B4Xt3r wrote: ↑
Wed Oct 23, 2019 7:53 pm
Grt2bOutdoors wrote: ↑
Wed Oct 23, 2019 11:10 am
OP - How old are you? Are you retired?
There is no way I would prepay the mortgage in lieu of pre-tax retirement savings. The amount of tax-deferred or tax-free retirement space is limited each year by law, you should seek to fill that bucket first before prepayment of your mortgage. If you have to make the choice, the retirement plan wins. If you follow Dave Ramsey, then I can see why you are asking this question, but I still recommend your retirement plan coming first.
Could you explain why the retirement plan wins?
1) Each year the amount you can contribute to a retirement plan on either a pre-tax or after-tax basis is capped. If you fail to contribute in 2019, you can not make up for the missed contribution amount in 2020. Let's say in 2019 you are on track to contribute $10K but you instead choose to take a holiday and make up for it in 2020. The max you can contribute is again $19K in 2020 - you fail to play catch-up due to the limitation. You are short $1K.
2) If invested as a traditional pension plan might be, a 60/40 fund might return 7%, this year they are actually returning quite a bit more, but for this example we will use 7%. Your mortgage costs you, 3.5% and part of it is tax-deductible, so let's say your net cost is 2.75%. By funding the retirement plan, your money is growing at a faster rate of return with zero tax implications. The net spread between the fund's return and your after-tax cost is 4.25%. At the end of year 1, retirement account is worth $10,700. In year 2, account is worth $10.700 + another $10,000 in contributions, plus growth. Each subsequent year, compounding will continue to grow, slowly at first, but by year 20-30 you will be surprised just how much it has grown.
3) A dollar saved in a pre-tax or after-tax retirement account today could be worth $7.61, leave it in for 50 years its worth $29.46. Chances are you are not going to withdraw all
of your retirement balances on day 1 of retirement.
4) You could choose to invest part of your money in a taxable account, but you would lose tax deferral benefits on reinvested dividends. That could be your mortgage pre-payment fund, if and when you ultimately decide to pay off the mortgage in full.
5) If you pre-pay your mortgage on a monthly basis, you give up a semi-accessible value in exchange for an illiquid asset (your house). Borrowing from a retirement plan should be considered semi accessible because of the tax implications that could result from having a employer retirement plan loan at the time of job loss. IMO would only recommend pre-paying the mortgage if you are sufficiently liquid and are already able to save for retirement first. Sufficiently liquid - you have a significant pool of readily accessible funds in the event of an economic downturn or emergency without having to resort to taking out leverage (debt) or you have a large amount of monthly disposable income after expenses and your livelihood is secure.