Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

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kelladoo
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Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by kelladoo » Wed Sep 19, 2018 5:07 pm

We have a $397k mortgage (4.75% interest, 30 year fixed) that we just opened in June 2018. This is our third home that we’ve owned, doesn’t require anything as far as updates or improvements, and we intend to stay in this house for the long haul. We are trying to decide if there’s a glaring reason NOT to pay down the mortgage by reallocating pre-tax money that would normally have gone to maxing out our retirement accounts. I know, I know! I can’t believe I’m writing that, but hear me out.

We are 33 years old with one child under 1 year old (we hope to have another one in the next couple of years=)). We have a 6 month emergency fund, we already own 25% of our house, have no other debt besides our mortgage, we have similar lean spending habits, and very stable jobs that we have been at for 10 years. We have always contributed to our retirement accounts and have spent the last four years maxing them out (401ks, Roths, HSA). We have a combined retirement portfolio of ~$460k ($400k pretax, $60k post tax), not to mention we each have an annuity (1% of high 3 for every year worked – part-time or full-time).

Our thought is this: If we reduced our contributions to our 401ks down to 5% to get the employer match, we could get about $1600 extra per month (after taxes) in our takehome pay to throw at the mortgage. That coupled with throwing a large portion of our savings at the mortgage each month would mean we could pay off the mortgage in about 7 years without really changing our lifestyle - we would still be saving about $400 per month. The only reason we are comfortable reducing our 401k contributions so drastically is because our retirement nest egg seems pretty sizable to us at this age. We intend to continue maxing out our Roths and HSA.

Why attack the mortgage and not invest in something else? Blame the little munchkin, but we aren’t interested in spending our time on other investments (real estate, starting side hustles, etc.). We would much rather spend our free time hiking together, laying in the yard looking at bugs, having food fights, etc. We have been invested in low cost index funds for a long time and have done pretty well with that. We don’t think paying off the mortgage this way is the MOST brilliant idea in the world, but we tend to get excited about working together toward a goal, and so we don’t think it’s a TERRIBLE idea. At the end we will have a paid off house, and there’s always the possibility that we get obsessed and cut our timeline down from 7 years. We kind of just want to spice it up after doing the index-fund thing for so long. However, we are also considering stashing all of this money in Vanguard index funds to grow until the balance equals the principal and then just making one lump sum payment to axe the mortgage.
In an ideal world, we will reach FI by our mid to late-40s before our oldest is in middle school. Once we pay off the mortgage at age 40, we will have a few more years to max out our retirement accounts again, stash cash for FI, and help start some education funds for our kids. We are toying with the idea of switching to part-time at that point too.

With the 2018 tax code standard deduction, it seems to make a little more sense to do this than before, but it’s still a stretch since we will definitely have a higher taxable income by not sheltering the 401k money. But we kind of don’t care in a way. How much should we care?! Has anyone else made this decision?


livesoft
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by livesoft » Wed Sep 19, 2018 7:56 pm

No way.
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KlangFool
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by KlangFool » Wed Sep 19, 2018 8:05 pm

OP,

You would have to be crazy to believe that paying 20% to 30% tax in order to save 4.75% interest is a good idea. It is a very simple math.

20% to 30% is bigger than 4.75%.

KlangFool

bradpevans
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by bradpevans » Wed Sep 19, 2018 8:07 pm

Nope

I look at it this way: if you invest that many will grow and grow and grow, possibly doubling every 7-10 years. The third doubling and fourth doubling are a lot bigger impact than the first or second. The sooner it’s invested....

NYC_Guy
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by NYC_Guy » Wed Sep 19, 2018 8:08 pm

Nope.

Dottie57
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by Dottie57 » Wed Sep 19, 2018 8:17 pm

Don’t lose the investing space. Max out every thing you can. THEN, find money each month to add to your current monthly paymenmake sure the lender knows to apply to the principal.

7 years is way too long to stop investing.

Ron Ronnerson
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by Ron Ronnerson » Wed Sep 19, 2018 8:18 pm

Based on the info you’ve provided, I would not attack this mortgage with a vengeance. You’re young and your interest rate is decent. I’d invest the money and not make drastic changes. Don’t try to fix something that isn’t broken.

TravelforFun
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by TravelforFun » Wed Sep 19, 2018 8:20 pm

KlangFool wrote:
Wed Sep 19, 2018 8:05 pm
OP,

You would have to be crazy to believe that paying 20% to 30% tax in order to save 4.75% interest is a good idea. It is a very simple math.

20% to 30% is bigger than 4.75%.

KlangFool
Not that simple. The 20% to 30% is not tax savings. You're just deferring it until later when you're forced to withraw and pay those taxes; and some of us are finding out our tax rates in retirement are not any lower than when we were contributing.

TravelforFun

KlangFool
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by KlangFool » Wed Sep 19, 2018 8:24 pm

TravelforFun wrote:
Wed Sep 19, 2018 8:20 pm
KlangFool wrote:
Wed Sep 19, 2018 8:05 pm
OP,

You would have to be crazy to believe that paying 20% to 30% tax in order to save 4.75% interest is a good idea. It is a very simple math.

20% to 30% is bigger than 4.75%.

KlangFool
Not that simple. The 20% to 30% is not tax savings. You're just deferring it until later when you're forced to withraw and pay those taxes; and some of us are finding out our tax rates in retirement are not any lower than when we were contributing.

TravelforFun
TravelforFun,

It is that simple. Not when OP's portfolio is only a few hundred thousand. Only when it is more than 1 million or larger, then, it might be relevant.

KlangFool

rivers03
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years

Post by rivers03 » Wed Sep 19, 2018 8:48 pm

Although it is obviously a somewhat controversial opinion as evidenced by the above replies, my H and I have made a similar choice. We took out a 10 year mortgage and still prepay it. We also both have pensions (1% of high 3 for me and 1.5% for him) and secure govt jobs but I put in 5% plus 5% match and H puts in 10% (no match) and we put a few hundred/mo each in a Roth. So, we don’t max all tax advantaged retirement savings. But, we are 35 now and should have the mortgage paid off in the next 3 years. I understand the math advantages of focusing on retirement. But, I just can’t shake the idea of mortgage freedom at such a relatively young age. We have 3 young kids and have no idea what their educational expenses might be. Maybe at least one of us could go part time (I am finding my kids need more from me the older they get!), maybe we can cash flow big international trips, maybe we will buy a lake house, WHO KNOWS? But without a mortgage we will be free to cash flow just about anything life might throw our way and that idea gives me peace- priceless. A larger $ in my 401k does not give me peace because I know myself to well enough to know I would not take it out early due to tax consequences. We are naturally frugal and the plan is with 2 pensions and a paid off house, we should be able to manage our needs and use the 401k/Roth/SS for wants. I don’t want to put off time/experiences with my kids plus the extra stress that debt has on me personally just for extras at 59.5+ when my kids will be (hopefully) independent and have their own families. 2 pensions means you probably won’t be able to be in the lowest tax bracket in retirement anyways. At least that is what I am telling myself! Best of luck to you!

tampaite
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by tampaite » Wed Sep 19, 2018 8:53 pm

kelladoo wrote:
Wed Sep 19, 2018 5:07 pm
We have a $397k mortgage (4.75% interest, 30 year fixed) that we just opened in June 2018.

Our thought is this: If we reduced our contributions to our 401ks down to 5% to get the employer match, we could get about $1600 extra per month (after taxes) in our takehome pay to throw at the mortgage. That coupled with throwing a large portion of our savings at the mortgage each month would mean we could pay off the mortgage in about 7 years without really changing our lifestyle - we would still be saving about $400 per month.
Sounds perfectly reasonable. You want the home paid o off by lowering 401k contribution but you contribute enough to capture the match, go for it, you will be happy in 7 years

JBTX
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by JBTX » Wed Sep 19, 2018 9:00 pm

TravelforFun wrote:
Wed Sep 19, 2018 8:20 pm
KlangFool wrote:
Wed Sep 19, 2018 8:05 pm
OP,

You would have to be crazy to believe that paying 20% to 30% tax in order to save 4.75% interest is a good idea. It is a very simple math.

20% to 30% is bigger than 4.75%.

KlangFool
Not that simple. The 20% to 30% is not tax savings. You're just deferring it until later when you're forced to withraw and pay those taxes; and some of us are finding out our tax rates in retirement are not any lower than when we were contributing.

TravelforFun
Klang Fool assumes everybody's future tax rate will be / should be zero.

I disagree, but nonetheless I agree they should not pay off mortgage and forego 401k at 32 years old.

JBTX
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by JBTX » Wed Sep 19, 2018 9:01 pm

tampaite wrote:
Wed Sep 19, 2018 8:53 pm
kelladoo wrote:
Wed Sep 19, 2018 5:07 pm
We have a $397k mortgage (4.75% interest, 30 year fixed) that we just opened in June 2018.

Our thought is this: If we reduced our contributions to our 401ks down to 5% to get the employer match, we could get about $1600 extra per month (after taxes) in our takehome pay to throw at the mortgage. That coupled with throwing a large portion of our savings at the mortgage each month would mean we could pay off the mortgage in about 7 years without really changing our lifestyle - we would still be saving about $400 per month.
Sounds perfectly reasonable. You want the home paid o off by lowering 401k contribution but you contribute enough to capture the match, go for it, you will be happy in 7 years
Happy, but with less money.

drawpoker
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by drawpoker » Wed Sep 19, 2018 9:16 pm

Nope. Bad idea. Always max out your retirement plans contribution. Every single year you are eligible.

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Watty
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by Watty » Wed Sep 19, 2018 10:05 pm

kelladoo wrote:
Wed Sep 19, 2018 5:07 pm
With the 2018 tax code standard deduction, it seems to make a little more sense to do this than before, but it’s still a stretch since we will definitely have a higher taxable income by not sheltering the 401k money. But we kind of don’t care in a way. How much should we care?! Has anyone else made this decision?
One thing I would look at is where your taxable income is within the tax brackets after making the 5% 401k contribution to get the employer match

For example if your taxable income is $10,000 above the start of the 22% federal tax bracket then it might make sense to contribute another $10K to the 401k to get down to the 12% federal tax bracket and then use the rest of the available money to paydown the mortgage.

You would also want to do a dummy tax return to see the details of the tax impact. This may not be obvious since there can be tax phaseouts where every extra dollar of income cause you to lose some sort of tax credit. This could cause your effective tax rate to be much higher than what your tax bracket is.

You would also want to include your state taxes to figure out where your combined federal and state tax bracket changes.
kelladoo wrote:
Wed Sep 19, 2018 5:07 pm
Our thought is this: If we reduced our contributions to our 401ks down to 5% to get the employer match, we could get about $1600 extra per month (after taxes) in our takehome pay to throw at the mortgage. That coupled with throwing a large portion of our savings at the mortgage each month would mean we could pay off the mortgage in about 7 years without really changing our lifestyle - we would still be saving about $400 per month.
Things often are not black and white and you would be going from maxing out the accounts to essentially making the minimum reasonable contribution. It might make more sense to do something in between.

You might consider only paying your mortgage off fast enough to have it paid off by the time your kid will be going to college which might be about 16 years.

If you get future raises you could also direct those to paying off the mortgage without impacting your lifestyle.

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unclescrooge
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by unclescrooge » Wed Sep 19, 2018 10:07 pm

JBTX wrote:
Wed Sep 19, 2018 9:00 pm
TravelforFun wrote:
Wed Sep 19, 2018 8:20 pm
KlangFool wrote:
Wed Sep 19, 2018 8:05 pm
OP,

You would have to be crazy to believe that paying 20% to 30% tax in order to save 4.75% interest is a good idea. It is a very simple math.

20% to 30% is bigger than 4.75%.

KlangFool
Not that simple. The 20% to 30% is not tax savings. You're just deferring it until later when you're forced to withraw and pay those taxes; and some of us are finding out our tax rates in retirement are not any lower than when we were contributing.

TravelforFun
Klang Fool assumes everybody's future tax rate will be / should be zero.

I disagree, but nonetheless I agree they should not pay off mortgage and forego 401k at 32 years old.
While it might not be zero, tax brackets are progressive. You still have to fill out the lower brackets before you get to the higher ones.

Avoiding a 401k contribution to pay off a loan with an after-tax cost of probably 3% is just bad math. But on the other hand, someone needs to pay down the Federal debt. OP, you should totally pay off your mortgage first :twisted:

rivers03
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by rivers03 » Wed Sep 19, 2018 10:25 pm

unclescrooge wrote:
Wed Sep 19, 2018 10:07 pm
JBTX wrote:
Wed Sep 19, 2018 9:00 pm
TravelforFun wrote:
Wed Sep 19, 2018 8:20 pm
KlangFool wrote:
Wed Sep 19, 2018 8:05 pm
OP,

You would have to be crazy to believe that paying 20% to 30% tax in order to save 4.75% interest is a good idea. It is a very simple math.

20% to 30% is bigger than 4.75%.

KlangFool
Not that simple. The 20% to 30% is not tax savings. You're just deferring it until later when you're forced to withraw and pay those taxes; and some of us are finding out our tax rates in retirement are not any lower than when we were contributing.

TravelforFun
Klang Fool assumes everybody's future tax rate will be / should be zero.

I disagree, but nonetheless I agree they should not pay off mortgage and forego 401k at 32 years old.
While it might not be zero, tax brackets are progressive. You still have to fill out the lower brackets before you get to the higher ones.

Avoiding a 401k contribution to pay off a loan with an after-tax cost of probably 3% is just bad math. But on the other hand, someone needs to pay down the Federal debt. OP, you should totally pay off your mortgage first :twisted:
Right but their 2 pensions could likely be ~80k pushing them into the 22% bracket based on current tax laws? Of course things will change, but it is not unreasonable to think that 2 pensions alone will fill the bottom bracket for 2 higher-ish earners. We don’t have an exact income breakdown but based on the OP’s pension calculations, 2 earners with a high 3 of $120,000 and 33 years of service would equal ~80k in annual pension income. So any 401k withdrawals would be 22% bracket. Am I missing something?

SoAnyway
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by SoAnyway » Wed Sep 19, 2018 10:27 pm

I'm with the majority. This a bad financial move, OP. Once the opportunity to make that full annual contribution for a year is gone, it's gone forever. There are plenty of regrets all over this forum of those who could've contributed to the max in prior years but didn't for a variety of reasons....

KlangFool
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by KlangFool » Wed Sep 19, 2018 10:38 pm

rivers03 wrote:
Wed Sep 19, 2018 10:25 pm
unclescrooge wrote:
Wed Sep 19, 2018 10:07 pm
JBTX wrote:
Wed Sep 19, 2018 9:00 pm
TravelforFun wrote:
Wed Sep 19, 2018 8:20 pm
KlangFool wrote:
Wed Sep 19, 2018 8:05 pm
OP,

You would have to be crazy to believe that paying 20% to 30% tax in order to save 4.75% interest is a good idea. It is a very simple math.

20% to 30% is bigger than 4.75%.

KlangFool
Not that simple. The 20% to 30% is not tax savings. You're just deferring it until later when you're forced to withraw and pay those taxes; and some of us are finding out our tax rates in retirement are not any lower than when we were contributing.

TravelforFun
Klang Fool assumes everybody's future tax rate will be / should be zero.

I disagree, but nonetheless I agree they should not pay off mortgage and forego 401k at 32 years old.
While it might not be zero, tax brackets are progressive. You still have to fill out the lower brackets before you get to the higher ones.

Avoiding a 401k contribution to pay off a loan with an after-tax cost of probably 3% is just bad math. But on the other hand, someone needs to pay down the Federal debt. OP, you should totally pay off your mortgage first :twisted:
Right but their 2 pensions could likely be ~80k pushing them into the 22% bracket based on current tax laws? Of course things will change, but it is not unreasonable to think that 2 pensions alone will fill the bottom bracket for 2 higher-ish earners. We don’t have an exact income breakdown but based on the OP’s pension calculations, 2 earners with a high 3 of $120,000 and 33 years of service would equal ~80k in annual pension income. So any 401k withdrawals would be 22% bracket. Am I missing something?
rivers03,

Why would anyone choose to pay tax now? You can never do better than the folks that defer their taxes. The impact is asymmetrical.

A) In the worst case, it is not too bad for the deferred tax folks. They ended up paying the same tax 30+ years later.

B) The worst case for folks that pay taxes now is not enough money to live on. This is fatal.

KlangFool

randomguy
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by randomguy » Wed Sep 19, 2018 10:50 pm

rivers03 wrote:
Wed Sep 19, 2018 10:25 pm


Right but their 2 pensions could likely be ~80k pushing them into the 22% bracket based on current tax laws? Of course things will change, but it is not unreasonable to think that 2 pensions alone will fill the bottom bracket for 2 higher-ish earners. We don’t have an exact income breakdown but based on the OP’s pension calculations, 2 earners with a high 3 of $120,000 and 33 years of service would equal ~80k in annual pension income. So any 401k withdrawals would be 22% bracket. Am I missing something?
Bottom Bracket is at 77k with a 24k standard deduction so you are still looking at 20k of bottom brackets to fill. And then it isn't like you start loosing. You just go to break even. We are ignoring a bunch of tax issues, SS, inflation adjustments, FASFA or CSS effects, early retirement (forced or voluntary) and the like that make exact calculations a bit more difficult. If in the future you need to save more than the max allowed in tax advantaged accounts, you end up paying a tax drag penalty.

OP is talking about early retirement in their late 40s. I expect they will have a lower average income in the future and will likely be in the same or lower tax bracket. They would have to put their assumptions in and run the math.

There are tons of threads where people say they are happy with paying off the mortgage early. I always assume they have never done the math on how much it cost them:) But in reality it is likely to be a small difference either way. A somewhat reasonable approach would be to cut the 401(k) contributions in say half and pay off the mortgage in a few more years. You might find things changes a lot when kid #2 shows up (or kid 1 starts talking;)).

SoAnyway
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by SoAnyway » Wed Sep 19, 2018 10:57 pm

rivers03 wrote:
Wed Sep 19, 2018 10:25 pm
Right but their 2 pensions could likely be ~80k pushing them into the 22% bracket based on current tax laws? Of course things will change, but it is not unreasonable to think that 2 pensions alone will fill the bottom bracket for 2 higher-ish earners. We don’t have an exact income breakdown but based on the OP’s pension calculations, 2 earners with a high 3 of $120,000 and 33 years of service would equal ~80k in annual pension income. So any 401k withdrawals would be 22% bracket. Am I missing something?
Not that it would necessarily change my pov, but I didn't realize OP/spouse have 2 pensions coming. Did I miss something? :confused
Last edited by SoAnyway on Wed Sep 19, 2018 10:58 pm, edited 1 time in total.

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unclescrooge
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by unclescrooge » Wed Sep 19, 2018 10:57 pm

rivers03 wrote:
Wed Sep 19, 2018 10:25 pm
unclescrooge wrote:
Wed Sep 19, 2018 10:07 pm
JBTX wrote:
Wed Sep 19, 2018 9:00 pm
TravelforFun wrote:
Wed Sep 19, 2018 8:20 pm
KlangFool wrote:
Wed Sep 19, 2018 8:05 pm
OP,

You would have to be crazy to believe that paying 20% to 30% tax in order to save 4.75% interest is a good idea. It is a very simple math.

20% to 30% is bigger than 4.75%.

KlangFool
Not that simple. The 20% to 30% is not tax savings. You're just deferring it until later when you're forced to withraw and pay those taxes; and some of us are finding out our tax rates in retirement are not any lower than when we were contributing.

TravelforFun
Klang Fool assumes everybody's future tax rate will be / should be zero.

I disagree, but nonetheless I agree they should not pay off mortgage and forego 401k at 32 years old.
While it might not be zero, tax brackets are progressive. You still have to fill out the lower brackets before you get to the higher ones.

Avoiding a 401k contribution to pay off a loan with an after-tax cost of probably 3% is just bad math. But on the other hand, someone needs to pay down the Federal debt. OP, you should totally pay off your mortgage first :twisted:
Right but their 2 pensions could likely be ~80k pushing them into the 22% bracket based on current tax laws? Of course things will change, but it is not unreasonable to think that 2 pensions alone will fill the bottom bracket for 2 higher-ish earners. We don’t have an exact income breakdown but based on the OP’s pension calculations, 2 earners with a high 3 of $120,000 and 33 years of service would equal ~80k in annual pension income. So any 401k withdrawals would be 22% bracket. Am I missing something?
Yes, the likelihood of pensions staying solvent over then next 60 years.

randomguy
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by randomguy » Wed Sep 19, 2018 11:01 pm

KlangFool wrote:
Wed Sep 19, 2018 10:38 pm


rivers03,

Why would anyone choose to pay tax now? You can never do better than the folks that defer their taxes. The impact is asymmetrical.

A) In the worst case, it is not too bad for the deferred tax folks. They ended up paying the same tax 30+ years later.

B) The worst case for folks that pay taxes now is not enough money to live on. This is fatal.

KlangFool
That just isn't true. Simple example I have 100k. I can pay 25% now or pay taxes in the future. 12 months from now I win the mega lottery for 400 million dollars. Now I have to pay 40% in taxes on my 100k. I just lost 15k. Obviously that is the absurd case (and you don't care since you made a ton of money) but similar effects can happen from changing states (move from FL to NYC), spouse dying/divorce (go from 12% to 22% for the same income), SS taxation, and a slew of other things.

That said I bias all my options towards deferring taxes when the choice is even close because yes the worst cases tend to involve being in low tax brackets in retirement not in paying too much in taxes.

randomguy
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by randomguy » Wed Sep 19, 2018 11:04 pm

SoAnyway wrote:
Wed Sep 19, 2018 10:57 pm
Not that it would necessarily change my pov, but I didn't realize OP/spouse have 2 pensions coming. Did I miss something? :confused

There is a line
an annuity (1% of high 3 for every year worked – part-time or full-time)
.
which is basically a "pension". Obviously missing details about things like when payouts start (day you leave, 65,...) and inflation adjustments which affect the math.

APB
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by APB » Wed Sep 19, 2018 11:07 pm

Mathematically no.

Emotionally . . . maybe? You two are doing fantastic, and with your discipline, if you really want to, I'm sure you'll still continue to have a very bright financial present and future. But will it really end up feeling better if everyone here told you it was suboptimal? Just something to chew on. Great job so far!

P.S. see if the below could apply to your situation.

https://www.madfientist.com/how-to-acce ... nds-early/
My posts represent my own opinion and do not constitute financial advice. I am simply a hobbyist. :)

SoAnyway
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by SoAnyway » Wed Sep 19, 2018 11:09 pm

randomguy wrote:
Wed Sep 19, 2018 11:04 pm
SoAnyway wrote:
Wed Sep 19, 2018 10:57 pm
Not that it would necessarily change my pov, but I didn't realize OP/spouse have 2 pensions coming. Did I miss something? :confused
There is a line
an annuity (1% of high 3 for every year worked – part-time or full-time)
.
which is basically a "pension". Obviously missing details about things like when payouts start (day you leave, 65,...) and inflation adjustments which affect the math.
Ah. Thanks, RG. Yeah, I'd need a LOT more detail on OP's situation for that to change my opinion that this is an unwise move....

Erwin007
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by Erwin007 » Thu Sep 20, 2018 12:08 am

No. Would absolutely not reduce 7 years of retirement contributions to pay off that mortgage early.

Olemiss540
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by Olemiss540 » Thu Sep 20, 2018 6:40 am

I don't think it matters what you gus do, you both seem setup to be in an amazing position with your level of assets at your age.

You truly appear to be crushing it!
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

Nissanzx1
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by Nissanzx1 » Thu Sep 20, 2018 6:58 am

OP may we have income figures?

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teen persuasion
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by teen persuasion » Thu Sep 20, 2018 8:10 am

Our thought is this: If we reduced our contributions to our 401ks down to 5% to get the employer match, we could get about $1600 extra per month (after taxes) in our takehome pay to throw at the mortgage. That coupled with throwing a large portion of our savings at the mortgage each month would mean we could pay off the mortgage in about 7 years without really changing our lifestyle - we would still be saving about $400 per month. The only reason we are comfortable reducing our 401k contributions so drastically is because our retirement nest egg seems pretty sizable to us at this age. We intend to continue maxing out our Roths and HSA.
If a 5% contribution is "still saving $400 per month", that implies $8k income per month, or $96k annually combined. Maxing 2 401ks would be $37k annually, or $3083/month. You are calculating $400 savings and $1600 take home to throw at the mortgage, leaving $1083/month lost to taxes, or ~$13k annually?

FWIW, we did make the choice to pay down our mortgage over maxing retirement accounts when our kids were young. Our details differed, though - our mortgage was 9.75%, that was a guaranteed return on our prepayment. I earmarked our tax refunds to lump sum principal payments. When DH's employer stopped the 401k match, he wanted to discontinue his minimal 5% contribution, but I wanted to replace the lost match. I tweaked his withholdings to minimise the change to take home. Next tax season I realized the additional advantage to increasing his 401k contributions - larger refundable credits. I kept incrementally increasing his contributions, especially after other $ obligations disappeared, like student loans, or after raises. We went from 5% to 55% in just a few years. When the mortgage was nearly gone (one year left) we switched the tax refunds to funding Roth IRAs for both of us.

In hindsight, perhaps I should have made opening a Roth IRA for me (SAHM until recently) an equal priority to paying down the mortgage. Perhaps.

I had written out an amortization schedule, which showed my that the biggest bang from prepaying the mortgage came early in the loan's life, when monthly payments were mostly interest and very little principal. If I had "found money" like a rebate check in any given month, I'd look at the schedule to see how many months of principal payments it represented, and add it into to next payment. When the principal payment is $25, it's fairly painless to add $100 and knock off 4 extra months, at least early on. DH had received a small inheritance from an aunt, $10k, which we had thrown in savings while he was unemployed/in grad school to retrain. After sitting on it a year, never needed to touch it, I was finally comfortable using it to make our first big lump sum payment on the mortgage (with a tax refund thrown in). That first $15k knocked 8 years off the mortgage. That was the biggest dent we could put in it, so I stretched to put as much as possible in that payment. Later lump payments covered fewer years, so we concentrated on the earliest payments, but still tried to at least throw in 1-2 extra month's principal payment whenever possible while it was painless. We paid it off in less than 15 years.

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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by FireProof » Thu Sep 20, 2018 8:21 am

KlangFool wrote:
Wed Sep 19, 2018 8:05 pm
OP,

You would have to be crazy to believe that paying 20% to 30% tax in order to save 4.75% interest is a good idea. It is a very simple math.

20% to 30% is bigger than 4.75%.

KlangFool
20 to 30% PLUS the rate of investment return PLUS tax-free compounding is bigger than 4.75%.

Hell, it's not unreasonable to think that just investment return will be bigger than 4.75%, which is why this is often debated WITHOUT the massive retirement account bonus.

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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by Jags4186 » Thu Sep 20, 2018 8:25 am

I vote no but not for tax reasons/compounding reasons. If you increase your takehome $1600 you will in essense be spending $1600 more a month to pay down your mortgage. What if something “comes up” and you need to redirect that $1600 elsewhere? As a new homeowner myself, I have found the ever growing list of expenses keeps on getting larger—much higher than I had anticipated. It would be “easy” to back off retirement savings as to not feel the pinch on a month to month basis. But I choose to figure out how to make it work with what I currently have, not with what I could have.

I fear that over the next 7 years as your child grows, and you possibly have more children, your expenses will rise and that $1600 will be eaten up by other expenses. Then you will be in the position of not paying off your mortgage quickly and not saving for retirement.

If you’re already maxing out your tax defferred accounts every raise going forward is going to come home to you. Instead of saving half your raise like some people do, redirect all of your raise to paying down the mortgage. It will take longer to pay off but you don’t know what the next 7 years holds—a few large bonuses here and there, a job change with a large increase in income, all could happen and you could still reach your goal.

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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by Frank Grimes » Thu Sep 20, 2018 8:46 am

You could always keep the contributions where they're at and then also scrimp and save to make an extra payment or two per year if you feel like it. That won't kill it in 7 years but should chop a good bit of mortgage time while preserving that tax advantaged growth.

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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by aristotelian » Thu Sep 20, 2018 8:58 am

Another no. Tax deferral is a powerful advantage. You should max your retirement accounts if you can. Only exception would be if you are in a low tax bracket but I have a feeling that is not the case for OP.

If you want to prioritize the mortgage over taxable brokerage account, that would make sense.

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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by Texanbybirth » Thu Sep 20, 2018 9:39 am

Sure, go for it. What did it for me is: you'll both still contribute enough to get company match (so basically 10% to 401ks), and you'll both still max Roth IRAs and your HSA. That's probably still a good chunk of change on top of your annuity. Again, if you continue to do all of this, then I say YES. Just don't forget your reason why you want this:
kelladoo wrote:
Wed Sep 19, 2018 5:07 pm
Why attack the mortgage and not invest in something else? Blame the little munchkin...We would much rather spend our free time hiking together, laying in the yard looking at bugs, having food fights, etc.
(We do this is at our house with our two munchkins, and have no plans to pay off the mortgage early, so I'm not sure how they're related. But I know emotions play a big role in finances.)

In 7 years when your mortgage is paid off, come back and give us all an update. Or just update this thread periodically! :beer

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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by teen persuasion » Thu Sep 20, 2018 12:09 pm

Something about the numbers felt off to me, so I found a prepayment calculator and began experimenting.

Increasing payments by $1600 monthly would take nearly 12 years to pay it off (141 payments). To do it in 84 payments you would need to increase the payment by nearly $3600 per month.

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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by LateStarter1975 » Thu Sep 20, 2018 12:52 pm

teen persuasion wrote:
Thu Sep 20, 2018 12:09 pm
Something about the numbers felt off to me, so I found a prepayment calculator and began experimenting.

Increasing payments by $1600 monthly would take nearly 12 years to pay it off (141 payments). To do it in 84 payments you would need to increase the payment by nearly $3600 per month.
I think he mentioned that they will also be putting in some money from savings towards the mortgage payoff
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by michaeljc70 » Thu Sep 20, 2018 12:54 pm

Nope. There's a lot of text there, but I don't see a lot of actual rational reasons to do so.

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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by LateStarter1975 » Thu Sep 20, 2018 12:55 pm

Even Dave Ramsey suggests you put at least 15% of your gross income into retirement before you pay off your house...unless the 5% you put to get the match + your 2 Roths + HSA will get you to that 15%. Personally, I share your enthusiasm about paying off your mortgage early, but I am doing mine only after maximizing all retirement accounts available to me. Either way you take, I'm sure you will be fine. But like the majority here says, it'll likely be more financially prudent to max out all your retirement accounts and then put the extra towards your mortgage. Good luck and let us know what you eventually decide to do.
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by Meg77 » Thu Sep 20, 2018 1:14 pm

I suggest thinking of it in percentage terms versus aiming to "max out" retirement accounts or put in "only" enough to get the match. Using these as the two options is "anchoring" - a behavioral finance bias that means you are attracted to an arbitrary number for some reason other than a rational, objective one.

Consider this - what if you had no employer match and could put an unlimited amount of your income into your 401ks? How much would you save for retirement then?

There's no right answer, but I suggest 15-20% toward retirement, 5-10% toward short term savings (college funds, car or home renovation, other unknowns like getting pregnant with multiples or a child with special needs and deciding to take time off work), and any remaining extra cash flow to the mortgage.
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by Tamarind » Thu Sep 20, 2018 1:16 pm

No, I wouldn't. I pay extra on my mortgage, but that's on top of maxing all available tax-advantaged accounts.

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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by cusetownusa » Thu Sep 20, 2018 1:31 pm

KlangFool wrote:
Wed Sep 19, 2018 8:05 pm
OP,

You would have to be crazy to believe that paying 20% to 30% tax in order to save 4.75% interest is a good idea. It is a very simple math.

20% to 30% is bigger than 4.75%.

KlangFool
This

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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by Snowjob » Thu Sep 20, 2018 1:36 pm

Can you define the 60k post tax?

If this is not encumbered by obscenely large capital gains, I would be in favor of cashing that in for a big one time payment against the mortgage. take a look at a mortgage calculator and run the numbers and see how much interest that will save you. I'm going to be making a similar move as the rate of return is actually quite high in my instance -- its worth about 10% IRR for me.

In general though, don't skip out on being able to shelter your money though the 401k. The tax savings are way more valuable than paying off the mortgage faster.

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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by afan » Thu Sep 20, 2018 2:49 pm

Each year that you fail to put the maximum into retirement you lose that chance forever. You cannot go back and put in extra in a later year to make up the difference.

Maximize your retirement assets while you have the chance.

You can put whatever you can afford into the mortgage, after maximizing retirement contributions, deciding what that amount may be and changing as life goes on.

If you were really sure about your time table, then you could shop for whether you could get a better rate on a 15 year mortgage. The disadvantage is that you would be locked in to those higher payments. If other expenses came up you could not direct cash flow elsewhere.

Right now you have a mortgage you can afford, with extra cash after maximizing your retirement contributions. If real raises or inflation lead to higher nominal income then you would be in a position to pay down the mortgage faster. But don't give away your ability to fill tax advantaged space. That is too valuable.
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teen persuasion
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by teen persuasion » Thu Sep 20, 2018 6:01 pm

LateStarter1975 wrote:
Thu Sep 20, 2018 12:52 pm
teen persuasion wrote:
Thu Sep 20, 2018 12:09 pm
Something about the numbers felt off to me, so I found a prepayment calculator and began experimenting.

Increasing payments by $1600 monthly would take nearly 12 years to pay it off (141 payments). To do it in 84 payments you would need to increase the payment by nearly $3600 per month.
I think he mentioned that they will also be putting in some money from savings towards the mortgage payoff
we could get about $1600 extra per month (after taxes) in our takehome pay to throw at the mortgage. That coupled with throwing a large portion of our savings at the mortgage each month would mean we could pay off the mortgage in about 7 years without really changing our lifestyle - we would still be saving about $400 per month.
I dithered over how to interpret that bit, for a while. I could certainly have misinterpreted it, but in the end I decided he seemed most likely to be talking about the shifted savings ("throwing a large portion of our savings at the mortgage each month"), rather than some already saved but unmentioned pot of money. If they do have a chunk to throw at the mortgage, why not just increase the down payment and have a smaller mortgage?

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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by randomguy » Thu Sep 20, 2018 8:20 pm

afan wrote:
Thu Sep 20, 2018 2:49 pm

If you were really sure about your time table, then you could shop for whether you could get a better rate on a 15 year mortgage. The disadvantage is that you would be locked in to those higher payments. If other expenses came up you could not direct cash flow elsewhere.

A 7 or 10 year arm also works and gives you more payment flexibility. Of course if you end up not paying off the loan for whatever reason, you run the risk of interest rate resets.

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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by noco-hawkeye » Thu Sep 20, 2018 8:33 pm

No way.

The most valuable thing you have right now is time. If you decide to save more later on, the math will really not be working in your favor and you will regret it.

If you said you already have 80-90% of your retirement / FIRE / 529 / etc savings already in the bank - then it would be more reasonable to attack your debts. But right now the most valuable thing you have is time. If you save 25k this year and it grows to 250k in retirement - think how much better saving 50k would have been!

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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by grabiner » Thu Sep 20, 2018 8:58 pm

If you want to pay off your mortgage faster, then you should refinance to 15 years at a lower rate. You will then pay less in interest while paying off the mortgage, whether you pay it off in 15 years or 7.

And if you do this, I wouldn't recommend reducing retirement contributions to make extra payments on a 15-year mortgage, which would likely be at about 3.75%. The reason is that you can earn almost as much in your 401(k) or IRA without taking on any more risk (say 3.39% on Intermediate-Term Bond Index, which has about the same duration as your mortgage), and you will have more money growing tax-deferred once the mortgage is gone.
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Re: Should we temporarily reduce our retirement contributions in order to pay off our $400k mortgage in 7 years?

Post by mnnice » Thu Sep 20, 2018 10:02 pm

I noticed that the OP hasn’t returned. :|

Am I also the only one that thinks that a 525k house seems like a lot on about a 100k income? Any place I’ve lived 525k is a lot of house and would come 8-10k tax bill. My guesstimate would be $2050 principal and interest, $750 taxes, and $75 insurance or ~$2800. That’s about 33% of gross. Paying extra beyond the money in taxable sounds ambitious let alone trying to pay it off in 7 years. If they had a 200k house with 150k remaining on the mortgage you could make more of a case for spending the 60k in taxable and hitting it hard and paying off in 2-3 years then emphasizing retirement savings more later.

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