Stop extra mortgage payment and put into taxable account?

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kilkoyne
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Stop extra mortgage payment and put into taxable account?

Post by kilkoyne »

I have been paying an extra $500 month towards my principal on my mortgage for the past few years. If I continue so I'd have my mortgage paid off in appr 10 years which is close to retirement age. Mortgage interest is 3.5%.

With this current downtrend I thought I'd buy VFIAX shares in my taxable account with the $500 instead. (I wanted to do the mutual fund so I can just set up automatic buys every two weeks and not worry about timing the market).

Over a 10 year period I'm going to "assume" VFIAX would be a better option. I also won't "need" to pull from my taxable account in 10 years as my pension and SS would provide me the minimum to get by for a number of years if needed.

Should I put the extra $500 into the market or keep paying extra towards mortgage? Thanks
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eye.surgeon
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Re: Stop extra mortgage payment and put into taxable account?

Post by eye.surgeon »

Financially probably better off investing that extra payment although it's unknowable. Psychologically, being mortgage-free has a significant non-financial reward. I'm still making extra mortgage payments.
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Re: Stop extra mortgage payment and put into taxable account?

Post by bradpevans »

kilkoyne wrote: Thu Dec 20, 2018 4:26 pm I have been paying an extra $500 month towards my principal on my mortgage for the past few years. If I continue so I'd have my mortgage paid off in appr 10 years which is close to retirement age. Mortgage interest is 3.5%.

With this current downtrend I thought I'd buy VFIAX shares in my taxable account with the $500 instead. (I wanted to do the mutual fund so I can just set up automatic buys every two weeks and not worry about timing the market).

Over a 10 year period I'm going to "assume" VFIAX would be a better option. I also won't "need" to pull from my taxable account in 10 years as my pension and SS would provide me the minimum to get by for a number of years if needed.

Should I put the extra $500 into the market or keep paying extra towards mortgage? Thanks
I'm strongly in the invest the $500 rather than pay down:
a) your money is in the market sooner
b) your money is more liquid in the market than in your house
c) your retirement money / long term money will most likely be invested (much?) longer than time left on mortgage
d) paying it down doesn't improve your cash flow (paying it OFF is different)
chevca
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Re: Stop extra mortgage payment and put into taxable account?

Post by chevca »

I like the think of a few as three. So, a quick check show the S&P 500 was at 2005 and change on 12/18/15. How do you possibly think you were good to go throwing $500 extra at the mortgage since then and now think you should stop because the S&P 500 is at 2467 and change on 12/20/18???

If the plan was to pay off the mortgage aggressively, stick with that plan, IMO.
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kilkoyne
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Re: Stop extra mortgage payment and put into taxable account?

Post by kilkoyne »

The plan to pay off the mortgage early was in place before I understood long-term investing. I've educated myself enough to where I understand that markets are buy/hold for me and I'm in it for the long run (likely won't be pulling anything from taxable for another 12+ years).

I know there are no guarantees but given past history tells me I'm better off in the markets. On the other hand I don't know if I'm trying to "time the market" by putting money into the markets or I'm just more knowledgeable than I have been in the past.

I'm the worst "investor". Sold 1st house right before "boom". Bought second house right before bust. Got burned buying gold. But some FB because everyone said I couldn't go wrong and we saw what happened there. I'm probably behind overall in 401k because I listened to "market timers".

I started aggressively paying down mortgage because I lost money no matter what I did. I'm also trying now to follow buy/hold strategy buying index funds and not worrying about it. I still can max out my retirement and add to my taxable while putting extra money towards mortgage so I guess I should be happy I can even afford to this.
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Jerry55
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Re: Stop extra mortgage payment and put into taxable account?

Post by Jerry55 »

In 1992, I had a 15 yr mortgage, but continued to invest in my Thrift Savings Plan (TSP) but wanted to accelerate the end of payments as much as possible. At that time, I was 37 yrs old, and could retire @ age 55 (in 2010). So I added an additional payment per year, breaking it up into 12 monthly installments. By doing so, I paid off the mortgage in 2005 (my birthday present to myself) at age 50.

At that point, I was able to up my retirement contributions to the "over 50" value, but continued to work until age 57.
My point is that....I was extremely happy to NOT have any house payments so early in life, and because I worked an additional 2 years, I wound up saving even more. I just hit year 6 of retirement recently, and have conversations with some of my other retired co-workers who WISHED they had done what I did, but that's water under their bridge now.

In the end, my mental happiness only grew, and putting it into the market, could have wound up like the stock market is today. Possible losses.

So, what's important to you ? Money or ??? Good Luck.
Retired CSRS on 12/19/2012 @ age 57 w/39 years | Good Bye Tension, Hello Pension !!!
DSInvestor
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Re: Stop extra mortgage payment and put into taxable account?

Post by DSInvestor »

kilkoyne wrote: Thu Dec 20, 2018 5:59 pm
I started aggressively paying down mortgage because I lost money no matter what I did. I'm also trying now to follow buy/hold strategy buying index funds and not worrying about it. I still can max out my retirement and add to my taxable while putting extra money towards mortgage so I guess I should be happy I can even afford to this.
bold = my emphasis.

If you can afford to max out retirement accounts, add to taxable and make extra principal payments, you're in great shape. Taxable investing and accelerated mortgage payments don't have to be mutually exclusive. Do a little bit of both. This way you're not going to be 100% wrong depending on how things turn out. Attack both goals simulataneously and you have liquidity in the taxable account if needed and you also move up your mortgage payoff date.

I did both. I automated everything. I altered my mortgage auto debit payment to include extra principal every month. I also used automated monthly transactions to buy tax efficient funds in my taxable account.
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Re: Stop extra mortgage payment and put into taxable account?

Post by willthrill81 »

bradpevans wrote: Thu Dec 20, 2018 5:09 pm
kilkoyne wrote: Thu Dec 20, 2018 4:26 pm I have been paying an extra $500 month towards my principal on my mortgage for the past few years. If I continue so I'd have my mortgage paid off in appr 10 years which is close to retirement age. Mortgage interest is 3.5%.

With this current downtrend I thought I'd buy VFIAX shares in my taxable account with the $500 instead. (I wanted to do the mutual fund so I can just set up automatic buys every two weeks and not worry about timing the market).

Over a 10 year period I'm going to "assume" VFIAX would be a better option. I also won't "need" to pull from my taxable account in 10 years as my pension and SS would provide me the minimum to get by for a number of years if needed.

Should I put the extra $500 into the market or keep paying extra towards mortgage? Thanks
I'm strongly in the invest the $500 rather than pay down:
a) your money is in the market sooner
b) your money is more liquid in the market than in your house
c) your retirement money / long term money will most likely be invested (much?) longer than time left on mortgage
d) paying it down doesn't improve your cash flow (paying it OFF is different)
Even though we're aggressively paying off our mortgage directly, I must say that this logic is very compelling. If we weren't going to be paying our mortgage off soon (i.e. projected 16 months), we'd probably invest the money in a taxable account as a 'sinking fund' for paying off the mortgage down the road.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Stop extra mortgage payment and put into taxable account?

Post by grabiner »

kilkoyne wrote: Thu Dec 20, 2018 4:26 pm I have been paying an extra $500 month towards my principal on my mortgage for the past few years. If I continue so I'd have my mortgage paid off in appr 10 years which is close to retirement age. Mortgage interest is 3.5%.
See Paying down loans versus investing on the wiki.

If you are deducting the interest, it's not worth paying down; you can earn a higher return without taking more risk at 3.12% on Admiral shares of Vanguard Long-Term Tax-Exempt.

If you aren't deducting the intererst, then at a 3.5% rate, it's probably a better investment to buy a risk-free 10-year "bond" with a mortgage payment than to buy a low-risk bond fund. And that is the right comparison, because...
Over a 10 year period I'm going to "assume" VFIAX would be a better option. I also won't "need" to pull from my taxable account in 10 years as my pension and SS would provide me the minimum to get by for a number of years if needed.
You can look at the same decision in your other investments. If you hold Total Bond Market in your IRA or 401(k), you might well assume that a stock index will beat the 3.31% return there, but you still have some trade-off between risk and return. If you want to take more risk, you would be better off paying down your mortgage, and moving money from bonds to stock in your IRA. This would give you the same stock exposure, but a higher return because you earn 3.5% on the mortgage payoff and avoid taxes on the stock investment.
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kilkoyne
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Re: Stop extra mortgage payment and put into taxable account?

Post by kilkoyne »

Alright, no easy answer but a few options I hadn't thought of so I have some homework to do.

I may change the mortgage payment or I may not. The main thing I'm focusing on is not trying to time markets and avoiding trading or trying to pick individual stocks.
Laundry_Service
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Re: Stop extra mortgage payment and put into taxable account?

Post by Laundry_Service »

You could alternate months to put the money towards your mortgage or buy stocks.
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Re: Stop extra mortgage payment and put into taxable account?

Post by YoungBogle »

Invest, because:
1) mortgage interest deduction
2) mortgage interest rate is low
3) liquidity
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Re: Stop extra mortgage payment and put into taxable account?

Post by chevca »

kilkoyne wrote: Thu Dec 20, 2018 5:59 pm The plan to pay off the mortgage early was in place before I understood long-term investing. I've educated myself enough to where I understand that markets are buy/hold for me and I'm in it for the long run (likely won't be pulling anything from taxable for another 12+ years).

I know there are no guarantees but given past history tells me I'm better off in the markets. On the other hand I don't know if I'm trying to "time the market" by putting money into the markets or I'm just more knowledgeable than I have been in the past.
Okay, I can understand that. The question to ask then is, if the market shoots back up to new highs, do you stop throwing extra at investing and start paying down the mortgage again? If not and the plan is to just keep investing, then go for it. If you think you will just go back and forth between the two, I'd say keep paying down the mortgage. You're just more likely to be wrong more than right if you go back and forth. No offense, just that we can't time or predict that stuff well enough.

Also, how is this money invested? If it's 12 years away or whatever and say, 60/40, it might not be that easy to beat a 3.5% after taxes over the next decade or so. If one believes predictions.
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Re: Stop extra mortgage payment and put into taxable account?

Post by willthrill81 »

marstaton4 wrote: Thu Dec 20, 2018 7:28 pm You could alternate months to put the money towards your mortgage or buy stocks.
This is good advice. If you're unsure which direction to take with any financial move after carefully considering the matter, engaging in both actions may be the best way to minimize your long-term regret. People too often think in binary terms.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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kilkoyne
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Re: Stop extra mortgage payment and put into taxable account?

Post by kilkoyne »

willthrill81 wrote: Thu Dec 20, 2018 7:33 pm
marstaton4 wrote: Thu Dec 20, 2018 7:28 pm You could alternate months to put the money towards your mortgage or buy stocks.
This is good advice. If you're unsure which direction to take with any financial move after carefully considering the matter, engaging in both actions may be the best way to minimize your long-term regret. People too often think in binary terms.
Thinking I may split the $500 to $250 stock/$250 mortgage which is essentially the same as alternating months.

I really need to come up with an investment policy statement for myself and stick to it.
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Re: Stop extra mortgage payment and put into taxable account?

Post by willthrill81 »

kilkoyne wrote: Thu Dec 20, 2018 7:47 pm
willthrill81 wrote: Thu Dec 20, 2018 7:33 pm
marstaton4 wrote: Thu Dec 20, 2018 7:28 pm You could alternate months to put the money towards your mortgage or buy stocks.
This is good advice. If you're unsure which direction to take with any financial move after carefully considering the matter, engaging in both actions may be the best way to minimize your long-term regret. People too often think in binary terms.
Thinking I may split the $500 to $250 stock/$250 mortgage which is essentially the same as alternating months.

I really need to come up with an investment policy statement for myself and stick to it.
Yep. :sharebeer
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Stop extra mortgage payment and put into taxable account?

Post by grabiner »

YoungBogle wrote: Thu Dec 20, 2018 7:30 pm Invest, because:
1) mortgage interest deduction
2) mortgage interest rate is low
3) liquidity
Is there still a deduction? My estimate is that the mortgage is worth paying down if the interest is not deductible, but investing makes more sense if the interest is deductible. (I don't need liquidity myself, but I won't pay down my mortgage because I have an even lower rate and I do still deduct all the interest.)
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Re: Stop extra mortgage payment and put into taxable account?

Post by stan1 »

There's no right or wrong answer.

We maxed out our retirement accounts and built a six figure taxable investing account then we started adding 1 then later 2 extra mortage payments each year until we finally decided to simply pay it off once the value of the mortgage got to be about 5% of our net worth.

I would do the same again. Others would keep a mortgage for the rest of their lives. Still others would pay off their mortgage before maxing out retirement accounts. Those are extremes. There's many shades of gray for balance in the middle. An argument can be made for any of those based off your personal willingness to accept risk.
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Re: Stop extra mortgage payment and put into taxable account?

Post by Max The Dog »

Pay that mortgage every two weeks. You accomplish the same thing as paying the extra money, but you won't notice it. You'll probably be able to put the extra cash in the market too.
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Re: Stop extra mortgage payment and put into taxable account?

Post by Flyer24 »

kilkoyne wrote: Thu Dec 20, 2018 7:47 pm
willthrill81 wrote: Thu Dec 20, 2018 7:33 pm
marstaton4 wrote: Thu Dec 20, 2018 7:28 pm You could alternate months to put the money towards your mortgage or buy stocks.
This is good advice. If you're unsure which direction to take with any financial move after carefully considering the matter, engaging in both actions may be the best way to minimize your long-term regret. People too often think in binary terms.
Thinking I may split the $500 to $250 stock/$250 mortgage which is essentially the same as alternating months.

I really need to come up with an investment policy statement for myself and stick to it.

There is no right or wrong as you are already maximizing your retirement. I like the idea of just splitting 250/250 so you don’t have second thoughts.
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Re: Stop extra mortgage payment and put into taxable account?

Post by bltn »

If I was already maxing my 401k payments and adding to my taxable accounts monthly, and if by adding 500 dollars a month to my prinipal payment on my mortgage I was going to complete my mortgage payments in about 10 years, shortly before I retired, I would continue the no risk course of continuing the mortgage paydown at the current rate. Paying off the mortgage before retirement is huge. Having no mortgage payments will be like having a bigger nest egg. Guaranteed.
Wealth is the balance between expenses and income. Reducing your expenses by prepaying the mortgage is a sure thing. Continue your course.
Good luck.
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Re: Stop extra mortgage payment and put into taxable account?

Post by chevca »

grabiner wrote: Thu Dec 20, 2018 8:12 pm
YoungBogle wrote: Thu Dec 20, 2018 7:30 pm Invest, because:
1) mortgage interest deduction
2) mortgage interest rate is low
3) liquidity
Is there still a deduction? My estimate is that the mortgage is worth paying down if the interest is not deductible, but investing makes more sense if the interest is deductible. (I don't need liquidity myself, but I won't pay down my mortgage because I have an even lower rate and I do still deduct all the interest.)
The mortgage interest deduction was only worth it to the high mortgage, high income, high tax bracket folks in the past anyway. It really made very little difference to the majority of home owners anyway. Now, it means even less to even more folks. That is a very weak reason to factor into hanging onto a mortgage, IMO.

Say someone has a 3.5% mortgage rate, but even if it's deductible an they're in the 22% bracket, we should think 3.5% is worth paying down, but 2.7% effective is not worth paying down? I don't see the difference at less than 1%, but maybe that's just me?
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Re: Stop extra mortgage payment and put into taxable account?

Post by HIinvestor »

We were happy to prepay an extra $500 or so/month on our mortgage so it would be fully paid off before H retired. It just felt good knowing our fixed expenses were lowered by the amount of our former monthly mortgage payment. In terms of how shrewd a financial move it was to prepay that aggressively vs invest those funds is something we have NOT run the numbers on, but peace of mind on retiring the mortgage felt and feels great!
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Re: Stop extra mortgage payment and put into taxable account?

Post by Thorsbane »

grabiner wrote: Thu Dec 20, 2018 7:12 pm
kilkoyne wrote: Thu Dec 20, 2018 4:26 pm I have been paying an extra $500 month towards my principal on my mortgage for the past few years. If I continue so I'd have my mortgage paid off in appr 10 years which is close to retirement age. Mortgage interest is 3.5%.
See Paying down loans versus investing on the wiki.

If you are deducting the interest, it's not worth paying down; you can earn a higher return without taking more risk at 3.12% on Admiral shares of Vanguard Long-Term Tax-Exempt.

If you aren't deducting the intererst, then at a 3.5% rate, it's probably a better investment to buy a risk-free 10-year "bond" with a mortgage payment than to buy a low-risk bond fund. And that is the right comparison, because...
Over a 10 year period I'm going to "assume" VFIAX would be a better option. I also won't "need" to pull from my taxable account in 10 years as my pension and SS would provide me the minimum to get by for a number of years if needed.
You can look at the same decision in your other investments. If you hold Total Bond Market in your IRA or 401(k), you might well assume that a stock index will beat the 3.31% return there, but you still have some trade-off between risk and return. If you want to take more risk, you would be better off paying down your mortgage, and moving money from bonds to stock in your IRA. This would give you the same stock exposure, but a higher return because you earn 3.5% on the mortgage payoff and avoid taxes on the stock investment.
With the recent tax law changes, a large swath of individuals will no longer qualify for the interest deduction. Something to consider.

Also, I frequently see posters reference 10-year bonds beating the 3.5% rate... However, I never see anyone mention that you will get taxed on the interest income, so your effective rate must be even higher (3.5% + (22% * 3.5%) + desired margin to make this worthwhile)
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Re: Stop extra mortgage payment and put into taxable account?

Post by barnaclebob »

Cash flow is king in retirement IMO. Our mortgage P+I is about 40% of our expenses each month. It will be a great feeling to pay that off in about 10 to 15 years depending on how much extra we are able to throw at it. Once the house is paid off we'll be very well positioned to be retired by age 50 assuming nothing too insane happens with the stock and bond markets.
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Re: Stop extra mortgage payment and put into taxable account?

Post by grabiner »

chevca wrote: Fri Dec 21, 2018 2:10 am
grabiner wrote: Thu Dec 20, 2018 8:12 pm
YoungBogle wrote: Thu Dec 20, 2018 7:30 pm Invest, because:
1) mortgage interest deduction
2) mortgage interest rate is low
3) liquidity
Is there still a deduction? My estimate is that the mortgage is worth paying down if the interest is not deductible, but investing makes more sense if the interest is deductible. (I don't need liquidity myself, but I won't pay down my mortgage because I have an even lower rate and I do still deduct all the interest.)
The mortgage interest deduction was only worth it to the high mortgage, high income, high tax bracket folks in the past anyway. It really made very little difference to the majority of home owners anyway. Now, it means even less to even more folks. That is a very weak reason to factor into hanging onto a mortgage, IMO.

Say someone has a 3.5% mortgage rate, but even if it's deductible an they're in the 22% bracket, we should think 3.5% is worth paying down, but 2.7% effective is not worth paying down? I don't see the difference at less than 1%, but maybe that's just me?
The break-even point can easily be between the two. Currently, long-term municipal bonds yield 3.10%. Therefore, in this example, you get a better return from paying down a non-deductible mortgage than from investing in bonds, but a better return from investing in bonds than from paying down a deductible mortgage.
Thorsbane wrote: Fri Dec 21, 2018 10:45 am Also, I frequently see posters reference 10-year bonds beating the 3.5% rate... However, I never see anyone mention that you will get taxed on the interest income, so your effective rate must be even higher (3.5% + (22% * 3.5%) + desired margin to make this worthwhile)
If you aren't maxing out your 401(k) and IRA, then you get a tax-free return on any bonds you buy there. (In a Roth account, the returns are naturally tax-free; in a traditional account, you can contribute more than the dollars you pay out of pocket, and that cancels out the tax cost on withdrawal.)

For taxable accounts, I recommend using municipal bonds for comparison, as in the example above. (Most investors who max out retirement accounts are in a high enough tax bracket that they would use municipal bonds if they hold bonds in a taxable account.)
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Re: Stop extra mortgage payment and put into taxable account?

Post by willthrill81 »

barnaclebob wrote: Fri Dec 21, 2018 11:01 am Cash flow is king in retirement IMO. Our mortgage P+I is about 40% of our expenses each month. It will be a great feeling to pay that off in about 10 to 15 years depending on how much extra we are able to throw at it. Once the house is paid off we'll be very well positioned to be retired by age 50 assuming nothing too insane happens with the stock and bond markets.
As Pete the Planner says, retirement can be successful in two ways: having a lot of money and not needing a lot of money. Obviously, some mix of both works well too.

When our mortgage is paid off, I strongly suspect that we will feel like birds freed from the cage. Is that logical? Perhaps not, but then again it's probably not very logical for a 20 year old to have a 50/50 portfolio either. It's called personal finance for good reason. Individuals have to do what they feel works best for them.
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Re: Stop extra mortgage payment and put into taxable account?

Post by Jerry55 »

One Last Comment...

On My Birthday, I had a "Mortgage Burning Parrr-Taayyy"

Of course, it was a copy of the mortgage, but it went well with the BBQ Ribs and such.

Just Think about it....your very own Par-Tay ! :sharebeer
Retired CSRS on 12/19/2012 @ age 57 w/39 years | Good Bye Tension, Hello Pension !!!
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kilkoyne
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Re: Stop extra mortgage payment and put into taxable account?

Post by kilkoyne »

Spoke with the bank today. At $300 extra towards principal I'd be paid off in 12/26 (8 years) and I'd be close to 62 y/o which would be my earliest retirement date.

With my mortgage paid off I could easily live off of SS, rental income, and my small pension without having to touch my 401k or taxable accounts.

I like this option because my earliest retirement date would not be contingent on future market returns. :happy
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Re: Stop extra mortgage payment and put into taxable account?

Post by grabiner »

kilkoyne wrote: Sat Dec 22, 2018 1:55 am Spoke with the bank today. At $300 extra towards principal I'd be paid off in 12/26 (8 years) and I'd be close to 62 y/o which would be my earliest retirement date.

With my mortgage paid off I could easily live off of SS, rental income, and my small pension without having to touch my 401k or taxable accounts.

I like this option because my earliest retirement date would not be contingent on future market returns. :happy
If you buy bonds instead, your retirement date will not be any more dependent on market returns. On the date that you would have otherwise paid off your mortgage, you will have a bond portfolio of value close to your mortgage balance, so that you can choose to pay off the mortgage then. Whether this is better or worse depends on whether the bond portfolio grows faster or slower than the mortgage. (And whether you want to pay off the mortgage then depends on interest rates at the time; if rates rise so that you have a portfolio of bonds yielding 5% and a 3.5% mortgage, you will happily take the bond interest.)
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