers? So it can't all be that much vacation, though I wouldn't necessarily say raising kids is a vacation all of the time. :wink:
Presenting papers, writing grants, traveling for research, preparing a new course(s) for the upcoming academic year, teaching summer sessions, performing (for those in the arts), registration/orientation of incoming freshmen, can all be part or none of one's June/July/August. Depends on one's discipline, field of expertise, contract at the institution, etc... .
Yup. Summers for me typically are a mix of summer teaching, conferences, and writing, and spending more time with the kids. I'm on a nine-month contract so technically I can do whatever I want in the summers but prudence suggests using the time to write.


Thanks for your advice, everyone, and for thinking it through with me. Much better than advice like "would you take out a loan at 3.5% to make money in the stock market?" because my snarky thought was, "well, if I knew the answer to that question I wouldn't be asking!"

I think I have a plan:
1) Figure out what our desired saving % should be.
2) Figure out what makes the most sense with respect to the new tax changes to figure out where to put the savings.
3) Retirement.
4) College.
5) Stay the course on the mortgage for now -- as long as it's paid off before the kids hit college I think we really can't lose.

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by KlangFool » Wed Jan 31, 2018 4:25 pm

getthatmarshmallow wrote:
Wed Jan 31, 2018 12:18 pm
KlangFool wrote:
Tue Jan 30, 2018 8:49 pm
OP,

I assume that you are contributing 11K to Roth IRAs every year. You have access to that money anytime. So, why would you keep 30K in the taxable account?

KlangFool
I'm afraid I'm not following. I can't put the money that's in there now into a Roth IRA -- we are putting money into Roths going forward but that money is from past savings. It's sitting there because I don't know what to do with it.
getthatmarshmallow,

You do not need to keep 30K in the taxable account. You have plenty of money in the Roth IRA that you can use. Hence, you can contribute those 30K into the 403B.

KlangFool

getthatmarshmallow
Posts: 205
Joined: Mon Dec 04, 2017 9:43 am

Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by getthatmarshmallow » Wed Jan 31, 2018 10:49 pm

KlangFool wrote:
Wed Jan 31, 2018 4:25 pm
getthatmarshmallow wrote:
Wed Jan 31, 2018 12:18 pm
KlangFool wrote:
Tue Jan 30, 2018 8:49 pm
OP,

I assume that you are contributing 11K to Roth IRAs every year. You have access to that money anytime. So, why would you keep 30K in the taxable account?

KlangFool
I'm afraid I'm not following. I can't put the money that's in there now into a Roth IRA -- we are putting money into Roths going forward but that money is from past savings. It's sitting there because I don't know what to do with it.
getthatmarshmallow,

You do not need to keep 30K in the taxable account. You have plenty of money in the Roth IRA that you can use. Hence, you can contribute those 30K into the 403B.

KlangFool

Good thinking -- but apparently it's not allowed on our plan, when I asked about contributing to it a couple of months ago.

KlangFool
Posts: 9954
Joined: Sat Oct 11, 2008 12:35 pm

Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by KlangFool » Wed Jan 31, 2018 10:57 pm

getthatmarshmallow wrote:
Wed Jan 31, 2018 10:49 pm
KlangFool wrote:
Wed Jan 31, 2018 4:25 pm
getthatmarshmallow wrote:
Wed Jan 31, 2018 12:18 pm
KlangFool wrote:
Tue Jan 30, 2018 8:49 pm
OP,

I assume that you are contributing 11K to Roth IRAs every year. You have access to that money anytime. So, why would you keep 30K in the taxable account?

KlangFool
I'm afraid I'm not following. I can't put the money that's in there now into a Roth IRA -- we are putting money into Roths going forward but that money is from past savings. It's sitting there because I don't know what to do with it.
getthatmarshmallow,

You do not need to keep 30K in the taxable account. You have plenty of money in the Roth IRA that you can use. Hence, you can contribute those 30K into the 403B.

KlangFool

Good thinking -- but apparently it's not allowed on our plan, when I asked about contributing to it a couple of months ago.
getthatmarshmallow,

Come on. Money is fungible. You could increase your paycheck deduction to 403B and spend from your taxable account.

KlangFool

JBTX
Posts: 3901
Joined: Wed Jul 26, 2017 12:46 pm

Re: Analysis Paralysis -- 403b or Kill the Mortgage?

Post by JBTX » Wed Jan 31, 2018 11:19 pm

getthatmarshmallow wrote:
Wed Jan 31, 2018 10:49 pm
KlangFool wrote:
Wed Jan 31, 2018 4:25 pm
getthatmarshmallow wrote:
Wed Jan 31, 2018 12:18 pm
KlangFool wrote:
Tue Jan 30, 2018 8:49 pm
OP,

I assume that you are contributing 11K to Roth IRAs every year. You have access to that money anytime. So, why would you keep 30K in the taxable account?

KlangFool
I'm afraid I'm not following. I can't put the money that's in there now into a Roth IRA -- we are putting money into Roths going forward but that money is from past savings. It's sitting there because I don't know what to do with it.
getthatmarshmallow,

You do not need to keep 30K in the taxable account. You have plenty of money in the Roth IRA that you can use. Hence, you can contribute those 30K into the 403B.

KlangFool

Good thinking -- but apparently it's not allowed on our plan, when I asked about contributing to it a couple of months ago.
A true Roth IRA you can pull out principle/contributions any time, although personally I would not want raid my Roth for an emergency, but I understand what KF is saying it makes conceptual sense. At any rate, you could choose to have lower EF knowing you can access your Roth if needed.

I know it makes some people feel good but there is no need to rush paying off a low rate mortgage. I would max out retirement possibilities as much as possible. Like some others have said,529s are good college savings vehicles but there is some risk at least one kid doesn’t go to college.

So my suggestion is max retirement as much as possible, then if you have extra throw a little bit at a 529 and increase your mortgage payment modestly.

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