5.6% Mortgage - Pay off early or Invest?
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5.6% Mortgage - Pay off early or Invest?
Hello,
As the title suggests, currently trying to decide what is the better option. my wife and I recently purchased a condo.
Mathematically, I know that SP500 averages 10% a year, so since 5.6% is less, its better to just pay the monthly and invest the rest. However, I am always concerned about market swing and just having a loan is mentally another stressor.
If my mortgage was under 4% I would pay the min and invest, if it was 7% or more, I would pay down asap. But it is right in the middle area.
Any advice? There are rumors of more rate decreases moving forward, do you guys think we will really get back to 4% mortgages?
As the title suggests, currently trying to decide what is the better option. my wife and I recently purchased a condo.
Mathematically, I know that SP500 averages 10% a year, so since 5.6% is less, its better to just pay the monthly and invest the rest. However, I am always concerned about market swing and just having a loan is mentally another stressor.
If my mortgage was under 4% I would pay the min and invest, if it was 7% or more, I would pay down asap. But it is right in the middle area.
Any advice? There are rumors of more rate decreases moving forward, do you guys think we will really get back to 4% mortgages?
Last edited by No_Ragrets on Thu Feb 06, 2025 1:22 am, edited 1 time in total.
- simplesimon
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Re: 5.6% Mortgage - Pay off early or Invest?
How old are you? How much other liquidity do you have?No_Ragrets wrote: Wed Jan 22, 2025 2:23 pm Hello,
As the title suggests, currently trying to decide what is the better option. I recently purchased a one bed condo.
Mathematically, I know that SP500 averages 10% a year, so since 5.6% is less, its better to just pay the monthly and invest the rest. However, I am always concerned about market swing and just having a loan is mentally another stressor.
If my mortgage was under 4% I would pay the min and invest, if it was 7% or more, I would pay down asap. But it is right in the middle area.
Any advice? There are rumors of more rate decreases moving forward, do you guys think we will really get back to 4% mortgages?
The younger you are and less liquidity you have, I would lean towards paying regular payments and building up assets. If 50 years old with plenty of assets, I'd lean towards prepaying the loan.
If you're somewhere in the middle, you can certainly pre-pay half the amount you intend and invest the rest.
Re: 5.6% Mortgage - Pay off early or Invest?
That answer can depend on a lot of things, need a little bit more background info before we could provide meaningful advice I would reckon.
Stuff to think about -
Mortgage balance
Tax rate (Fed/State)
Do you itemize or use standard deduction for taxes
Age
Portfolio balance
I am sure there are plenty of other things to add to the above list, just something quick and off the top of my head.
Stuff to think about -
Mortgage balance
Tax rate (Fed/State)
Do you itemize or use standard deduction for taxes
Age
Portfolio balance
I am sure there are plenty of other things to add to the above list, just something quick and off the top of my head.
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Re: 5.6% Mortgage - Pay off early or Invest?
I wouldn't count on the S&P continuing to perform as it has in the past, let alone the most recent 15 years.
As simon mentioned, a lot depends on your own situation If you are deducting part of your home mortgage, then you need to take that into consideration. If you think that the TCJA will expire at the end of this year, as per the current law, then potentially much more of that mortgage interest would be tax deductible. How valuable that is depends on your marginal tax rate. In general, the higher your marginal tax rate, the most valuable that interest deduction becomes.
If you can deduct your mortgage interest now, or starting in 2026, and you are in the 24% marginal bracket, then that 5.6% interest is only costing you 4.2%. Additionally, that principle and interest you are paying is being reduced each year in real dollars through inflation.
The flip side, is what kind of return would you need on your investment to equal a guaranteed safe, tax free return of 5.6%? In the 24% bracket it would be 7%. I don't know where I can get a 7% absolutely safe return.
I have a mortgage that is only 5%. I am making extra principle payments every month. I'm in the 24% bracket. If TCJA isn't extended, I likely will regret this decision.
As simon mentioned, a lot depends on your own situation If you are deducting part of your home mortgage, then you need to take that into consideration. If you think that the TCJA will expire at the end of this year, as per the current law, then potentially much more of that mortgage interest would be tax deductible. How valuable that is depends on your marginal tax rate. In general, the higher your marginal tax rate, the most valuable that interest deduction becomes.
If you can deduct your mortgage interest now, or starting in 2026, and you are in the 24% marginal bracket, then that 5.6% interest is only costing you 4.2%. Additionally, that principle and interest you are paying is being reduced each year in real dollars through inflation.
The flip side, is what kind of return would you need on your investment to equal a guaranteed safe, tax free return of 5.6%? In the 24% bracket it would be 7%. I don't know where I can get a 7% absolutely safe return.
I have a mortgage that is only 5%. I am making extra principle payments every month. I'm in the 24% bracket. If TCJA isn't extended, I likely will regret this decision.
On investing; I have lots of questions, many opinions, and little knowledge. A dangerous combination. Be warned.
Re: 5.6% Mortgage - Pay off early or Invest?
The math is not that simple, because you are not trying to maximize returns; you are trying to get the optimal trade-off between expected returns and risk. This is probably why you have some bonds; you prefer the low-risk 4.59% on Total Bond Market to the riskier stock returns. If you want to hold more stock, a better way to do this is to sell bonds to buy the stock.No_Ragrets wrote: Wed Jan 22, 2025 2:23 pm Mathematically, I know that SP500 averages 10% a year, so since 5.6% is less, its better to just pay the monthly and invest the rest. However, I am always concerned about market swing and just having a loan is mentally another stressor.
At 5.6%, I would recommend maxing out your IRA and 401(k) in preference to making extra mortgage payments. Paying down the mortgage is a low-risk, long-term return; you can get a low-risk, long-term return of 5.39% in Admiral Shares of Vanguard Long-Term Bond Index. So it costs you almost nothing to invest in that fund in preference to a paydown, and you retain the option of refinancing your mortgage if rates fall, or keeping the low-rate mortgage and investing in higher-yielding bonds if rates rise. (You don't have to invest in that fund, but it is the most natural comparison. Anything else you invest in is a fair trade-off between return and risk. You can invest in shorter-term bonds for less risk, or in stocks for much more risk with the potential of higher returns, depending on your risk tolerance.)
If you are maxing out your retirement accounts, and your mortgage interest isn't deductible, 5.6% tax-free is a very good return on a taxable account, so paying down the mortgage is likely the best investment you can make. If your mortgage interest is partly deductible, I wouldn't pay it down unless you can pay down enough to get into the non-deductible part. (For example, if you are $4000 above the standard deduction, then a $100K paydown eliminates $4000 of deductible interest and then $1600 of non-deductible interest, and any further paydowns will continue to earn 5.6%.)
Re: 5.6% Mortgage - Pay off early or Invest?
+1 to this.grabiner wrote: Wed Jan 22, 2025 11:52 pm
At 5.6%, I would recommend maxing out your IRA and 401(k) in preference to making extra mortgage payments.
If you are maxing out your retirement accounts, and your mortgage interest isn't deductible, 5.6% tax-free is a very good return on a taxable account, so paying down the mortgage is likely the best investment you can make.
Adding HSA to the accounts you should max out contribution to (if available).
This is the exact situation we're in, mortgage rate of 5.625%. We are paying off the mortgage before investing in taxable or the coveted MBR, but we have enough liquidity and a sub 4-year payoff plan.
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Re: 5.6% Mortgage - Pay off early or Invest?
To give a bit of a background, I am 41. I recently got married last year, so the home purchase is a joint purchase with my wife who is 40.
Due to some bad decisions in the past, I do not have a lot of saved up assets, but I have no other debt besides the home, wife makes really good money and had the savings to front the down payment.
Haven't filed taxes yet but we will most likely fall in the 28% bracket. We live in California.
My retirement accounts are pretty low as I restarted my life in 2022 so have been steadily saving since then debt free. My wife was much better, she's been maxing out her 401k and IRA for like 15 years or so now. However since the home purchase, we both have scaled back the 401k to just get the full match.
I think one of the big reasons we are contemplating paying back earlier is neither of us want to have a mortgage payment until we are 70, hopefully we can retire earlier, maybe the 55-60 range. But because the interest rate is neither amazingly good or amazingly bad, was not sure if it was the best decision. Plus economic outlook is always unknown.
Also from my understanding mortgage payment never changes even with early paydown, so the interest will still stay the same regardless, youre basically saving the interest portion of the payments in the back end of the mortgage. Since we just got the house, I'm pretty sure we will qualify for the interest deductions for at least 10 more years since the interest is mostly front loaded on the mortgage amortization schedule.
Last edited by No_Ragrets on Thu Feb 06, 2025 1:24 am, edited 1 time in total.
Re: 5.6% Mortgage - Pay off early or Invest?
This is correct for a fixed-rate mortgage, unless you refinance or recast. In contrast, an adjustable-rate mortgage refinances itself whenever the rate is reset; your payment after this year's reset is determined by this year's balance and the new interest rate. Thus paying down an ARM will reduce your payments, unless you choose to continue to pay the original amount and pay off the ARM earlier.No_Ragrets wrote: Fri Jan 31, 2025 6:07 pm Also from my understanding mortgage payment never changes even with early paydown, so the interest will still stay the same regardless, youre basically saving the interest portion of the payments in the back end of the mortgage. Since we just got the house, I'm pretty sure we will qualify for the interest deductions for at least 10 more years since the interest is mostly front loaded on the mortgage amortization schedule.
Re: 5.6% Mortgage - Pay off early or Invest?
There is no 28% tax bracket. If you are in 24% marginal federal tax bracket and say 10% California marginal tax rate then you are saving $34 in taxes for every $100 contributed to pre-tax 401k.No_Ragrets wrote: Fri Jan 31, 2025 6:07 pm Haven't filed taxes yet but we will most likely fall in the 28% bracket. We live in California.
My retirement accounts are pretty low as I restarted my life in 2022 so have been steadily saving since then debt free. My wife was much better, she's been maxing out her 401k and IRA for like 15 years or so now. However since the home purchase, we both have scaled back the 401k to just get the full match.
I would rather save 34% in tax instead of 5.6% in the interest.
Re: 5.6% Mortgage - Pay off early or Invest?
No_Ragrets<No_Ragrets wrote: Fri Jan 31, 2025 6:07 pm
However since the home purchase, we both have scaled back the 401k to just get the full match.
Given that you do not max up your 401Ks, you are essentially paying 20+% Federal taxes plus state income taxes in order to pay down the 5.6% mortgage.
20+% Federal Taxes plus state taxes is much bigger than 5.6%. So, how does it makes any sense to pay down the mortgage?
You can contribute the money into the 401K and keep it in cash and still ahead of paying the mortgage.
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Re: 5.6% Mortgage - Pay off early or Invest?
You may have already studied the wiki on this topic; if not, it is recommended: https://www.bogleheads.org/wiki/Paying_ ... _investing, paying special attention to "Guidelines for making the choice" and "If the decision is close". Even more relevant is "Funding priority" in this wiki: https://www.bogleheads.org/wiki/Priorit ... nvestments. The BH philosophy and prevailing wisdom is to make paying off the mortgage early a low or no priority. Do all the others first if for no other reason than to benefit from compounding interest in your investments, if not the marginal tax improvement KF pointed out. In 10 years you may thank yourself for doing so. Good luck!
by Hyperchicken » Tue Feb 13, 2024 |
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Re: 5.6% Mortgage - Pay off early or Invest?
While I agree with the conclusion in this situation, this math is not correct; one indication it is not correct is that nobody recommends borrowing on credit cards at 18% so that you can contribute more to a 401(k).babystep wrote: Fri Jan 31, 2025 9:05 pm If you are in 24% marginal federal tax bracket and say 10% California marginal tax rate then you are saving $34 in taxes for every $100 contributed to pre-tax 401k.
I would rather save 34% in tax instead of 5.6% in the interest.
The most important point is that you are comparing a one-time benefit to an annual benefit. The 401(k) gives a one-time benefit from the tax savings (although some of that will be lost in tax when you withdraw); the benefit from the mortgage prepayment is earned every year. This is the reason you should pay off your credit cards in preference to making unmatched 401(k) contributions.
The other issue is that the annual benefit is not the full interest rate. If you could earn the same rate on bonds in the 401(k) as on a mortgage payment, then you would gain nothing by paying down the mortgage with money you could instead invest. With bond yields lower than the mortgage rate, the benefit of the mortgage payment is only the difference between mortgage and bond yields.
Re: 5.6% Mortgage - Pay off early or Invest?
Thank you so much for pointing this out. I indeed ignored those for simplicity.grabiner wrote: Fri Jan 31, 2025 10:30 pmWhile I agree with the conclusion in this situation, this math is not correct; one indication it is not correct is that nobody recommends borrowing on credit cards at 18% so that you can contribute more to a 401(k).babystep wrote: Fri Jan 31, 2025 9:05 pm If you are in 24% marginal federal tax bracket and say 10% California marginal tax rate then you are saving $34 in taxes for every $100 contributed to pre-tax 401k.
I would rather save 34% in tax instead of 5.6% in the interest.
The most important point is that you are comparing a one-time benefit to an annual benefit. The 401(k) gives a one-time benefit from the tax savings (although some of that will be lost in tax when you withdraw); the benefit from the mortgage prepayment is earned every year. This is the reason you should pay off your credit cards in preference to making unmatched 401(k) contributions.
The other issue is that the annual benefit is not the full interest rate. If you could earn the same rate on bonds in the 401(k) as on a mortgage payment, then you would gain nothing by paying down the mortgage with money you could instead invest. With bond yields lower than the mortgage rate, the benefit of the mortgage payment is only the difference between mortgage and bond yields.
I will just add one point that although the tax saving is one time for the 401k but 401k investment does provide annual return/benefit similar to annual benefit from the mortgage prepayment.
Re: 5.6% Mortgage - Pay off early or Invest?
(Edit: I agree with babystep above) The 401(k) benefit is greater than one-time in that it (1) defers the tax and (2) earns compounding interest every year (3) that (can be) greater than (OP's) mortgage interest in the right investment while (4) the mortgage interest is fixed. One should pay off high(er) interest credit cards in preference to making unmatched 401(k) contributions.grabiner wrote: Fri Jan 31, 2025 10:30 pm The most important point is that you are comparing a one-time benefit to an annual benefit. The 401(k) gives a one-time benefit from the tax savings (although some of that will be lost in tax when you withdraw); the benefit from the mortgage prepayment is earned every year. This is the reason you should pay off your credit cards in preference to making unmatched 401(k) contributions.
OP- In my case, I chose to pay off my mortgage 10 years ago, but my circumstances were a bit different. I was already 9 years into the mortgage and had a second mortgage with a balloon coming due in a year I would not have been able to pay off back then. Interest rates were 6.9% and 9.25%. I had a windfall that covered both mortgages AND a lingering psychological factor favoring no mortgage. I'm not second-guessing my decision, but IF I were to do it again, I think I might pay off the second, keep the first, and invest the rest. Everything else equal, I would be right on my retirement target today. While hindsight may be 20/20, unfortunately the butterfly effect blurs the actual outcomes. The other cataract is I didn't know anything about investing or retirement planning 10 years ago, so I might have blown the rest on who knows what. I'll say this: Had I asked this forum what to do with my particular windfall, knowing what I know now, it would have advised NOT to pay off the mortgages. But consulting with wife, parent, trusted friends, and CPA, the decision was unanimous.
Windfalls are a bit different scenario than monthly extra principal payments. I would not miss the opportunity to max out a 401(k) or other tax-advantaged investment vs. just starting a mortgage at 5.9%. This is one of those SWAN vs. FOMO decisions; which one drives you? I'll say something else: The forum advised me to use extra money to payoff early a 4.75% auto loan instead of investing it (I'm already maxing out everything I can). At first I agreed to it, but I question it every month. The good news is I can change my mind and start investing it the first month it keeps me up at night (like it's doing right now!); you can too.
Good luck and rest in peace I mean, SLEEP WELL AT NIGHT!

by Hyperchicken » Tue Feb 13, 2024 |
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- simplesimon
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Re: 5.6% Mortgage - Pay off early or Invest?
It'll make life easier if you view you and your wife's assets and finances together. Your phrasing like "she fronted the down payment", "my life restarted in 2022", and "my wife is much better off" sort of muddies things a bit.No_Ragrets wrote: Fri Jan 31, 2025 6:07 pmTo give a bit of a background, I am 42. I recently got married last year, so the home purchase is a joint purchase with my wife who is 40.
Due to some bad decisions in the past, I do not have a lot of saved up assets, but I have no other debt besides the home, wife makes really good money and had the savings to front the down payment.
Haven't filed taxes yet but we will most likely fall in the 28% bracket. We live in California.
My retirement accounts are pretty low as I restarted my life in 2022 so have been steadily saving since then debt free. My wife was much better, she's been maxing out her 401k and IRA for like 15 years or so now. However since the home purchase, we both have scaled back the 401k to just get the full match.
I think one of the big reasons we are contemplating paying back earlier is neither of us want to have a mortgage payment until we are 70, hopefully we can retire earlier, maybe the 55-60 range. But because the interest rate is neither amazingly good or amazingly bad, was not sure if it was the best decision. Plus economic outlook is always unknown.
Also from my understanding mortgage payment never changes even with early paydown, so the interest will still stay the same regardless, youre basically saving the interest portion of the payments in the back end of the mortgage. Since we just got the house, I'm pretty sure we will qualify for the interest deductions for at least 10 more years since the interest is mostly front loaded on the mortgage amortization schedule.
I can't tell (and maybe you can't either) if you're on track as a household or not. Take a look at everything together. If on a combined basis you're low on liquidity, I would build that back up before pre-paying the loan.
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Re: 5.6% Mortgage - Pay off early or Invest?
Gleaning what I can from your comments, I wouldn't focus on paying off the mortgage, but rather seeking balance. paying down the principal solves fewer things than by saving and investing the money. The net result is the same or similar on your balance sheet, but optionality is broader by not tying up all of your capital in the house.
You are in a marathon, not a sprint. Build up a pace and make adjustments as needed. No reason you can't do both, pay a little extra to the mortgage and concentrate on building up your savings. Think balance.
You are in a marathon, not a sprint. Build up a pace and make adjustments as needed. No reason you can't do both, pay a little extra to the mortgage and concentrate on building up your savings. Think balance.
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Re: 5.6% Mortgage - Pay off early or Invest?
Hmm thanks for all the input. You are right, we fall in the 24% bracket. I think she used to be in the 32% before we got married. The mortgage is 30 year fixed, with no early payment penalties.
I guess I should add that I have about $60k between my Roth IRA and 401k, which is basically my life savings I've been able to save up since 2020. I probably have about $10k in my checkings/HYSA.
My wife has been much more diligent so has about $1.4 M in her retirement accounts and maybe about $150k in her aftertax brokerage (she liquidated most of it for the down payment).
We both do mostly Roth as we do not want to deal with the whole game of withdrawal/conversion to avoid getting put into higher income brackets later in life for Medicare and whatnot.
So another of our thought process was with just the 401k and matches we combine for about $50k a year into the 401k currently (mostly her). If we were to max out we could invest maybe $20000 more. However, the current retirement accounts we have even with just the $50k a year, we probably will have about $7M in 15 years assuming a 10% return. That is probably more than enough for what we need to survive, and instead of maxing out and still having to pay a mortgage then while also worrying about a withdrawal/conversion strategy, we were thinking about putting that $20k into early payment and would just only worry about paying utilities and traveling.
However, I must admit I don't know that much about tax brackets so did not really think of that angle before, it was just a dilemma between paying off the 5.6% mortgage or investing it into an aftertax brokerage.
I guess I should add that I have about $60k between my Roth IRA and 401k, which is basically my life savings I've been able to save up since 2020. I probably have about $10k in my checkings/HYSA.
My wife has been much more diligent so has about $1.4 M in her retirement accounts and maybe about $150k in her aftertax brokerage (she liquidated most of it for the down payment).
We both do mostly Roth as we do not want to deal with the whole game of withdrawal/conversion to avoid getting put into higher income brackets later in life for Medicare and whatnot.
So another of our thought process was with just the 401k and matches we combine for about $50k a year into the 401k currently (mostly her). If we were to max out we could invest maybe $20000 more. However, the current retirement accounts we have even with just the $50k a year, we probably will have about $7M in 15 years assuming a 10% return. That is probably more than enough for what we need to survive, and instead of maxing out and still having to pay a mortgage then while also worrying about a withdrawal/conversion strategy, we were thinking about putting that $20k into early payment and would just only worry about paying utilities and traveling.
However, I must admit I don't know that much about tax brackets so did not really think of that angle before, it was just a dilemma between paying off the 5.6% mortgage or investing it into an aftertax brokerage.
Re: 5.6% Mortgage - Pay off early or Invest?
It is the tax deferred account balance that matters. Not the whole amount. Roth 401k/Roth IRA portion is not taxable.No_Ragrets wrote: Sat Feb 01, 2025 11:53 pm Hmm thanks for all the input. You are right, we fall in the 24% bracket. I think she used to be in the 32% before we got married. The mortgage is 30 year fixed, with no early payment penalties.
I guess I should add that I have about $60k between my Roth IRA and 401k, which is basically my life savings I've been able to save up since 2020. I probably have about $10k in my checkings/HYSA.
My wife has been much more diligent so has about $1.4 M in her retirement accounts and maybe about $150k in her aftertax brokerage (she liquidated most of it for the down payment).
We both do mostly Roth as we do not want to deal with the whole game of withdrawal/conversion to avoid getting put into higher income brackets later in life for Medicare and whatnot.
So another of our thought process was with just the 401k and matches we combine for about $50k a year into the 401k currently (mostly her). If we were to max out we could invest maybe $20000 more. However, the current retirement accounts we have even with just the $50k a year, we probably will have about $7M in 15 years assuming a 10% return. That is probably more than enough for what we need to survive, and instead of maxing out and still having to pay a mortgage then while also worrying about a withdrawal/conversion strategy, we were thinking about putting that $20k into early payment and would just only worry about paying utilities and traveling.
However, I must admit I don't know that much about tax brackets so did not really think of that angle before, it was just a dilemma between paying off the 5.6% mortgage or investing it into an aftertax brokerage.
To pay 24% at retirement without pension, you need 6.25 million at your tax deferred accounts. if most of your contribution so far are Roth, how can you reach 6.25 millions?
What is your current annual expense?
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Re: 5.6% Mortgage - Pay off early or Invest?
You mentioned stressors. This is not fully a mathematical question. It’s a behavioral one combined with cash flow considerations.
And you can’t change the cash flow quickly (the second to last payment on a mortgage is the same as the first).
Having savings in taxable instead of paying down faster can be the solution. If something unexpected happens, you have the ability to manage the situation. If everything went into the loan, the balance is lower and your net worth situation is better, but your cash flow may be shot.
The percentage difference can be considered to be the cost of cash flow insurance. At some point the savings will be large enough that you can reconsider what to do with future inflows - or large enough to pay the loan off entirely.
And you can’t change the cash flow quickly (the second to last payment on a mortgage is the same as the first).
Having savings in taxable instead of paying down faster can be the solution. If something unexpected happens, you have the ability to manage the situation. If everything went into the loan, the balance is lower and your net worth situation is better, but your cash flow may be shot.
The percentage difference can be considered to be the cost of cash flow insurance. At some point the savings will be large enough that you can reconsider what to do with future inflows - or large enough to pay the loan off entirely.
Re: 5.6% Mortgage - Pay off early or Invest?
Assuming you have no other debts and are making retirement contributions, pay off the mortgage. It’s about so much more than the math.
Re: 5.6% Mortgage - Pay off early or Invest?
One thing that struck me- you said your wife is a high earner but you are doing Roth 401k contributions and not maxing out your retirement accounts. This might be a mistake depending on your anticipated tax rate in retirement. You’ll likely want to take advantage of tax arbitrage and be able to fill the lower brackets later on in retirement. Having pre-tax and Roth accounts will let you set your own tax rate.
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Re: 5.6% Mortgage - Pay off early or Invest?
So here is the breakdown of our finances, wife is more traditional than I thought
Annual Contributions (these include company matches)
Roth - $10900
Traditional - $34300
Unused space - $25000 (this is how much more we can invest into the 401k before max)
Traditional Balance = $827k
Roth Balance (IRA+401k) - $685k
Aftertax Brokerage - $157k
Bonds - $87k
Cash - $25k
Annual expenses $200k this is an estimate of our combined spending from what I can tell. We had separate expenses most the year last year until we got married in Sept, I'm guessing it will stay about the same since her rent is replaced by the mortgage (which is double the old rent), but we merged some expenses by moving in together. I used to only spend maybe 30k a year because a buddy let me crash with him for free and I drive a used Prius and I rarely buy clothes. Most of my spending was eating out (because I am not a good cook), stuff with my kids, and travel. Hopefully the restaurant bill goes down because my wife loves to cook and we probably wont go out as much as we did when we were living apart. I'll have a better idea where we stand after a couple months and everything settles in because right now the spending is crazy because wife is furnishing the house. Ideally, I would like to spend a lot less, but my wife likes nice things and since she makes most of the money I try not to meddle too much.
If I can get more info on retirement withdraw strategy, my concern was always that if we have too much in traditional, its hard to withdraw and convert at the same time. Basically the traditional balance we have to use up or convert to Roth before 72 so we can avoid RMDs. At a 7% return at current pace, I have the traditional balance will grow to over $4M in 20 years so we have to whittle down the $4M in like 10 years while not going into a higher tax bracket, no? At even a 4% withdrawal that is $160k a year we can take out every year and the balance not go down. So if we put even more into traditional that balance will just be even larger in the future.
Annual Contributions (these include company matches)
Roth - $10900
Traditional - $34300
Unused space - $25000 (this is how much more we can invest into the 401k before max)
Traditional Balance = $827k
Roth Balance (IRA+401k) - $685k
Aftertax Brokerage - $157k
Bonds - $87k
Cash - $25k
Annual expenses $200k this is an estimate of our combined spending from what I can tell. We had separate expenses most the year last year until we got married in Sept, I'm guessing it will stay about the same since her rent is replaced by the mortgage (which is double the old rent), but we merged some expenses by moving in together. I used to only spend maybe 30k a year because a buddy let me crash with him for free and I drive a used Prius and I rarely buy clothes. Most of my spending was eating out (because I am not a good cook), stuff with my kids, and travel. Hopefully the restaurant bill goes down because my wife loves to cook and we probably wont go out as much as we did when we were living apart. I'll have a better idea where we stand after a couple months and everything settles in because right now the spending is crazy because wife is furnishing the house. Ideally, I would like to spend a lot less, but my wife likes nice things and since she makes most of the money I try not to meddle too much.
If I can get more info on retirement withdraw strategy, my concern was always that if we have too much in traditional, its hard to withdraw and convert at the same time. Basically the traditional balance we have to use up or convert to Roth before 72 so we can avoid RMDs. At a 7% return at current pace, I have the traditional balance will grow to over $4M in 20 years so we have to whittle down the $4M in like 10 years while not going into a higher tax bracket, no? At even a 4% withdrawal that is $160k a year we can take out every year and the balance not go down. So if we put even more into traditional that balance will just be even larger in the future.
Re: 5.6% Mortgage - Pay off early or Invest?
Pay off the mortgage and replace “I” with “we” in your financial processes.
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Re: 5.6% Mortgage - Pay off early or Invest?
Current annual expense is probably going to be 200k. Details in prior post.
Can you elaborate on your comment about "To pay 24% at retirement without pension, you need 6.25 million at your tax deferred accounts"? I am not following. Am I able to stay in the 24% bracket while withdraw/convert that 6 M over 10 years? If I have 6 M in pretax, how do I get it down to a manageable amount by 72 and the RMD kick in and it doesn't affect my Medicare premiums?
Re: 5.6% Mortgage - Pay off early or Invest?
You cannot reach 6m in your tax deferred account. So, why do you choose to pay more taxes by not maxing up your 401K?No_Ragrets wrote: Thu Feb 06, 2025 1:28 amCurrent annual expense is probably going to be 200k. Details in prior post.
Can you elaborate on your comment about "To pay 24% at retirement without pension, you need 6.25 million at your tax deferred accounts"? I am not following. Am I able to stay in the 24% bracket while withdraw/convert that 6 M over 10 years? If I have 6 M in pretax, how do I get it down to a manageable amount by 72 and the RMD kick in and it doesn't affect my Medicare premiums?
Why do you need to worry about 6m? You only have 800+K now. Any money you contribute to Trad 401K will not be paying 24%. 800K divided by 25 equal 32K. What is the marginal tax rate at 32K? It is only 2K of taxable income after 30K standard deduction.
At 2K of taxable income, you are paying 10% taxes. So, why do you choose to pay 24% - 10% = 14% more taxes in order to save 5.6% mortgage interest?
KlangFool
Last edited by KlangFool on Thu Feb 06, 2025 8:55 am, edited 1 time in total.
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Re: 5.6% Mortgage - Pay off early or Invest?
You won't withdraw it all over 10 years. The expectation is that you will withdraw 4% of the initial balance every year, growing with inflation; this is generally accepted as a sustainable withdrawal rate.No_Ragrets wrote: Thu Feb 06, 2025 1:28 amCurrent annual expense is probably going to be 200k. Details in prior post.
Can you elaborate on your comment about "To pay 24% at retirement without pension, you need 6.25 million at your tax deferred accounts"? I am not following. Am I able to stay in the 24% bracket while withdraw/convert that 6 M over 10 years? If I have 6 M in pretax, how do I get it down to a manageable amount by 72 and the RMD kick in and it doesn't affect my Medicare premiums?
However, if this is all in a 401(k)/traditional IRA, you won't be able to limit your withdrawals from the 401(k) to that tax bracket. If the market rises, you will need to withdraw more because of RMDs. When one spouse dies, the tax brackets are halved but the RMDs are not. And when both spouses die, anything left must be withdrawn by the heirs in 10 years, in their tax bracket.
(Also, the 401(k) withdrawals wouldn't need to be quite this large to hit the 24% tax bracket'; 85% of your Social Security will also be taxable.)
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Re: 5.6% Mortgage - Pay off early or Invest?
If we plan to work 20 more years, we will be 61. At 7% growth at our current contributions, the traditional 401k will grow to about $4.5 M. If at 60 we quit work, stop contributing, and only withdraw 100k a year to stay in the 12% bracket, it will grow to about $9M when I turn 72. If we withdraw more it falls into the 22% bucket, which historically has been 25% and may revert there in the future, so will be a wash from the 24% we pay now. When I turn 73 my RMD will be about $340k, which would severely mess up my taxes and Medicare premiums.KlangFool wrote: Thu Feb 06, 2025 6:50 amYou cannot reach 6m in your tax deferred account. So, why do you choose to pay more taxes by not maxing up your 401K?No_Ragrets wrote: Thu Feb 06, 2025 1:28 am
Current annual expense is probably going to be 200k. Details in prior post.
Can you elaborate on your comment about "To pay 24% at retirement without pension, you need 6.25 million at your tax deferred accounts"? I am not following. Am I able to stay in the 24% bracket while withdraw/convert that 6 M over 10 years? If I have 6 M in pretax, how do I get it down to a manageable amount by 72 and the RMD kick in and it doesn't affect my Medicare premiums?
Why do you need to worry about 6m? You only have 800+K now. Any money you contribute to Trad 401K will not be paying 24%. 800K divided by 25 equal 32K. What is the marginal tax rate at 32K? It is only 2K of taxable income after 30K standard deduction.
At 2K of taxable income, you are paying 10% taxes. So, why do you choose to pay 24% - 10% = 14% more taxes in order to save 5.6% mortgage interest?
KlangFool
Thats why i would rather do Roth for any additional contribution so we don't have to deal with this later, while we still have money, or would pay down the mortgage with the leftovers so have no mortgage and thus less money we have to withdraw later.
You do have a point, I can probably get more than 5.6% by investing, thats what most people seem to be saying is the better way to go rather than peace of mind to have it paid off. but the 5.6 is guaranteed payment vs who knows what the market will be in future. also, if rates will go down in future it might be better to just refinance to a lower rate later and invest the diff ... so many options
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Re: 5.6% Mortgage - Pay off early or Invest?
You have to withdraw all or enough so the RMD at 72 is low enough to not trigger any taxable event. Have to have the balance at 3 M or less so the RMD stays under 115k i thinkgrabiner wrote: Thu Feb 06, 2025 8:37 amYou won't withdraw it all over 10 years. The expectation is that you will withdraw 4% of the initial balance every year, growing with inflation; this is generally accepted as a sustainable withdrawal rate.No_Ragrets wrote: Thu Feb 06, 2025 1:28 am
Current annual expense is probably going to be 200k. Details in prior post.
Can you elaborate on your comment about "To pay 24% at retirement without pension, you need 6.25 million at your tax deferred accounts"? I am not following. Am I able to stay in the 24% bracket while withdraw/convert that 6 M over 10 years? If I have 6 M in pretax, how do I get it down to a manageable amount by 72 and the RMD kick in and it doesn't affect my Medicare premiums?
However, if this is all in a 401(k)/traditional IRA, you won't be able to limit your withdrawals from the 401(k) to that tax bracket. If the market rises, you will need to withdraw more because of RMDs. When one spouse dies, the tax brackets are halved but the RMDs are not. And when both spouses die, anything left must be withdrawn by the heirs in 10 years, in their tax bracket.
(Also, the 401(k) withdrawals wouldn't need to be quite this large to hit the 24% tax bracket'; 85% of your Social Security will also be taxable.)
Re: 5.6% Mortgage - Pay off early or Invest?
No_Ragrets,No_Ragrets wrote: Thu Feb 06, 2025 7:40 pmIf we plan to work 20 more years, we will be 61. At 7% growth at our current contributions, the traditional 401k will grow to about $4.5 M. If at 60 we quit work, stop contributing, and only withdraw 100k a year to stay in the 12% bracket, it will grow to about $9M when I turn 72.KlangFool wrote: Thu Feb 06, 2025 6:50 am
You cannot reach 6m in your tax deferred account. So, why do you choose to pay more taxes by not maxing up your 401K?
Why do you need to worry about 6m? You only have 800+K now. Any money you contribute to Trad 401K will not be paying 24%. 800K divided by 25 equal 32K. What is the marginal tax rate at 32K? It is only 2K of taxable income after 30K standard deduction.
At 2K of taxable income, you are paying 10% taxes. So, why do you choose to pay 24% - 10% = 14% more taxes in order to save 5.6% mortgage interest?
KlangFool
A) Tax brackets are adjusted upward by inflation every year.
"only withdraw 100k a year to stay in the 12% bracket, it will grow to about $9M when I turn 72. "
B) You could choose to Roth convert up to 24% (400K) and only spend 100K per year.
C) In summary, even in your worst case, you will not pay more taxes.
D) This is assuming you work 20 more years. You could always choose to retire early if you have too much money.
KlangFool
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Re: 5.6% Mortgage - Pay off early or Invest?
Okay you got point about tax brackets, but if Im going to convert at 24% later, might as well do it now and not worry about it later. Also, its only 22% and 24% now because of Trump, it used to be 25% and 28%, which we will go back to in 2026. I think its hard to see taxes being lower in 20 years than now.KlangFool wrote: Thu Feb 06, 2025 8:34 pmNo_Ragrets,No_Ragrets wrote: Thu Feb 06, 2025 7:40 pm
If we plan to work 20 more years, we will be 61. At 7% growth at our current contributions, the traditional 401k will grow to about $4.5 M. If at 60 we quit work, stop contributing, and only withdraw 100k a year to stay in the 12% bracket, it will grow to about $9M when I turn 72.
A) Tax brackets are adjusted upward by inflation every year.
"only withdraw 100k a year to stay in the 12% bracket, it will grow to about $9M when I turn 72. "
B) You could choose to Roth convert up to 24% (400K) and only spend 100K per year.
C) In summary, even in your worst case, you will not pay more taxes.
D) This is assuming you work 20 more years. You could always choose to retire early if you have too much money.
KlangFool
If I put money into retirement account I can't pull out without penalty for 20 years, so either I work or I should invest in after tax. However given our age and this new 30 year mortgage, probably have to work until 60. So trying to see if it will be better to pay off mortgage earlier (and lower withdraws needed in future to pay for mortgage) or invest more now in 401k and figure out payments later.
Having mortgage payment may be stressful if retired.
Re: 5.6% Mortgage - Pay off early or Invest?
No_Ragrets,No_Ragrets wrote: Thu Feb 06, 2025 9:48 pmOkay you got point about tax brackets, but if Im going to convert at 24% later, might as well do it now and not worry about it later. Also, its only 22% and 24% now because of Trump, it used to be 25% and 28%, which we will go back to in 2026. I think its hard to see taxes being lower in 20 years than now.KlangFool wrote: Thu Feb 06, 2025 8:34 pm
No_Ragrets,
A) Tax brackets are adjusted upward by inflation every year.
"only withdraw 100k a year to stay in the 12% bracket, it will grow to about $9M when I turn 72. "
B) You could choose to Roth convert up to 24% (400K) and only spend 100K per year.
C) In summary, even in your worst case, you will not pay more taxes.
D) This is assuming you work 20 more years. You could always choose to retire early if you have too much money.
KlangFool
"Okay you got point about tax brackets, but if Im going to convert at 24% later, might as well do it now and not worry about it later. "
This is assuming that you are continuously fully employed for the next 20 years and do not retire early. How safe is that assumption? And, if that is not true, you have paid more taxes.
If you are wrong, you do not have enough money for retirement.
If you are right, you are paying the same amount of taxes.
Why would you take this bet? When you are guaranteed to lose? Your best case in Roth is the same as the worst case with tax deferring.
"which we will go back to in 2026. I think its hard to see taxes being lower in 20 years than now."
I know I cannot predict the future. And, you can change your decision every year. But, this year 2025, your tax deferred account's size is too small to do not defer.
I will take the opposite bet. Globally, Western Democracies are lowering their income taxes and replaced with VAT/Consumption/Sales Taxes for the last 10 to 20 years. The USA will be the last one to do it. Politically, it is easier for the Democracy to replace income taxes with consumption taxes.
Taxes can go up but it does not have to be the income taxes.
KlangFool
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Re: 5.6% Mortgage - Pay off early or Invest?
Agreed.KlangFool wrote: Thu Feb 06, 2025 10:19 pmNo_Ragrets,No_Ragrets wrote: Thu Feb 06, 2025 9:48 pm
Okay you got point about tax brackets, but if Im going to convert at 24% later, might as well do it now and not worry about it later. Also, its only 22% and 24% now because of Trump, it used to be 25% and 28%, which we will go back to in 2026. I think its hard to see taxes being lower in 20 years than now.
"Okay you got point about tax brackets, but if Im going to convert at 24% later, might as well do it now and not worry about it later. "
This is assuming that you are continuously fully employed for the next 20 years and do not retire early. How safe is that assumption? And, if that is not true, you have paid more taxes.
If you are wrong, you do not have enough money for retirement.
If you are right, you are paying the same amount of taxes.
Why would you take this bet? When you are guaranteed to lose? Your best case in Roth is the same as the worst case with tax deferring.
"which we will go back to in 2026. I think its hard to see taxes being lower in 20 years than now."
I know I cannot predict the future. And, you can change your decision every year. But, this year 2025, your tax deferred account's size is too small to do not defer.
I will take the opposite bet. Globally, Western Democracies are lowering their income taxes and replaced with VAT/Consumption/Sales Taxes for the last 10 to 20 years. The USA will be the last one to do it. Politically, it is easier for the Democracy to replace income taxes with consumption taxes.
Taxes can go up but it does not have to be the income taxes.
KlangFool
Even if tax brackets stay the same, people still have the flexibility of choosing the year to convert any traditional amount into Roth.
However, ACA subsidies and other tax benefits can impact the effective brackets. It can influence the picture and make some conversions not as favorable even though the tax bracket might have dropped.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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Re: 5.6% Mortgage - Pay off early or Invest?
if i withdraw a lot after retirement whether it is 10 or 20 year then it will increase my income so my aca subsidy or medicare might be impacted vs if i do roth now, i will not have any income when i retire to lower other costsKlangFool wrote: Thu Feb 06, 2025 10:19 pmNo_Ragrets,No_Ragrets wrote: Thu Feb 06, 2025 9:48 pm
Okay you got point about tax brackets, but if Im going to convert at 24% later, might as well do it now and not worry about it later. Also, its only 22% and 24% now because of Trump, it used to be 25% and 28%, which we will go back to in 2026. I think its hard to see taxes being lower in 20 years than now.
"Okay you got point about tax brackets, but if Im going to convert at 24% later, might as well do it now and not worry about it later. "
This is assuming that you are continuously fully employed for the next 20 years and do not retire early. How safe is that assumption? And, if that is not true, you have paid more taxes.
If you are wrong, you do not have enough money for retirement.
If you are right, you are paying the same amount of taxes.
Why would you take this bet? When you are guaranteed to lose? Your best case in Roth is the same as the worst case with tax deferring.
"which we will go back to in 2026. I think its hard to see taxes being lower in 20 years than now."
I know I cannot predict the future. And, you can change your decision every year. But, this year 2025, your tax deferred account's size is too small to do not defer.
I will take the opposite bet. Globally, Western Democracies are lowering their income taxes and replaced with VAT/Consumption/Sales Taxes for the last 10 to 20 years. The USA will be the last one to do it. Politically, it is easier for the Democracy to replace income taxes with consumption taxes.
Taxes can go up but it does not have to be the income taxes.
KlangFool
i see your point but your strategy works if you dont oversave and dont need to keep income under a certain level
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Re: 5.6% Mortgage - Pay off early or Invest?
yes!secondopinion wrote: Fri Feb 07, 2025 12:48 amAgreed.KlangFool wrote: Thu Feb 06, 2025 10:19 pm
No_Ragrets,
"Okay you got point about tax brackets, but if Im going to convert at 24% later, might as well do it now and not worry about it later. "
This is assuming that you are continuously fully employed for the next 20 years and do not retire early. How safe is that assumption? And, if that is not true, you have paid more taxes.
If you are wrong, you do not have enough money for retirement.
If you are right, you are paying the same amount of taxes.
Why would you take this bet? When you are guaranteed to lose? Your best case in Roth is the same as the worst case with tax deferring.
"which we will go back to in 2026. I think its hard to see taxes being lower in 20 years than now."
I know I cannot predict the future. And, you can change your decision every year. But, this year 2025, your tax deferred account's size is too small to do not defer.
I will take the opposite bet. Globally, Western Democracies are lowering their income taxes and replaced with VAT/Consumption/Sales Taxes for the last 10 to 20 years. The USA will be the last one to do it. Politically, it is easier for the Democracy to replace income taxes with consumption taxes.
Taxes can go up but it does not have to be the income taxes.
KlangFool
Even if tax brackets stay the same, people still have the flexibility of choosing the year to convert any traditional amount into Roth.
However, ACA subsidies and other tax benefits can impact the effective brackets. It can influence the picture and make some conversions not as favorable even though the tax bracket might have dropped.
Re: 5.6% Mortgage - Pay off early or Invest?
How can you oversave in the tax deferred account when you only have 800+K in your tax deferred account? You should do some calculations to come up a realistic projection. Is 4M realistic at all? In any case, you should tax deferred in 2025.No_Ragrets wrote: Fri Feb 07, 2025 3:31 amif i withdraw a lot after retirement whether it is 10 or 20 year then it will increase my income so my aca subsidy or medicare might be impacted vs if i do roth now, i will not have any income when i retire to lower other costsKlangFool wrote: Thu Feb 06, 2025 10:19 pm
No_Ragrets,
"Okay you got point about tax brackets, but if Im going to convert at 24% later, might as well do it now and not worry about it later. "
This is assuming that you are continuously fully employed for the next 20 years and do not retire early. How safe is that assumption? And, if that is not true, you have paid more taxes.
If you are wrong, you do not have enough money for retirement.
If you are right, you are paying the same amount of taxes.
Why would you take this bet? When you are guaranteed to lose? Your best case in Roth is the same as the worst case with tax deferring.
"which we will go back to in 2026. I think its hard to see taxes being lower in 20 years than now."
I know I cannot predict the future. And, you can change your decision every year. But, this year 2025, your tax deferred account's size is too small to do not defer.
I will take the opposite bet. Globally, Western Democracies are lowering their income taxes and replaced with VAT/Consumption/Sales Taxes for the last 10 to 20 years. The USA will be the last one to do it. Politically, it is easier for the Democracy to replace income taxes with consumption taxes.
Taxes can go up but it does not have to be the income taxes.
KlangFool
i see your point but your strategy works if you dont oversave and dont need to keep income under a certain level
KlangFool
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Re: 5.6% Mortgage - Pay off early or Invest?
we currently contribute about 34k into trad each year, because all our matches are to pretax plus wife seems to do like half into trad.KlangFool wrote: Fri Feb 07, 2025 7:03 amHow can you oversave in the tax deferred account when you only have 800+K in your tax deferred account? You should do some calculations to come up a realistic projection. Is 4M realistic at all? In any case, you should tax deferred in 2025.No_Ragrets wrote: Fri Feb 07, 2025 3:31 am
if i withdraw a lot after retirement whether it is 10 or 20 year then it will increase my income so my aca subsidy or medicare might be impacted vs if i do roth now, i will not have any income when i retire to lower other costs
i see your point but your strategy works if you dont oversave and dont need to keep income under a certain level
KlangFool
so if we got 827k, contribute 34k a year, increase by 2% based on increase of salary, 7% gain, will be 4.5M when i hit 59. so that why im thinking if we do any more investing, maybe to do to roth instead of fully max trad. at a min we would still be putting 34k into trad each year
but back to original questions, you think better to do more to retirement account, or pay off mortgage, or invest into aftertax (in case we retire early)
Re: 5.6% Mortgage - Pay off early or Invest?
No_Ragrets,No_Ragrets wrote: Fri Feb 07, 2025 11:59 amwe currently contribute about 34k into trad each year, because all our matches are to pretax plus wife seems to do like half into trad.KlangFool wrote: Fri Feb 07, 2025 7:03 am
How can you oversave in the tax deferred account when you only have 800+K in your tax deferred account? You should do some calculations to come up a realistic projection. Is 4M realistic at all? In any case, you should tax deferred in 2025.
KlangFool
so if we got 827k, contribute 34k a year, increase by 2% based on increase of salary, 7% gain, will be 4.5M when i hit 59. so that why im thinking if we do any more investing, maybe to do to roth instead of fully max trad. at a min we would still be putting 34k into trad each year
but back to original questions, you think better to do more to retirement account, or pay off mortgage, or invest into aftertax (in case we retire early)
"so if we got 827k, contribute 34k a year, increase by 2% based on increase of salary, 7% gain, will be 4.5M when i hit 59."
Why do you think so far? The only question is whether it makes sense for you to max up Trad 401K in 2025? You do not have enough to even pay 12% taxes in retirement yet. It takes 1.35M in tax deferred account. Why won't you save at least 10+% taxes for your Trad 401K 2025 contribution?
"but back to original questions, you think better to do more to retirement account, or pay off mortgage, or invest into aftertax (in case we retire early)"
You should max up his and her's Trad 401K and Roth IRAs. Then, invest the tax savings in the taxable account. If and when you are financially independent, then pay down the mortgage.
KlangFool
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Re: 5.6% Mortgage - Pay off early or Invest?
thxKlangFool wrote: Fri Feb 07, 2025 12:16 pmNo_Ragrets,No_Ragrets wrote: Fri Feb 07, 2025 11:59 am
we currently contribute about 34k into trad each year, because all our matches are to pretax plus wife seems to do like half into trad.
so if we got 827k, contribute 34k a year, increase by 2% based on increase of salary, 7% gain, will be 4.5M when i hit 59. so that why im thinking if we do any more investing, maybe to do to roth instead of fully max trad. at a min we would still be putting 34k into trad each year
but back to original questions, you think better to do more to retirement account, or pay off mortgage, or invest into aftertax (in case we retire early)
"so if we got 827k, contribute 34k a year, increase by 2% based on increase of salary, 7% gain, will be 4.5M when i hit 59."
Why do you think so far? The only question is whether it makes sense for you to max up Trad 401K in 2025? You do not have enough to even pay 12% taxes in retirement yet. It takes 1.35M in tax deferred account. Why won't you save at least 10+% taxes for your Trad 401K 2025 contribution?
"but back to original questions, you think better to do more to retirement account, or pay off mortgage, or invest into aftertax (in case we retire early)"
You should max up his and her's Trad 401K and Roth IRAs. Then, invest the tax savings in the taxable account. If and when you are financially independent, then pay down the mortgage.
KlangFool