I will pay off mortgage at 40. What next?

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Lyonsguy
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I will pay off mortgage at 40. What next?

Post by Lyonsguy » Wed Apr 19, 2017 10:14 pm

So I'm 38 and will be paying off my mortgage in about 2 years. I'd like to get some feedback from others who are on track or have already paid off mortgage pretty early in life's bout what they did after paying off mortgage. Maybe I'm complicating things but I'm also looking outside the box from standard answers.

Here is my situation. 38 married 4 kids age 1,3,5,7. Wife is getting her masters in nursing and will be done in 1 year. Savings rate will be about 40k/year (this year it was mortgage, extra mortgage, solar panels, and tuition for the wife's masters degree) and 9k in 401k through employer (so 49k total).

I don't love the stock market but think of it as a profitable love/hate and figure diversification includes stocks market, but other other investments as well (even side small businesses that I build up).

My question to everybody is what was it like to transition from a guaranteed rate of return (paying off mortgage early) to a variable and more risky investments that you actually have to plan for. I guess I'm feeling a little hesitant by switching from an obvious investment strategy (early mortgage, wife's' masters) to one that requires a few more choices (529, land, IRA, mutual funds, sticks, etc.).

Also, I realize that my expenses will go up as kids grow, but also know my wife's salary has an upside of 30k/year additional after the degree (if she decides to ever work 40 hours, as she is now very part time as a nurse).

mhalley
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Re: I will pay off mortgage at 40. What next?

Post by mhalley » Wed Apr 19, 2017 10:54 pm

I put the money I had been paying toward the mortgage into a taxable brokerage account. I was already maxing retirement accounts. I beefed up my granddaughters 529 a little.
Some like real estate, but I never had any desire to be a landlord.There are many other options, depending on what your goals are. A vacation home that you plan on retiring to would be another possibility.
Some other options:
Max out all retirement accounts (401k, Roth, hsa)
Beef up emergency funds
New car fund
Home renovation/maintenance fund (roof,hvac, new kitchen/br, etc
Vacation fund
Last edited by mhalley on Wed Apr 19, 2017 11:02 pm, edited 1 time in total.

emoore
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Re: I will pay off mortgage at 40. What next?

Post by emoore » Wed Apr 19, 2017 11:01 pm

Max out 401k and Roth IRAs.

majiaknight
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Re: I will pay off mortgage at 40. What next?

Post by majiaknight » Thu Apr 20, 2017 12:50 am

Check this webpage to prioritize investments after paying off mortgage:
https://www.bogleheads.org/wiki/Priorit ... nvestments

You have 4 lovely kids so you need a lot of money (liquid assets excluding your primary house) to support your large family for the next 18 years.

inbox788
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Re: I will pay off mortgage at 40. What next?

Post by inbox788 » Thu Apr 20, 2017 2:26 am

That's great not to have a mortgage at such a young age. You're doing well for yourself. What is not clear is whether you're in a low cost of living area or high cost of living area and whether the home is $150k vs $750k.

How old were you when you bought the home? I'm assuming you were around 25-30, and you could replicate the purchase in a similar timeframe. Faster if you collect rent. Or you could throw $50k/year into the market and in 10 years, you will most likely have over $750k+ saved up. BTW, the market is risky, but buying real estate is also risky. While paying off a mortgage is a fixed return, the value of the real estate can vary as those that went underwater during the recent crisis can attest to.

Do you have emergency fund, HSA, term life insurance, pension, retirement plan, college savings or other debt?

tigermilk
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Re: I will pay off mortgage at 40. What next?

Post by tigermilk » Thu Apr 20, 2017 5:57 am

Congrats. Paid my house off around your age and have been without a mortgage for nearly a decade. What did we do? More taxable investing, took more vacations, increased what we'd normally spend on a car, built up the savings account more, and in general just become stress-free in life. Was able to cash flow expenses like new flooring for the house, that new, expensive front and back door that wasn't really necessary but made the house look better, buy good seats for season tickets to some of the local arts events. In other words, after paying off the debt, we've been paying ourselves back through better enjoyment of life and what is has to offer. Nothing wrong with treating yourself for all your hard work.

mortfree
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Re: I will pay off mortgage at 40. What next?

Post by mortfree » Thu Apr 20, 2017 9:39 am

Congrats. I paid mine off last year at Age 39. what have I done since?

Maxed my 401k in 2016 for the first time. I started maxing the Roth in 2015.

Contributed to my wife's Roth IRA for 2016.

Added more to my taxable account.

Added to the downpayment on my wife's vehicle.

Small home improvement projects.

Always looking for more ideas as to what to do as well so I'll hope there are more replies, but given the posts on here I think we are in the minority for paying off a home this early - everyone pays off their consumer debt first and can't imagine paying off the mortgage b/c of the tax deduction and "real" interest rate.

Lyonsguy
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Re: I will pay off mortgage at 40. What next?

Post by Lyonsguy » Thu Apr 20, 2017 9:42 am

tigermilk wrote:Congrats. Paid my house off around your age and have been without a mortgage for nearly a decade. What did we do? More taxable investing, took more vacations, increased what we'd normally spend on a car, built up the savings account more, and in general just become stress-free in life. Was able to cash flow expenses like new flooring for the house, that new, expensive front and back door that wasn't really necessary but made the house look better, buy good seats for season tickets to some of the local arts events. In other words, after paying off the debt, we've been paying ourselves back through better enjoyment of life and what is has to offer. Nothing wrong with treating yourself for all your hard work.

This kind of what I'm thinking. I want to reduce stress mostly, and also keep my foot on the gas investment wise as well. My dad worked 60-80 hours a week (airline and dentist no kidding) and held real estate at the same time and is doing well but was stressed and under slept his whole life. I'm "designing" my life style and want to plan ahead and make the decisions of stress and work and retirement with an active consideration rather than autopilot (like my dad did by burying his head in the sand and just working non stop). Maybe I have part younger generation in me, but I don't want to just work until I die with millions I don't really need (and which could spoil my kids).

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MnyGrl
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Re: I will pay off mortgage at 40. What next?

Post by MnyGrl » Thu Apr 20, 2017 9:48 am

majiaknight wrote:Check this webpage to prioritize investments after paying off mortgage:
https://www.bogleheads.org/wiki/Priorit ... nvestments

You have 4 lovely kids so you need a lot of money (liquid assets excluding your primary house) to support your large family for the next 18 years.
Agreed, are you planning to help the kids with college? Four 529 plans maxed out should take care of your excess for a while. :happy

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DaftInvestor
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Re: I will pay off mortgage at 40. What next?

Post by DaftInvestor » Thu Apr 20, 2017 10:01 am

Sounds like you expect that after your wife gets her degree your household income will increase putting you, probably, in a higher tax bracket. Thus - you want to save - but also want to avoid (or defer) taxes on growth of your money as much as possible.
Try to max out tax-deferred retirement accounts and, provided you plan on paying for kids colleges, put money into 529 accounts for each child. 529 plans are a great deal if you plan on funding college - even if you don't get a state deduction you will enjoy tax-free growth of your money.

donall
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Re: I will pay off mortgage at 40. What next?

Post by donall » Thu Apr 20, 2017 10:25 am

Wow, your wife takes care of 4 young kids, works part-time, and goes to school? Buy her a new car, take vacations for two, and double the date nights. I hope you have lots of life and disability insurance. Start a 529 account, as one or more of your children will use it.

TheJoker
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Re: I will pay off mortgage at 40. What next?

Post by TheJoker » Thu Apr 20, 2017 10:33 am

REFINANCE !!!!! For those of you that pay off your mortgage, lets look at my avenue to financial security. Borrowed money is tax free. I continue to borrow (mortgage) at 4% and invest in the stock market with my return of 8 to 10% return over the past 10 years. (6 to 8% long term in a simple 500 index fund) If invested properly, my dividends cover my mortgage payment and dividends are only taxed at a 15% (max 20% rate). I am guessing that your income tax rate is more than 20% particularly if you have state income tax. Additionally, the mortgage interest is a itemized deduction on your income tax. I know that 90% of you will think I am crazy, but it has worked for me over the past 40 years. When a lender asked me if I wanted a 40 year mortgage, I stated that "only if they could not offer a 50 year mortgage". To me ......it's all about cash flow and minimizing income taxes. And my stock portfolio equity continues to grow without income tax until the stock is sold. But once again....... why sell when I can borrow (refinance) tax free money against my home. Just a crazy old man, but it works for me.

Grt2bOutdoors
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Re: I will pay off mortgage at 40. What next?

Post by Grt2bOutdoors » Thu Apr 20, 2017 10:34 am

You can contribute up to $18K pre-tax in your 401k plan. I'd increase your tax deferral into the plan up to the max permitted. You did not state your asset allocation, but you can tailor the asset allocation to reduce the volatility of your portfolio while maximizing returns.

What to do with the rest of your excess? Take a vacation with the wife and kids, you should celebrate your accomplishments.
Open a 529 plan, if you haven't already.
Save the remainder in a taxable account - it doesn't have to be 80/20, 70/30, 60/40, it could be 50/50 and you'd likely be just fine.

I bet you can just taste it - the feeling of being debt free. :sharebeer Just make sure you continue to pay your taxes on time - government's want their taxes paid on time.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Grt2bOutdoors
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Re: I will pay off mortgage at 40. What next?

Post by Grt2bOutdoors » Thu Apr 20, 2017 10:40 am

BhamETFs wrote:REFINANCE !!!!! For those of you that pay off your mortgage, lets look at my avenue to financial security. Borrowed money is tax free. I continue to borrow (mortgage) at 4% and invest in the stock market with my return of 8 to 10% return over the past 10 years. (6 to 8% long term in a simple 500 index fund) If invested properly, my dividends cover my mortgage payment and dividends are only taxed at a 15% (max 20% rate). I am guessing that your income tax rate is more than 20% particularly if you have state income tax. Additionally, the mortgage interest is a itemized deduction on your income tax. I know that 90% of you will think I am crazy, but it has worked for me over the past 40 years. When a lender asked me if I wanted a 40 year mortgage, I stated that "only if they could not offer a 50 year mortgage". To me ......it's all about cash flow and minimizing income taxes. And my stock portfolio equity continues to grow without income tax until the stock is sold. But once again....... why sell when I can borrow (refinance) tax free money against my home. Just a crazy old man, but it works for me.
Dividends are taxed at 15-20% but that is before the 3.8% Investment Tax and before the additional 0.9% Medicare tax and before the state/city gets their hands on their portion. It's not tax free - it's tax deductible, but if you live in a state like New Jersey you'll find NJ doesn't let you deduct the interest. Maybe your theory works in a state like Florida or Alaska, it doesn't really work in a high tax state like mentioned above. So far as your dividends covering mortgage interest - over the short life time of my mortgage I shelled out high five figures in interest that can never be recouped - it's a sunk cost and that was the after tax portion of it. Dividends are fully taxable, further, do you know how much principal you'd need invested to earn high five figures in dividends after-tax? You'd have to be awfully wealthy or highly compensated to have invested so much. If your job is not stable, I hardly believe you'd want to be levered up. Those I know who levered up are rueing that decision to this day.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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englishgirl
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Re: I will pay off mortgage at 40. What next?

Post by englishgirl » Thu Apr 20, 2017 10:50 am

It hasn't been very long for me/us, but so far we have built up to maximizing my 401k and SEP IRA, and my spouse's IRA (I was already maximizing my IRA). Next up will probably be dropping my income by working less, so I don't necessarily think I will be venturing into a taxable account - will probably bump up the cash savings so I have a nice big emergency fund to buffer the switch to all self-employed income. Oh, and we're taking a nice vacation this year but then again, that was in the plan anyway.
Sarah

FloRidaRocky
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Re: I will pay off mortgage at 40. What next?

Post by FloRidaRocky » Thu Apr 20, 2017 10:58 am

If you're not already maxing out the 401k, that's a guaranteed 25-28% return in annual income tax savings.

Mr.BB
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Re: I will pay off mortgage at 40. What next?

Post by Mr.BB » Thu Apr 20, 2017 2:40 pm

I love not having a mortgage. Just finished paying off last year.
It was a relatively small mortgage payment and our tax write off only came to a couple of hundred dollars on our tax return for carrying a mortgage.
This is what we have done with our money that normally would of gone to the bank
1) 27% - we keep in our checking acct just for groceries / bill paying - basically to reward ourselves to make life just a little easier
2) 35% - we put into our Roth accounts -(extra besides our normal contributions)
3) 38% - We maxed out my wife's 401k with this extra money. So we keep this extra money in our checking account to make up the difference of the extra money that is taken out every month in my wife's 401k (which also gives us an extra $1200 -$1400 a year in company matching)

The best part is not having a payment every month! Feels good!
"We are what we repeatedly do. Excellence, then, is not an act, but a habit."

LateStarter1975
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Re: I will pay off mortgage at 40. What next?

Post by LateStarter1975 » Thu Apr 20, 2017 2:48 pm

Save at least 75% of it into a taxable account and keep the rest for enjoyment, and other miscellaneous spending
Debt is dangerous...simple is beautiful

Jack FFR1846
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Re: I will pay off mortgage at 40. What next?

Post by Jack FFR1846 » Thu Apr 20, 2017 2:59 pm

Paid off the mortgage at 45 and was VERY averse to the stock market. Upped our 401k's a bit and back then, savings bonds were a viable option because we could buy paper bonds online using a credit card with a $30k per person max and 6 month wait period to cash. So all of our extra money went to that, using prior year savings bonds to make up the difference until we no longer needed to sell anymore. Of course that's totally squashed now.....but you could still get $60k worth a year, if you're looking for no risk investment.

Oh, and Ally has upped their 5 year CD to 2.25% if you need more no risk investment space. Cap One 360 is 2.3% just to outdo Ally.
Bogle: Smart Beta is stupid

deltaneutral83
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Re: I will pay off mortgage at 40. What next?

Post by deltaneutral83 » Thu Apr 20, 2017 3:15 pm

FloRidaRocky wrote:If you're not already maxing out the 401k, that's a guaranteed 25-28% return in annual income tax savings.
I would like to point out that for me, it's nowhere close to this as my 401k has high ER's over 1. Average ER is 1.14% for my 401k portfolio. I could do all this for 0.10% on my own in a taxable account. I've run the #s and I've used a 9% base rate for 40 years in a taxable with my bracket vs. 7.96%(so 9%-1.04% = 7.96%) in my 401k. Now this assumes the two portfolios return the same rate so there's a small issue there but it would take me more than 25 years for the taxable brokerage account to take the lead over the 401k. I also did not factor in taxes on capital gains and divs on the taxable brokerage account hypothetical, too much work for me to do that but that would maybe add another few years and make it closer to 30 for it to get ahead. I envy those with decent ER's in their 401. Still a good deal for me though even with high ERs.

bloom2708
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Re: I will pay off mortgage at 40. What next?

Post by bloom2708 » Thu Apr 20, 2017 3:25 pm

deltaneutral83 wrote:
FloRidaRocky wrote:If you're not already maxing out the 401k, that's a guaranteed 25-28% return in annual income tax savings.
I would like to point out that for me, it's nowhere close to this as my 401k has high ER's over 1. Average ER is 1.14% for my 401k portfolio. I could do all this for 0.10% on my own in a taxable account. I've run the #s and I've used a 9% base rate for 40 years in a taxable with my bracket vs. 7.96%(so 9%-1.04% = 7.96%) in my 401k. Now this assumes the two portfolios return the same rate so there's a small issue there but it would take me more than 25 years for the taxable brokerage account to take the lead over the 401k. I also did not factor in taxes on capital gains and divs on the taxable brokerage account hypothetical, too much work for me to do that but that would maybe add another few years and make it closer to 30 for it to get ahead. I envy those with decent ER's in their 401. Still a good deal for me though even with high ERs.
I think you are missing the point of a pre-tax 401k. Even with a 1.0% expense ratio, it takes ~$30k pre-tax to invest $18k post-tax in a taxable account.

It takes $18k of pre-tax money to invest $18k (plus any match dollars). You lower your AGI by $18k. Pay the tax 20 years from now. Invest more now. If you max pre-tax 401k + Roth IRA each year, then move to HSA (if available). Then taxable.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

deltaneutral83
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Re: I will pay off mortgage at 40. What next?

Post by deltaneutral83 » Thu Apr 20, 2017 3:37 pm

bloom2708 wrote:
I think you are missing the point of a pre-tax 401k. Even with a 1.0% expense ratio, it takes ~$30k pre-tax to invest $18k post-tax in a taxable account.

It takes $18k of pre-tax money to invest $18k (plus any match dollars). You lower your AGI by $18k. Pay the tax 20 years from now. Invest more now. If you max pre-tax 401k + Roth IRA each year, then move to HSA (if available). Then taxable.
I assumed a 30% combined Fed/State tax rate in my example. Your example includes 40% (12/30). It's always going to be more advantageous the higher your current marginal tax rate to go the 401k route (even assuming the high ER's) for the monies invested beyond the match. I don't know if a 40% combined tax rate in a taxable account would ever catch up to a 401k even with the high ER's. I'd have to crunch the #s though.

bloom2708
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Re: I will pay off mortgage at 40. What next?

Post by bloom2708 » Thu Apr 20, 2017 3:47 pm

deltaneutral83 wrote:
bloom2708 wrote:
I think you are missing the point of a pre-tax 401k. Even with a 1.0% expense ratio, it takes ~$30k pre-tax to invest $18k post-tax in a taxable account.

It takes $18k of pre-tax money to invest $18k (plus any match dollars). You lower your AGI by $18k. Pay the tax 20 years from now. Invest more now. If you max pre-tax 401k + Roth IRA each year, then move to HSA (if available). Then taxable.
I assumed a 30% combined Fed/State tax rate in my example. Your example includes 40% (12/30). It's always going to be more advantageous the higher your current marginal tax rate to go the 401k route (even assuming the high ER's) for the monies invested beyond the match. I don't know if a 40% combined tax rate in a taxable account would ever catch up to a 401k even with the high ER's. I'd have to crunch the #s though.
Sounds good. Just information. All advice or ideas here are "for information only". The assumption is your tax bracket (in retirement) will be lower than 28, 33, 35. That is the case for many, but you may plan to save enough to be up in a higher tax bracket. It isn't a slam dunk, but I can still think you are undervaluing the value of pre-tax 401k.

My company matches $9,000 when I put in $18k. Not a much easier way to make $9,000. Just save $18,000 each year.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

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