Mortgage or Bonds at 50 !

[TheWiz]

Hi everyone,

I'm 50 years old, married, I have a mortgage 30 years at 3.75%, I'm 4 years in, therefore 26 more to go

We are planning to stay in this house for the next 15 years (2034/2035), and we would like to rent it after that time.

I'm currently redoing all my portfolio I have around 70k to invest (I thinking about 70% stock, 10% REITs, 10% CEF and 10% bonds), I understand that at 50 I should be more on the 60 or 50% stock allocation, but I'm late on my saving, so I'm trying to catch up, I'm also pushing 25000/year on my 401k).

Our mortgage payment is about $1350 every 2 weeks.

• Without extra payment, we will be done by March 2045 (Principal + Interest = $906000)

• with a 10k/year extra payment, we will done by January 2036 (Principal + Interest = $798000)

I should be able to make 10k extra payment every year

What would I do ? invest 10% in bonds or make some extra payment to my mortgage ?

Update: consolidating all my post

Here is more details:

Brokage account 1: $54K ( HD / SO / SMH / IBM / PANW / UNP / BABA)
Brokage account 2: $58K ( all cash )
Company Stock plan: $96K (include RSU / ESPP / no more stock option)
Rollover IRA : $100K all cash - this is the one we are talking about
401k: $166K (VTIVX - Vanguard Target Retirement 2045 Fund)

Total: $474K - not much but

Bought the house: $700K - current market value 1.1M - $525K mortage, still $494K to go ! - biweekly payment $1350

First thank you all for you replies, here a more details.

I currently 100% cash in my IRA account, and have around 70K to invest.
I have other brokage account, 401k, etc ... with around 400k saved, and a house current value about $1.1M

My target allocation for this IRA account is so far (waiting for your comment): 70% in stock , 10% BONDS, 10% REITS, 10% CEF
I'm not sure that having 70% in stock in IRA account make sense, and I may change my allocation for the IRA to 33% BONDS, 33% REITs, 33% CEF.

I have more money to invest in a regular brokage account, and use that money for stock only, therefore my high dividend stuff, would end up only in the IRA account, and regular stock in a brokage account

So my question for you is: Is it better to invest my BOND allocation (current idea 10% of 70K) in BONDS or just make extra payment with that money towards my mortgage every year (about $7000) . Of course the money I will use to make the extra payment will not come out of the IRA, but from another account.

So to summarize:

Option1: IRA account: 70% in stock , 10% BONDS, 10% REITS, 10% CEF
Option2: IRA account: 33% BONDS, 33% REITS, 33% CEF
Option3: IRA account: 70% in stock , 10% BONDS, 10% REITS, and make extra payment to mortgage
Option4: IRA account: 33% BONDS, 33% REITS, and make extra payment to mortgage


Thank you all in advance for your comments

Thanks for your help.

[Daryl]

At a really high level, it doesn't make sense to buy bonds paying less than the interest rate of your mortgage.

Saving $25K/year is admirable. What is your current expected retirement date? What type of lifestyle are you planning to lead once you get to that point in your life? Having a solid understanding of the competing goals (paying off the home / living in retirement) might help us provide more meaningful recommendations.

Thanks!

[JoeRetire]

Hi everyone,

I'm 50 years old, married, I have a mortgage 30 years at 3.75%, I'm 4 years in, therefore 26 more to go

We are planning to stay in this house for the next 15 years (2034/2035), and we would like to rent it after that time.

I'm currently redoing all my portfolio I have around 70k to invest (I thinking about 70% stock, 10% REITs, 10% CEF and 10% bonds), I understand that at 50 I should be more on the 60 or 50% stock allocation, but I'm late on my saving, so I'm trying to catch up, I'm also pushing 25000/year on my 401k).

Our mortgage payment is about $1350 every 2 weeks.

• Without extra payment, we will be done by March 2045 (Principal + Interest = $906000)

• with a 10k/year extra payment, we will done by January 2036 (Principal + Interest = $798000)

I should be able to make 10k extra payment every year

What would I do ? invest 10% in bonds or make some extra payment to my mortgage ?

I'm assuming the thought of having a mortgage isn't keeping you awake at night, since you decided to get one only 4 years ago.

I wouldn't pay off such an inexpensive mortgage.

I don't know what you mean as the alternative "invest 10% in bonds". Just invest your money according to your asset allocation strategy.

[Stinky]

I wouldn't pay off such an inexpensive mortgage.

I don't know what you mean as the alternative "invest 10% in bonds". Just invest your money according to your asset allocation strategy.

+1

If you want to use the extra money to nudge your asset allocation toward its target, go ahead. Once you reach your targeted allocation, just invest according to the allocation.

[MotoTrojan]

Where is this $70K located? REITs are a bad idea if in taxable.

I'd also pay off the mortgage before putting much into bonds.

[aristotelian]

Buying bonds makes no sense as bonds are earning less than your mortgage rate. I would either do stocks or pay down the mortgage. Personally, I would pay down the mortgage, or perhaps pay down with 50% and invest 50% in stocks.

[TheWiz]

First thank you all for you replies, here a more details.

I currently 100% cash in my IRA account, and have around 70K to invest.
I have other brokage account, 401k, etc ... with around 400k saved, and a house current value about $1.1M

My target allocation for this IRA account is so far (waiting for your comment): 70% in stock , 10% BONDS, 10% REITS, 10% CEF
I'm not sure that having 70% in stock in IRA account make sense, and I may change my allocation for the IRA to 33% BONDS, 33% REITs, 33% CEF.

I have more money to invest in a regular brokage account, and use that money for stock only, therefore my high dividend stuff, would end up only in the IRA account, and regular stock in a brokage account

So my question for you is: Is it better to invest my BOND allocation (current idea 10% of 70K) in BONDS or just make extra payment with that money towards my mortgage every year (about $7000) . Of course the money I will use to make the extra payment will not come out of the IRA, but from another account.

So to summarize:

Option1: IRA account: 70% in stock , 10% BONDS, 10% REITS, 10% CEF
Option2: IRA account: 33% BONDS, 33% REITS, 33% CEF
Option3: IRA account: 70% in stock , 10% BONDS, 10% REITS, and make extra payment to mortgage
Option4: IRA account: 33% BONDS, 33% REITS, and make extra payment to mortgage


Thank you all in advance for your comments

[Minty]

I guess I would say you should have an asset allocation plan which includes both taxable and non-taxable accounts. Without knowing the nature of your total portfolio, it is hard to give advice on what you should do with an additional $10k to be invested each year. But based on what you have posted, you have a big real estate investment already, so you probably do not need reits. And with only $70K in retirement funds, you should probably beef up savings before paying down a low rate mortgage. So my vote would be for a three fund portfolio in your IRA with a heavy stock tilt.

[Admiral]

OP, please, can you clarify your portfolio size and types(s) of accounts.

Are you saying you are 50 years old, with a $2700/mo mortgage payment, and have saved only 70k? And it's all in cash? The multiple posts are very confusing.

If what's above is correct, I not only would not pre-pay, I would likely not buy any bonds because you're going to need significant growth in the next 15 years in order to retire. Even with saving 25k per year.

Perhaps I am misunderstanding your portfolio.

[Kenkat]

Buying bonds makes no sense as bonds are earning less than your mortgage rate. I would either do stocks or pay down the mortgage. Personally, I would pay down the mortgage, or perhaps pay down with 50% and invest 50% in stocks.

I would say this is true but with a caveat. You lose liquidity by paying down the mortgage because that money is now tied up as equity in the home and not easily tapped without refinancing, HELOC, etc.

If liquidity is not a pressing issue, then yes, paying down the mortgage probably makes sense over lower yielding bonds.

[TheWiz]

@admiral: I understand your concern !!! I'm just speaking about my IRA here. I have way more saved in 401k, regular brokage account, etc ...

I did not want to add too much information, and only focus about my IRA allocation, and just want to know if it is better to invest in BONDs (around $7000/$10000 a year), or make extra payment towards my mortgage

[TheWiz]

At a really high level, it doesn't make sense to buy bonds paying less than the interest rate of your mortgage.

Saving $25K/year is admirable. What is your current expected retirement date? What type of lifestyle are you planning to lead once you get to that point in your life? Having a solid understanding of the competing goals (paying off the home / living in retirement) might help us provide more meaningful recommendations.

Thanks!

I would expect to retire by 62 or 65, not sure yet ! tomrrow if I could

[KingRiggs]

@admiral: I understand your concern !!! I'm just speaking about my IRA here. I have way more saved in 401k, regular brokage account, etc ...

I did not want to add too much information, and only focus about my IRA allocation, and just want to know if it is better to invest in BONDs (around $7000/$10000 a year), or make extra payment towards my mortgage

I don't think there is any way you can be given good, solid advice unless others know your entire financial picture. An IRA in isolation without relation to your "401k, regular brokage <sic> account, etc" is meaningless.

[TheWiz]

All information is now in my first post

[Brianmcg321]

If I was you, I would not be paying more on the mortgage.

I would be stashing as much money as possible into retirement accounts.

After you retire, some time around 65-70, you could probably just write a check for the remainder.

[Jebediah]

I think you don't have enough money or time to mess around with bonds, "CEF", or REITS. I'd go 100% stock, and I say that as a conservative, 50/50 investor.

[casaver]

I am in the same boat. Similar age. Just refinanced to started another 30-year term of 484k at 3.25%, after-tax equivalent of 1.8%. I have 120k muni in taxable earning 1.44%. But I need the liquidity as my second tier of EF. Will payoff or sell when I retire in 10 years.

[JoeRetire]

I am in the same boat. Similar age. Just refinanced to started another 30-year term of 484k at 3.25%, after-tax equivalent of 1.8%.

Wow - nice rate!

Will payoff or sell when I retire in 10 years.

Just curious - why?

[willthrill81]

Like most others, I agree that paying down the mortgage rather than buying more bonds makes sense for two reasons. First, there's a 1% spread between your mortgage interest rate and what bonds are yielding now, meaning that you are effectively borrowing at 3.75% only to loan out that same money at 2.74%, clearly a bad strategy unless you need the liquidity of bonds. Second, paying off the mortgage by the time you retire is probably a good move because it will reduce your sequence of returns risk because otherwise, you will be required to make withdrawals from your portfolio, even if it's doing poorly, to make the mortgage payment. One notable exception to this is if you will have enough guaranteed income from things like SS benefits or a pension to cover all of your essential spending, including the mortgage.

[willthrill81]

I wouldn't pay off such an inexpensive mortgage.

It's "inexpensive" as compared to historic mortgage rates, but it's still 1% higher than current bond yields. If one is using a mortgage to leverage a stock position, it may make sense, but using it to leverage a bond position does not.

[JoeRetire]

I wouldn't pay off such an inexpensive mortgage.

It's "inexpensive" as compared to historic mortgage rates, but it's still 1% higher than current bond yields. If one is using a mortgage to leverage a stock position, it may make sense, but using it to leverage a bond position does not.

I wouldn't leverage a bond position. Seems like a silly alternative.

[willthrill81]

I wouldn't pay off such an inexpensive mortgage.

It's "inexpensive" as compared to historic mortgage rates, but it's still 1% higher than current bond yields. If one is using a mortgage to leverage a stock position, it may make sense, but using it to leverage a bond position does not.

I wouldn't leverage a bond position. Seems like a silly alternative.

If you're holding bonds at the same time that you're in debt, that's precisely what you're doing.

[JoeRetire]

I wouldn't pay off such an inexpensive mortgage.

It's "inexpensive" as compared to historic mortgage rates, but it's still 1% higher than current bond yields. If one is using a mortgage to leverage a stock position, it may make sense, but using it to leverage a bond position does not.

I wouldn't leverage a bond position. Seems like a silly alternative.

If you're holding bonds at the same time that you're in debt, that's precisely what you're doing.

I suspect you and I have different definitions for the term "leverage". Good luck with that.

[corn18]

Hi everyone,

I'm 50 years old, married, I have a mortgage 30 years at 3.75%, I'm 4 years in, therefore 26 more to go

We are planning to stay in this house for the next 15 years (2034/2035), and we would like to rent it after that time.

I'm currently redoing all my portfolio I have around 70k to invest (I thinking about 70% stock, 10% REITs, 10% CEF and 10% bonds), I understand that at 50 I should be more on the 60 or 50% stock allocation, but I'm late on my saving, so I'm trying to catch up, I'm also pushing 25000/year on my 401k).

Our mortgage payment is about $1350 every 2 weeks.

• Without extra payment, we will be done by March 2045 (Principal + Interest = $906000)

• with a 10k/year extra payment, we will done by January 2036 (Principal + Interest = $798000)

I should be able to make 10k extra payment every year

What would I do ? invest 10% in bonds or make some extra payment to my mortgage ?

Update: consolidating all my post

Here is more details:

Brokage account 1: $54K ( HD / SO / SMH / IBM / PANW / UNP / BABA)
Brokage account 2: $58K ( all cash )
Company Stock plan: $96K (include RSU / ESPP / no more stock option)
Rollover IRA : $100K all cash - this is the one we are talking about
401k: $166K (VTIVX - Vanguard Target Retirement 2045 Fund)

Total: $474K - not much but

Bought the house: $700K - current market value 1.1M - $525K mortage, still $494K to go ! - biweekly payment $1350

First thank you all for you replies, here a more details.

I currently 100% cash in my IRA account, and have around 70K to invest.
I have other brokage account, 401k, etc ... with around 400k saved, and a house current value about $1.1M

My target allocation for this IRA account is so far (waiting for your comment): 70% in stock , 10% BONDS, 10% REITS, 10% CEF
I'm not sure that having 70% in stock in IRA account make sense, and I may change my allocation for the IRA to 33% BONDS, 33% REITs, 33% CEF.

I have more money to invest in a regular brokage account, and use that money for stock only, therefore my high dividend stuff, would end up only in the IRA account, and regular stock in a brokage account

So my question for you is: Is it better to invest my BOND allocation (current idea 10% of 70K) in BONDS or just make extra payment with that money towards my mortgage every year (about $7000) . Of course the money I will use to make the extra payment will not come out of the IRA, but from another account.

So to summarize:

Option1: IRA account: 70% in stock , 10% BONDS, 10% REITS, 10% CEF
Option2: IRA account: 33% BONDS, 33% REITS, 33% CEF
Option3: IRA account: 70% in stock , 10% BONDS, 10% REITS, and make extra payment to mortgage
Option4: IRA account: 33% BONDS, 33% REITS, and make extra payment to mortgage


Thank you all in advance for your comments

Thanks for your help.

There really isn't a right answer to your question. It has been asked and debated so many times on the financial fora I visit, that I usually skip those threads as nothing ever comes out of it except 25 pages of debating little nits. What I usually recommend is a balanced approach of pay some extra, save some extra and then revisit later on. BTW, we are in the same position and I am going to pay some of the mortgage off (3.875%), save some in taxable per my AA (60/40) and pay some extra towards the mortgage each month. I have 29 years left on a 30 year mortgage @ age 53.

But, the reason I replied is that we are both late starters. And I noticed you have a 401k and TIRA. Does your company allow a mega back door Roth (e.g. contribute after tax dollars to the 401k then do an in service rollover to a Roth IRA)? If it does, then do they allow you to roll your TIRA into your 401k? If both of these are yes, then I would recommend considering doing these 2 things. I found out about the back door Roth and mega back door Roth in 2015 when I joined BH.org and have been able to cram $175k into Roth accounts since then. Very, very nice to have some Roth money available to help with taxes, Roth conversions and RMDs in retirement.

[CurledMoss]

Dang can't imagine the property taxes on that.

[casaver]

I am in the same boat. Similar age. Just refinanced to started another 30-year term of 484k at 3.25%, after-tax equivalent of 1.8%.

Wow - nice rate!

Will payoff or sell when I retire in 10 years.

Just curious - why?

Because my marginal tax rate will probably be lower and I will probably have the liquidity to pay off. As a single parent I keep a bit extra second tier EF than usual. When kids grow up I won't need as much.

[Dottie57]

If you can pay off your mortgage before you retire that will really lower your expenses. Lower expenses = smaller pot of investments needed in retirement.

[JoeRetire]

I am in the same boat. Similar age. Just refinanced to started another 30-year term of 484k at 3.25%, after-tax equivalent of 1.8%.

Wow - nice rate!

Will payoff or sell when I retire in 10 years.

Just curious - why?

Because my marginal tax rate will probably be lower and I will probably have the liquidity to pay off. As a single parent I keep a bit extra second tier EF than usual. When kids grow up I won't need as much.

No, I'm sorry. I guess I wasn't clear.

You explained why you will be able to more easily pay off the mortgage when you retire in 10 years.
What I meant was why will you want to pay it off then rather than keep the very low rate mortgage indefinitely?

[casaver]

No problem. The first half of my answer answered that. When I retire my tax rate will be lower for sure. So the after-tax-deduction effective rate for my mortgage will be higher. I think that is a factor of common wisdom to pay off mortgage by retirement.

But if tax law or interest rate gap changes, I will reconsider. That is also the advantage of keeping a large balance, more flexibility. Large balance also get me better rate for no cost no fee refinancing. I just refinanced this month into 3.25 30-year fixed with no cost no fee. I could've done 7/1 ARM at 3% too but I was denied the best rate for a transaction during last 12 month in my HELOC. ( I dipped just for convenience of moving cash in a week for a car.)

[grabiner]

If you can pay off your mortgage before you retire that will really lower your expenses. Lower expenses = smaller pot of investments needed in retirement.

But if you have enough money to pay off your mortgage, you are in the same situation whether you have actually paid it off or not. You can keep this money in bond funds and use it to make the mortgage payments, or use it to pay off the mortgage, whichever makes more sense. In addition, if you do want to be mortgage-free in retirement, you can do that either by making extra mortgage payments now, or by investing the money in bond funds now and using it to pay off your mortgage when you retire.

In either situation, which option is better depends on the difference between bond yields and mortgage rates (after whatever tax adjustments are appropriate); keeping the mortgage may also have a benefit if liquidity is valuable.

The OP didn't mention their tax bracket, but the mortgage rate and amount are enough that any extra mortgage payments should reduce tax-deductible interest. In a 33% combined state and federal bracket, 3.75% becomes 2.50% after tax; in a 24% federal bracket only (in a state with no income tax, or one which doesn't allow deductions for mortgage interest), 3.75% becomes 2.85% after tax. These aren't great returns on an investment with a 26-year duration; paying down the mortgage and buying long-term munis would give a slight gain in current yields but involve a lot more interest-rate risk. Therefore, I wouldn't pay down this mortgage at current bond yields.

[casaver]

If you can pay off your mortgage before you retire that will really lower your expenses. Lower expenses = smaller pot of investments needed in retirement.

But if you have enough money to pay off your mortgage, you are in the same situation whether you have actually paid it off or not. You can keep this money in bond funds and use it to make the mortgage payments, or use it to pay off the mortgage, whichever makes more sense. In addition, if you do want to be mortgage-free in retirement, you can do that either by making extra mortgage payments now, or by investing the money in bond funds now and using it to pay off your mortgage when you retire.

In either situation, which option is better depends on the difference between bond yields and mortgage rates (after whatever tax adjustments are appropriate); keeping the mortgage may also have a benefit if liquidity is valuable.

The OP didn't mention their tax bracket, but the mortgage rate and amount are enough that any extra mortgage payments should reduce tax-deductible interest. In a 33% combined state and federal bracket, 3.75% becomes 2.50% after tax; in a 24% federal bracket only (in a state with no income tax, or one which doesn't allow deductions for mortgage interest), 3.75% becomes 2.85% after tax. These aren't great returns on an investment with a 26-year duration; paying down the mortgage and buying long-term munis would give a slight gain in current yields but involve a lot more interest-rate risk. Therefore, I wouldn't pay down this mortgage at current bond yields.

certainly agree. It is really case by case. In my case, the mortgage rate is 3.25% fixed for 30 year. My tax bracket is 48% fed, state, NIIT all combined. So the effective rate is 1.69%. I buy VCADX which is intermediate(5 year) CA muni bond at 1.44% right now, for better flexibility. It is just a wash or splitting the hair and I gain a lot of more flexibility. This part serves as my second tier of EF fund and counts toward my bond AA, enabling me invest more in stock. Should people keep a mortgage while having an AA less than 100% in stock? I do think so.

[grabiner]

It is really case by case. In my case, the mortgage rate is 3.25% fixed for 30 year. My tax bracket is 48% fed, state, NIIT all combined. So the effective rate is 1.69%. I buy VCADX which is intermediate(5 year) CA muni bond at 1.44% right now, for better flexibility. It is just a wash or splitting the hair and I gain a lot of more flexibility.

I would say you come out ahead on a risk-adjusted basis by keeping the mortgage. Vanguard Long-Term CA Tax-Exempt yields 1.75%, which is higher than the return on a mortgage payment, and still with a shorter duration. You chose to hold intermediate-term rather than long-term bonds, accepting a lower return for less risk, which is still a fair trade-off.

[Dottie57]

If you can pay off your mortgage before you retire that will really lower your expenses. Lower expenses = smaller pot of investments needed in retirement.

But if you have enough money to pay off your mortgage, you are in the same situation whether you have actually paid it off or not. You can keep this money in bond funds and use it to make the mortgage payments, or use it to pay off the mortgage, whichever makes more sense. In addition, if you do want to be mortgage-free in retirement, you can do that either by making extra mortgage payments now, or by investing the money in bond funds now and using it to pay off your mortgage when you retire.

In either situation, which option is better depends on the difference between bond yields and mortgage rates (after whatever tax adjustments are appropriate); keeping the mortgage may also have a benefit if liquidity is valuable.

The OP didn't mention their tax bracket, but the mortgage rate and amount are enough that any extra mortgage payments should reduce tax-deductible interest. In a 33% combined state and federal bracket, 3.75% becomes 2.50% after tax; in a 24% federal bracket only (in a state with no income tax, or one which doesn't allow deductions for mortgage interest), 3.75% becomes 2.85% after tax. These aren't great returns on an investment with a 26-year duration; paying down the mortgage and buying long-term munis would give a slight gain in current yields but involve a lot more interest-rate risk. Therefore, I wouldn't pay down this mortgage at current bond yields.

I do understand your point.

My position -since I have never been a top earner and highest salary was 110k - is to keep expenses low. For my retirement years. The smaller the outgoing money the less I need from retirement accounts. This is a conservative stance and I feel quite secure in it. I like feeling secure.

Winning the game for me is a comfortable home and being able to pay my expenses and have a bit of fun money too.

[JoeRetire]

When I retire my tax rate will be lower for sure. So the after-tax-deduction effective date for my mortgage will be higher.

I don't know what that means. A change in the date for your mortgage?

I think that is a factor of common wisdom to pay off mortgage by retirement.

So you will pay off the mortgage due to "common wisdom"? Okay.

[JoeRetire]

My position -since I have never been a top earner and highest salary was 110k - is to keep expenses low. For my retirement years. The smaller the outgoing money the less I need from retirement accounts. This is a conservative stance and I feel quite secure in it. I like feeling secure.

A feeling of security is sometimes worth spending more than necessary.

Winning the game for me is a comfortable home and being able to pay my expenses and have a bit of fun money too.

Fair enough.

I suspect you could have a comfortable home, pay your expenses, and have a bit of fun money by keeping your money invested rather using it to pay off your mortgage. But if it makes you that much more comfortable to have no mortgage along with less liquidity and a smaller nest egg, then choosing to pay it off makes sense.

[casaver]

haha, rate, not date. typo.

When I retire, I will live on withdrawing from my saving. my marginal tax rate will be much lower than today. Isn't it common for most of the people? I am in high tax bracket with all income from w-2, saving a big portion of my after-tax income. when I retire, I can manage tax better with mostly investment income and withdrawals from retirement accounts. And I will need barely half of today's income with kids gone, no need to save, no mortgage.

[casaver]

Dang can't imagine the property taxes on that.

not bad. I think OP is paying 8k a year because it is ~1.2% on the purchase price. Rent is certainly so much higher.