Once you have an emergency fund, are maxing out your 401(k) and Roth, and have no other debt than your mortgage, should you pay your mortgage off or invest in taxable because "it will still return more than the interest on your mortgage"?
For the reasoning about why you should invest in retirement before paying off the mortgage, especially if you're young, is well illustrated in this video (skip 10 1:30 if you want) https://www.youtube.com/watch?v=36BN42mat10
But I am already "maxing out everything else", so I'm delving into what to do with my "excess income" and why. Since as usual, the answer is probably "it depends", I'll share some basic info about my situation:
- MFJ, early 50s, planning on retiring in 10 years but would love to have the option/security to do so earlier. planning on taking SS at 70
- Mortgage is 15-year at 3.5%, with $88K principal & 9 years left (March 2030). We are currently paying bi-weekly instead of monthly, which is the equivalent of 2 extra payments per year, so the actual payoff date will be Jan 2029. I don't plan on retiring before the mortgage is paid off.
- P&I is $1120/month. I am currently putting $1500/month into a taxable account (60/40 AA, with the bond portion being roughly 20% in muni bonds (MUB), 12% US total bonds (BND), 7% int'l bonds (BNDX) and 1% cash (because I was told by an advisor I needed 1-2% in "frictional cash". This is in addition to my ER)
- I used to itemize my taxes, but the last few years TurboTax had me take the standard deduction, so I'm not even sure "mortgage interest is tax advantaged" is true anymore.
First stop, the Boglehead wiki says: https://www.bogleheads.org/wiki/Priorit ... nvestments
- 8. Invest inside a taxable investing account. In certain circumstances, a Non-deductible traditional IRA and/or variable annuity may be better than a taxable account.
- 9. Pay off low-interest debt (eg. most mortgages, some car loans).
Looking at the advice on MrMoneyMustache's site: https://forum.mrmoneymustache.com/inves ... msg1333153
- 7. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.
- 8. Invest in a taxable account and/or fund a 529 with any extra.
I wish I really understood what that means. The way I understand it, at a high level, it means if your taxable investment balance is going to grow slower than the mortgage rate, then you're better off taking the 3.5% guaranteed "return" on the mortgage cash.
A 60/40 portfolio has definitely returned more than 3.5% historically, but this is where my heap explodes: the mortgage itself has an 8-year horizon, but the money I invest instead of paying the mortgage has a 10-40 year horizon depending on how I withdraw from my different accounts during retirement, but I suspect taxable is what will be depleted first. Also does the sentence above imply I should look at the returns of the bonds section of the portfolio only?
What's the historical return of bonds (higher than the current T-Bill right?) and is today's TBill price an indication of a bond fund return over the next 10 years?
Here are some options I can think of, and in every case, I'd continue contributing $1500 to "something" every month, and once the mortgage is paid off I contribute the usual $1500 plus the $1120 I now saved in P&I :
- Do nothing, continue paying my mortgage over the next 8 years and invest $1500 at 60/40 in brokerage
- Put the bond portion of the $1500 into the mortgage, i.e. pay an extra $600 a month to the mortgage principal and invest the remaining $900 in the stock portion only of the brokerage (so it would slowly shift over time to a higher stock allocation, so would my entire portfolio, however, the imbalance would be much smaller)
- take the mortgage ($88K) balance out of the brokerage stock portion today and pay off the mortgage immediately (causing the taxable account to snaps to roughly 75/25). I think I don't want to rebalance, or now I am losing the 60/40 return. but then what, put my $1500+$1120 in the taxable account every month and invest only in bonds till I'm back to 60/40? my head hurts!