I agree that Investing is better than paying off mortage but.....

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Admiral
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Re: I agree that Investing is better than paying off mortage but.....

Post by Admiral » Thu Jul 30, 2020 8:55 pm

willthrill81 wrote:
Thu Jul 30, 2020 8:44 pm
Admiral wrote:
Thu Jul 30, 2020 8:35 pm
willthrill81 wrote:
Thu Jul 30, 2020 8:31 pm
Admiral wrote:
Thu Jul 30, 2020 8:21 pm
willthrill81 wrote:
Thu Jul 30, 2020 7:49 pm


I'm not assuming that anyone wants to be 100% stock, but buying bonds yielding half of one's mortgage rarely makes good sense apart from taxes, which do play a role in this, and which is why I was careful to refer to 'post-tax' and 'pre-tax' rates.

In your own situation, assuming that your 2.25% mortgage is not tax deductible, it's very possible that paying 25% tax on the funds used to pay down the mortgage would be mathematically superior to owning bonds with 0% income tax right now. For instance, if you paid 25% tax on $100k to pay down your mortgage and got a 2.25% return on those funds for 20 years, you would be left with a tax-free $117,038. By comparison, the future value of $100k for 20 years on a bond fund yielding 1.2% is $126,943. You would need to pay a tax rate below 8% on those funds in order for the bonds to come out ahead after taxes. Maybe that will be true for you, but it won't be for many.
Except that I have 10 years left on the mortgage and the bonds may be invested for decades (at least partially if not in full). My bonds yield more each month that my mortgage costs me in interest.
Your comparison is wrong on both counts. Once the mortgage is gone, you can invest the funds previously used to pay it anyway you wish, and you've already said that your mortgage rate is higher than what your bonds are yielding.
It’s true the mortgage RATE is higher. But the AMOUNT in pretax is greater than the mortgage balance. Hence, the coupons pay more than the interest. And the reason the amount is higher is that 100% of it is untaxed.
Again, that's irrelevant. Grabiner addressed why better than I have.
Sorry but I disagree that it’s irrelevant. I do not plan nor expect to be in an identical bracket in retirement. Therefore, why would I pay 25% income tax now to save the difference between a 2.25% mortgage and a 1.6% bond return? I’d rather save 100%, pay the slight interest premium, and allow my bond holdings to grow. As well, my personal belief is that Total Bond’s returns will be higher in the future than they are now. My mortgage rate is fixed. Bond rates fluctuate. Yes at some level it’s a gamble on interest rates. I also have no interest in tying up more money in my home as I already have 73% equity.

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LilyFleur
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Re: I agree that Investing is better than paying off mortage but.....

Post by LilyFleur » Thu Jul 30, 2020 10:06 pm

One thing that has not been mentioned is this: if the OP and his wife are blessed to have a lifelong marriage without a divorce, eventually one of them will become a widower. With the survivor collecting a nice pension as well as social security, RMDs will create a tax burden in the single tax brackets.

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Re: I agree that Investing is better than paying off mortage but.....

Post by Bfwolf » Thu Jul 30, 2020 10:33 pm

bg5 wrote:
Thu Jul 30, 2020 7:06 pm
Man....this forum is great but now i cannot figure out what to do. Our current house payment is $1086....once we pay it off my taxes would be $330 a month so basically once I pay off the house I free up an additional $740 a month.

But as others have pointed out investing all that cash each month can most likely beat that in the long run. I reality is with both of us getting pensions and SS most of this cash will be given to our kids and hopefully grand kids someday so I feel like we have a good 20-30 years before we even tap into that cash
Here's my 2 cents.

As has been pointed out, the tax arbitrage advantages many receive from 401ks may not be there for you due to your pensions. You'd still get the dividend/interest/cap gain tax avoidance, but the 401k advantages are less compelling without the tax arbitrage. If your tax rate in retirement is the same as your tax rate now, a traditional 401k is no better than a Roth. Which is still good, but not great.

Because your 401k advantage is limited, I am very skeptical of the idea of holding bonds there rather than paying off your mortgage. The 30 year treasury rate is 1.2%. That's your direct comparison to your 3% mortgage--both are guaranteed returns. So assuming you are not 100% stocks in your retirement accounts, I disagree with the idea of putting money into your 401k or Roth to hold bonds rather than paying off your mortgage. I think paying off your mortgage is a better deal given the 1.8% gap between what you'll get for paying off your mortgage vs owning long term treasuries. Or said another way, borrowing at 3% from your house to buy long term treasuries at 1.2% doesn't make sense to me. Instead, I would consider paying off your mortgage and then reducing the amount of bonds you hold by the same amount. So if you own $50K in bonds right now, but you put $25K extra against your mortgage principal this year, you can sell $25K of those bonds and buy stocks instead and maintain the same risk profile.

The final consideration point is having cash on hand for emergencies, etc. When you pay off a mortgage or put the money in a 401k, you lose that flexibility. Any contributions to your Roth IRAs can be removed at any time without penalty (but not the earnings), so you may have more flexibility than you realize there. I would not recommend going overboard with keeping taxable account money on hand, no matter how it's invested. Keep enough around for the financial flexibility you need, but I would plow as much as you can against the mortgage and reduce your bond holdings in your 401k by the same amount.

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Re: I agree that Investing is better than paying off mortage but.....

Post by neverpanic » Fri Jul 31, 2020 2:29 am

bg5 wrote:
Wed Jul 29, 2020 7:56 am
our combined income is around $150,000 and we live in a very low cost area.

we will continue to get 2% raises for life
If I like the job, I'm probably going to work until I'm a little older, even though I don't need to.
I am not a financial professional or guru. I'm a schmuck who got lucky 10 times. Such is the life of the trader.

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Re: I agree that Investing is better than paying off mortage but.....

Post by CyclingDuo » Fri Jul 31, 2020 6:42 am

bg5 wrote:
Wed Jul 29, 2020 7:56 am
Ladies and Gents,

I agree from a math perspective its makes sense to continue to invest money in the market vs paying off my 30 year 3.0% mortgage but I need help as to when I should fully pay off my mortgage and where this money would come from.

A few things to understand about our situation...

1. Ages 39 and 35 - Both of us are teachers and will receive pensions and we will be able to easily live off of our pensions alone. This includes all hobbies, travel etc. I will retire in 14 years and wife will retire in 18 years.

2. We have about 300K as of now in retirement accounts and most of this is in a 457b which does allow us to withdraw prior to 59 1/2 if we retire. The other money is in Roth IRA and 403b. We currently invest about $35,000 annually to these accounts

3. We owe $165,000 on a home valued at $350,000 and we have a 30 year mortgage that we just started at 3% interest.

4. We have about $50,000 in cash and our combined income is around $150,000 and we live in a very low cost area. WE have no debt other than our home and our current mortage is about $1000 a month. We can easily save about $2500 each month after we contribute to retirement, have fun, vacation etc.

5. We have 3 kids ages 12, 8, and 1 and have around $20k in 529 plans. We plan to fully fund the first 2 at local state univ and can easily cash flow this as we will continue to get 2% raises for life as we are in very stable school district. The last child will use the 529 and we can pull out from other accunts when the time comes.

6. We hope to leave most of our retirement cash to the kids some day because our pension and SS will allow us to live a really great life in retirement.

Paying off mortage is not necessary for us to retire as it appears our pensions alone will allow us to easily be able to do the things we want in retirement. Our state also allows us to collect SS when the time comes. But we prefer to have house paid off just to keep things easier.

Option 1 = continue to invest like crazy now and pay off mortage when we retire using Roth IRA or 457B.

Option 2 = pay off around $10,000 each year off of principal so we continue to knock down mortage and this would probably allow us to pay off house in less than 10 years.

Option 3 = make minimum payments for next 30 years since we can easily save $2500-$3000 each month after travel, fun etc......and invest like crazy. Our pension estimator shows us we will take home alot more in retirement that we do now. When SS kicks in we will be killing it.

Option 4 - anything you suggest.

So when do we pay the rest off? Do we ever? Please advise
Don't you love everybody fighting over what you should or shouldn't do? :mrgreen:

First of all, kudos on where you currently are financially as a dual income teacher household.

:sharebeer

We can relate as we have about the same value house, both teach, had children (that are now out of college), went through the thought process of paying off the mortgage or not, and were fortunate, like you, to have our housing expense of our PITI - due to a nice downpayment - be only single digit or in the low teens percentage wise of our income. In your case, your PITI is only 8% of your gross which is a very sweet Unicorn position to be in as it frees up plenty of household cash flow to go into other areas.

That's a great position to be in and enhances your ability to do some things with the extra cash.

Somebody did mention it upthread, but I'm going to advocate for one thing since you are in a financial position to do so. Where we differ from you - in terms of being teachers - in our household is that one is in public school with the state pension, and I teach at the college level (no pension). Having been through the experiences of funding the education of our own children at a combination of state universities and private colleges and study abroad programs - as well as having been doing academic advising, recruiting, meeting with prospective students and their parents, talking one on one with students every day, teaching about finance to future educators/student teachers, etc... for the past 17 years one theme has emerged. That theme is that many students feel a lot of pressure and stress about student loans and are already feeling a heavy weight about it while they are in college.

Even before the past 17 years of experience, we had long ago in the early 1990's decided we were going to fund and pay for our children's education. Much like most of the college students I get to work with on a daily basis, I had graduated with the equivalent of about $42K - in today's dollars - in student loan debt at double digit interest rates (loans from the late 70's, early 80's). I had to really struggle and live on the cheaper than cheap to knock those things out to just stay ahead of the double digit interest rates at the time. I managed to get it all paid off before we got married, but due to the stress of it all at the time I vowed not to put my own kids in a similar situation. So we started setting aside money to accomplish that goal. In our case, thanks to a roaring bull market in the 90's, plus another one from 2009 to the end of their college educations a year ago, the amount we set aside more than covered everything and meant that our children entered their working careers debt free and they both had enough remaining in their education accounts (we used UTMA's as we started the process before 529's came along) that they have nice $100K+ portfolios, no debt, drive used cars, are both saving, investing and in good financial shape. We made them work in high school and college to help contribute to their education, to invest early in their Roth IRA's, and take on paid internships throughout college and graduate school.

Not that parents have to fully pay for the college educations of their children, but as educators and knowing the importance of a college education you are in a position to do that for your three children so that they can graduate 100% debt free. In our case, we hadn't planned on the equity returns being so grand. However, due to a lot of front loading of their accounts, had more than enough to cover undergraduate, graduate school and some specialty programs with plenty remaining to pass on to them.

Although you have $20K in each of your older children's 529 accounts, our suggestion would be to throw a lot more at those accounts now while you can. One of our children went to the big state university here in Iowa and tuition room and board is currently $24K for in state students (plus expenses) which is not too far from what we paid for that child's annual education costs. University of Michigan current in state tuition room and board (with expenses) is around $31K this coming year. Our child that attended a state university also did a year abroad and graduate school. Although $20K sounds like a nice number right now, you have to anticipate at least 4 years of school and maybe, depending on their field of study, graduate school and some possible summer programs. Your 12 year old will graduate just 10 years from now from undergraduate college, so the funding will be 7, 8, 9, and 10 years from now and will be well north of $100K by that time for 4 years. Even using the rule of 72 and a return rate of 7%, it is going to take 10.3 years for the current $20K to double to $40K. I wouldn't be surprised if tuition room and board and expenses are easily $40K per year by that time.

We would advocate right now, since your PITI is only 8% of your gross income, you have the traditional three legged stool of retirement income all set in motion as it is (pension, SS, and your contributions to the risk portfolio), and you have three children to educate that focusing on your mortgage right now is not what you should be worrying about at all. You should be throwing 96 mph fastballs at the college education funds. Three kids times over $100K each for undergraduate school is what would have me up at night with worry.

Just one more point of view to join everyone else and their opinions.

CyclingDuo
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Harry Livermore
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Re: I agree that Investing is better than paying off mortage but.....

Post by Harry Livermore » Fri Jul 31, 2020 7:00 am

CyclingDuo wrote:
Fri Jul 31, 2020 6:42 am

Although $20K sounds like a nice number right now, you have to anticipate at least 4 years of school and maybe, depending on their field of study, graduate school and some possible summer programs. Your 12 year old will graduate just 10 years from now from undergraduate college, so the funding will be 7, 8, 9, and 10 years from now and will be well north of $100K by that time. Even using the rule of 72 and a return rate of 7%, it is going to take 10.3 years for the current $20K to double to $40K. I wouldn't be surprised if tuition room and board and expenses is easily $40K by that time.

We would advocate right now, since your PITI is only 8% of your gross income, you have the traditional three legged stool of retirement income all set in motion as it is (pension, SS, and your contributions to the risk portfolio), and you have three children to educate that focusing on your mortgage right now is not what you should be worrying about at all. You should be throwing 96 mph fastballs at the college education funds. Three kids times over $100K each for undergraduate school is what would have me up at night with worry.

Just one more point of view to join everyone else's opinion.

CyclingDuo
I would agree with CyclingDuo here, if you are inclined to seriously help your children pay for college. My son (entering senior year undergrad) and my daughter (entering freshman year undergrad) both did well academically in high school and garnered significant merit awards at their schools (one private, one public out of state) and the net cost of attendance for each is between $34K and $40K per year. We told them that they would have to take small student loans ($10K-$12K all-in) to help us make it work. We saved pretty hard, juggling our desire to save for retirement, buy a family sized home, and keep the old/ smaller house as income-producing rental property. Like you guys, my wife is a teacher.
I would suggest that CyclingDuo's estimate may in fact be low 7-10 years from now. If you wish to have maximum flexibility, save some in the 529s and some in taxable. There are endless threads on this website debating "which is better" etc.
If you guys were DINKs I'd say go for it: pay down the mortgage. I crave the relaxation that I hope will come when I'm mortgage-free, so I understand the desire... but if you are honestly hoping to make a difference for your kids on college costs, hunker down now. And watch the sequence of returns risk there. We dialed down equity exposure on all the 529s as each kid entered middle and high school (by the end of freshman year in HS I generally had ratcheted them down to money market funds)
Cheers

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Re: I agree that Investing is better than paying off mortage but.....

Post by A440 » Fri Jul 31, 2020 7:49 am

I'm a teacher as well, and the only earner for our family of 4. I paid off our modest home with a lump sum after a successful investment real estate venture just before the bubble burst (being a landlord was one of several side hustles I had and it was a lot of work!). Even though I knew investing it would have made more sense financially, I wanted the peace of mind to know the house was ours and it was only us that owned it. "The borrower is slave to the lender". I also didn't want a mortgage just in case we ever had a RIF in our district, which did occur in 2009-2010, it was an awful time for sure.
We just switched the mortgage payment to an investment payment. If times got tough, we could always stop contributing, but if times got tough and we had a mortgage... :(
Good luck on your journey!
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Re: I agree that Investing is better than paying off mortage but.....

Post by Admiral » Fri Jul 31, 2020 8:07 am

Just want to add a few general points.

I would resist the urge to let the (future) tax tail wag the current investing dog. If it turns out that with your pensions your tax bracket is the same, or higher, than it is now.... well, there are worse problems. You can mitigate taxes in many ways (not least through charity). I also want to point out that the “safety” of having a paid off house in a downturn is no different than having a large pile of savings that can be used to make mortgage payments in the same situation. It’s simply mental accounting. If you have enough money to pay off a note but choose not to, that’s simply choosing to arbitrage your loan. It’s personal preference of course but I’d rather have the money and the loan than no loan and a lot less money. (This decision is a personal one since it depends how much taxable money you have.)

Regardless, in no universe would I stop contributing to a tax advantaged account to pre-pay a 3% mortgage based on speculation that I will “have too much money”... UNLESS I was extremely close to retirement and my retirement financial picture was both clear and secure.

I’m tired of arguing about bonds. 😉

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Re: I agree that Investing is better than paying off mortage but.....

Post by SQRT » Fri Jul 31, 2020 8:34 am

Once liquidity requirements and tax deferred contributions are achieved, I would pay down the mortgage.

People who say “I can earn more in the market” are making 2 errors.
1) they expect the recent market results will continue well into the future and
2) they are comparing equity returns (much riskier) to fixed income returns (comparable to mortgage debt). The true comparison would be investing in bonds vs paying down your mortgage. Not such a good deal.
Last edited by SQRT on Fri Jul 31, 2020 9:25 am, edited 1 time in total.

bltn
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Re: I agree that Investing is better than paying off mortage but.....

Post by bltn » Fri Jul 31, 2020 9:00 am

Nice job with managing your money so far. Living below your means to the extent you do is not to be taken for granted .

Putting myself in your position, I would approach the situation as follows. With two good choices I often take advantage of both. I would start prepaying principal on my mortgage, probably 1000 a month. I would put 500-1000 a month into 529 s. The last 500- 1000 I would continue to accumulate in my after tax accounts.

I am a big believer in paying off mortgages early, despite certain math models suggesting a benefit to investing borrowed money. I would have my mortgage paid off prior to retirement.
I also believe providing a mostly debt free education is one of the best legacies to provide your children. College will cost more than you anticipate. The only chance to cash flow education expenses will be to have significant savings in 529 s. And all earnings are tax free. Funding 529 s is for me a no brainer.
Finally I believe in after tax accumulation of money as much as I believe in maxing out deferred savings. I would keep some money going into the after tax accounts.

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Re: I agree that Investing is better than paying off mortage but.....

Post by jmw » Fri Jul 31, 2020 10:11 am

In classic lending where the bank keeps the loan on its own books, a mortgage is a bet on your income being able to service the loan for 30 years. If you have no job or income coming in, you are not getting the loan. If you have enough assets to pay off the loan with no income, the bank still won't give you the loan. The security interest is only there in case you default and there is no assurance that it will make the bank whole even with sizable equity. None of this says anything about you making more money by investing vs. paying off the mortgage.

How secure are your jobs really? We are in unprecedented times so past layoffs may not be a great guide in predicting how secure your jobs are.

Can you service the mortgage through death or permanent disability and still pay all of your other non-discretionary expenses?

I'd lean towards paying off the mortgage sooner rather than later.

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Re: I agree that Investing is better than paying off mortage but.....

Post by willthrill81 » Fri Jul 31, 2020 10:28 am

jmw wrote:
Fri Jul 31, 2020 10:11 am
How secure are your jobs really? We are in unprecedented times so past layoffs may not be a great guide in predicting how secure your jobs are.
I have first-hand knowledge to say that a significant number of tenured professors around the nation are going to lose their jobs in the next 12 months. I will not be surprised at all if this also happens to many primary educators as well due to faltering tax revenues in many states.
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Re: I agree that Investing is better than paying off mortage but.....

Post by grabiner » Fri Jul 31, 2020 10:37 am

Admiral wrote:
Thu Jul 30, 2020 8:55 pm
willthrill81 wrote:
Thu Jul 30, 2020 8:44 pm
Admiral wrote:
Thu Jul 30, 2020 8:35 pm
It’s true the mortgage RATE is higher. But the AMOUNT in pretax is greater than the mortgage balance. Hence, the coupons pay more than the interest. And the reason the amount is higher is that 100% of it is untaxed.
Again, that's irrelevant. Grabiner addressed why better than I have.
Sorry but I disagree that it’s irrelevant. I do not plan nor expect to be in an identical bracket in retirement. Therefore, why would I pay 25% income tax now to save the difference between a 2.25% mortgage and a 1.6% bond return? I’d rather save 100%, pay the slight interest premium, and allow my bond holdings to grow.
The amount being higher is not relevant. If you have $500K in bonds and a $250K mortgage, you could pay off the mortgage using only $250K in bonds, and you will come out ahead if the $250K in bonds that you sell have a lower yield than the mortgage rate. If you have $250K in bonds and use them to pay off a $250K mortgage, your gain or loss is the same.

But your math above explains that the after-tax return on the bonds may be higher. If you have $333K in bonds in your 401(k), that would be $250K after tax. If you hold the bonds for ten years and they return 1.6%, they grow to $391K. If you then withdraw the money in a 15% tax bracket, you have $332K, a 2.88% compounded return. If these numbers are correct, then you are better off not paying down a 2.75% mortgage, and probably not even a 3.00% or 3.25% mortgage because you can keep the money in the 401(k) growing tax-deferred. This is part of the reason I usually recommend maxing out a 401(k) and IRA before paying down a mortgage.
As well, my personal belief is that Total Bond’s returns will be higher in the future than they are now. My mortgage rate is fixed. Bond rates fluctuate. Yes at some level it’s a gamble on interest rates.
The way to avoid the gamble is to hold a bond portfolio with duration equal to your mortgage duration; the duration of a mortgage is slightly less than half its term. If you have 10 years left on your mortgage, you can buy a bond portfolio with bonds maturing in 1-10 years, and use each year's bonds to match that year's mortgage payments. You don't care what happens to interest rates; you will come out ahead or behind depending on whether the current cost of the bonds is less or more than the mortgage balance.

If your bond duration is shorter than your mortgage duration, you are making a bet on interest rates. If rates rise, your bonds lose value now, but they gain more in the future while you hold them to make mortgage payments.

But even if your bond duration is equal to your mortgage duration, there is a non-market-timing advantage for holding bonds and a mortgage. If rates rise, you break even, because you can still use the bonds to make the mortgage payments. If rates fall, you come out ahead. because you can sell the bonds for a profit to pay off the mortgage, or keep the bonds and refinance the mortgage.

You have to decide whether this optionality is worth the known cost. When I considered paying off my mortgage, I chose not to pay it off for a 0.2% interest rate spread (first post of that thread), nor 0.12% once I had worked out the math better in the linked post, but did pay it off for a 0.64% spread six months later (further down). The other considerations didn't matter for me; since I used a small part of my taxable account to pay off the mortgage, I didn't care about the loss of liquidity.
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Re: I agree that Investing is better than paying off mortage but.....

Post by ScubaHogg » Fri Jul 31, 2020 10:42 am

My vote is for when you retire. If I didn’t think the stock market would return 3.0% nominal over the next 25 years I wouldn’t invest in it at all.
“There is no problem so bad you can’t make it worse.” - Chris Hatfield, Astronaut mantra

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Re: I agree that Investing is better than paying off mortage but.....

Post by Admiral » Fri Jul 31, 2020 11:24 am

grabiner wrote:
Fri Jul 31, 2020 10:37 am
Admiral wrote:
Thu Jul 30, 2020 8:55 pm
willthrill81 wrote:
Thu Jul 30, 2020 8:44 pm
Admiral wrote:
Thu Jul 30, 2020 8:35 pm
It’s true the mortgage RATE is higher. But the AMOUNT in pretax is greater than the mortgage balance. Hence, the coupons pay more than the interest. And the reason the amount is higher is that 100% of it is untaxed.
Again, that's irrelevant. Grabiner addressed why better than I have.
Sorry but I disagree that it’s irrelevant. I do not plan nor expect to be in an identical bracket in retirement. Therefore, why would I pay 25% income tax now to save the difference between a 2.25% mortgage and a 1.6% bond return? I’d rather save 100%, pay the slight interest premium, and allow my bond holdings to grow.
The amount being higher is not relevant. If you have $500K in bonds and a $250K mortgage, you could pay off the mortgage using only $250K in bonds, and you will come out ahead if the $250K in bonds that you sell have a lower yield than the mortgage rate. If you have $250K in bonds and use them to pay off a $250K mortgage, your gain or loss is the same.

But your math above explains that the after-tax return on the bonds may be higher. If you have $333K in bonds in your 401(k), that would be $250K after tax. If you hold the bonds for ten years and they return 1.6%, they grow to $391K. If you then withdraw the money in a 15% tax bracket, you have $332K, a 2.88% compounded return. If these numbers are correct, then you are better off not paying down a 2.75% mortgage, and probably not even a 3.00% or 3.25% mortgage because you can keep the money in the 401(k) growing tax-deferred. This is part of the reason I usually recommend maxing out a 401(k) and IRA before paying down a mortgage.
As well, my personal belief is that Total Bond’s returns will be higher in the future than they are now. My mortgage rate is fixed. Bond rates fluctuate. Yes at some level it’s a gamble on interest rates.
The way to avoid the gamble is to hold a bond portfolio with duration equal to your mortgage duration; the duration of a mortgage is slightly less than half its term. If you have 10 years left on your mortgage, you can buy a bond portfolio with bonds maturing in 1-10 years, and use each year's bonds to match that year's mortgage payments. You don't care what happens to interest rates; you will come out ahead or behind depending on whether the current cost of the bonds is less or more than the mortgage balance.

If your bond duration is shorter than your mortgage duration, you are making a bet on interest rates. If rates rise, your bonds lose value now, but they gain more in the future while you hold them to make mortgage payments.

But even if your bond duration is equal to your mortgage duration, there is a non-market-timing advantage for holding bonds and a mortgage. If rates rise, you break even, because you can still use the bonds to make the mortgage payments. If rates fall, you come out ahead. because you can sell the bonds for a profit to pay off the mortgage, or keep the bonds and refinance the mortgage.

You have to decide whether this optionality is worth the known cost. When I considered paying off my mortgage, I chose not to pay it off for a 0.2% interest rate spread (first post of that thread), nor 0.12% once I had worked out the math better in the linked post, but did pay it off for a 0.64% spread six months later (further down). The other considerations didn't matter for me; since I used a small part of my taxable account to pay off the mortgage, I didn't care about the loss of liquidity.
Eggzactly. Total Bond avg duration is 6.4 years, mortgage has 10 years remaining.

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Re: I agree that Investing is better than paying off mortage but.....

Post by randomguy » Fri Jul 31, 2020 12:18 pm

SQRT wrote:
Fri Jul 31, 2020 8:34 am
Once liquidity requirements and tax deferred contributions are achieved, I would pay down the mortgage.

People who say “I can earn more in the market” are making 2 errors.
1) they expect the recent market results will continue well into the future and
2) they are comparing equity returns (much riskier) to fixed income returns (comparable to mortgage debt). The true comparison would be investing in bonds vs paying down your mortgage. Not such a good deal.
1) No. They expect the market returns of the past 150 or so years to continue. For reference the worst 30 year performance was a bit under 8%

2) Sure. But there is no constraint that I need to keep my risk constant. My goal isn't to minimize my risk. It is to have enough money when I want it. SO far in US history, taking on risk has pretty much always paid off.

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CyclingDuo
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Re: I agree that Investing is better than paying off mortage but.....

Post by CyclingDuo » Fri Jul 31, 2020 1:27 pm

willthrill81 wrote:
Fri Jul 31, 2020 10:28 am
jmw wrote:
Fri Jul 31, 2020 10:11 am
How secure are your jobs really? We are in unprecedented times so past layoffs may not be a great guide in predicting how secure your jobs are.
I have first-hand knowledge to say that a significant number of tenured professors around the nation are going to lose their jobs in the next 12 months. I will not be surprised at all if this also happens to many primary educators as well due to faltering tax revenues in many states.
Getting off topic with the OP's question as neither are teaching at the college level, but having already been through wave one of those cuts - you know I can relate. You do bring up an interesting point when thinking about longevity of career in public education under today's climate of the pandemic, recession, and state's being able to do their normal funding.

Obviously this year is a wild card regarding public education when it comes to online learning vs. in person learning, but would imagine everything to be back to normal a year or two from now depending on therapeutics and control of the virus. I wish we lived in an area where masks were mandated or people were at least aware enough to wear them to slow the spread in the meantime. At least we wear ours and do our best to shop where they are required, and only eat outside (at the corner table far away from everyone else) if we do go out to eat.

We have already seen some early buy out offers this Spring and Summer for those who were close to retirement and replacing them this year with younger, less expensive teachers as a way to deal with budget issues in our district and state. OP and spouse are not yet in that age category yet, so one would think they should be able to see some stability through the pandemic, economic woes as a result, and potential funding issues. I don't see the ability to start cutting primary educators at the K-12 level due to the sheer volume of students that need to be served unless some major alterations and changes occur - especially with plans to social distance classroom sizes and number of students in each room.

Regarding the current upcoming school year and those districts who have given the parents a choice of sending their kids to school, or having them learn at home online - it's an odd situation. Our locale will end the school day at around 1 PM for those that come to school in person (the majority have chosen this option in our town), then in the afternoon - the teachers will teach the same content to the online group (currently about 23-34% signed up for this option), but only for a shortened version for 2:30 hours. That will be a degraded learning experience for both groups, but hopefully it is not going to be like this for the entire academic year. Who knows?

My spouse has been busy getting all organized and ready on how she is going to handle the scheduling and shortened sessions starting this coming month as her school year kicks off. I'll be teaching all of my college classes online from home this Fall semester and until things improve.

Regardless, let's not put the fear of any job cuts to the OP and his spouse for their respective positions. Rather, I wish them all the best of teaching through this pandemic and coming out strong and healthy on the other side of it.

CyclingDuo
"Everywhere is within walking distance if you have the time." ~ Steven Wright

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Re: I agree that Investing is better than paying off mortage but.....

Post by Ron Ronnerson » Fri Jul 31, 2020 1:34 pm

I’m a teacher as well. Assuming you have good investments available in your 457b accounts, I would prioritize it over the 403b since you plan to retire in your early 50s. You will be able to access the funds in your 457b accounts without penalty once you separate from your employer. I think it is totally possible for you to be in the 12% bracket and I’d make that a goal. You just need to keep your adjusted gross income (AGI) below $105k to achieve this. Of your $150k income, I assume you and your spouse contribute around $10k toward pensions. So now you have an income of $140k that you need to get down to $105k. Next, subtract things like health & dental insurance premiums taken from your paychecks, flexible spending accounts for health and/or child care, charitable contributions, and educator expenses. All these things will lower your AGI. Next, contribute enough to the 457b accounts to bring your income to $105k. Once you subtract the standard deduction of $24,800, you will be in the 12% bracket. After that, I’d contribute toward your Roth IRA accounts.

If you have additional money left over, you can choose between various options such as paying off the mortgage faster, contributing more money into the 457b or 403b accounts, or toward 529 accounts. It really is a matter of personal preference and all options are good ones.

Personally, as 30-somethings, I would not be in a hurry to pay down a mortgage with a 3% rate when you already have over 50% equity in the home. Even if you had to carry this mortgage for many years to come, so what? Will the tiny fixed mortgage payment really matter one way or another after you account for years of inflation withering the payment down further, two pensions plus social security coming in, and a nice amount sitting in your retirement accounts?

Rates are so low that you will likely make more money investing in equities over the long run. However, it is definitely more risk as well. You and your spouse should discuss this and be true to yourselves about whether or not you wish to take such risk.

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Re: I agree that Investing is better than paying off mortage but.....

Post by willthrill81 » Fri Jul 31, 2020 1:45 pm

CyclingDuo wrote:
Fri Jul 31, 2020 1:27 pm
willthrill81 wrote:
Fri Jul 31, 2020 10:28 am
jmw wrote:
Fri Jul 31, 2020 10:11 am
How secure are your jobs really? We are in unprecedented times so past layoffs may not be a great guide in predicting how secure your jobs are.
I have first-hand knowledge to say that a significant number of tenured professors around the nation are going to lose their jobs in the next 12 months. I will not be surprised at all if this also happens to many primary educators as well due to faltering tax revenues in many states.
Getting off topic with the OP's question as neither are teaching at the college level, but having already been through wave one of those cuts - you know I can relate. You do bring up an interesting point when thinking about longevity of career in public education under today's climate of the pandemic, recession, and state's being able to do their normal funding.

Obviously this year is a wild card regarding public education when it comes to online learning vs. in person learning, but would imagine everything to be back to normal a year or two from now depending on therapeutics and control of the virus. I wish we lived in an area where masks were mandated or people were at least aware enough to wear them to slow the spread in the meantime. At least we wear ours and do our best to shop where they are required, and only eat outside (at the corner table far away from everyone else) if we do go out to eat.

We have already seen some early buy out offers this Spring and Summer for those who were close to retirement and replacing them this year with younger, less expensive teachers as a way to deal with budget issues in our district and state. OP and spouse are not yet in that age category yet, so one would think they should be able to see some stability through the pandemic, economic woes as a result, and potential funding issues. I don't see the ability to start cutting primary educators at the K-12 level due to the sheer volume of students that need to be served unless some major alterations and changes occur - especially with plans to social distance classroom sizes and number of students in each room.

Regarding the current upcoming school year and those districts who have given the parents a choice of sending their kids to school, or having them learn at home online - it's an odd situation. Our locale will end the school day at around 1 PM for those that come to school in person (the majority have chosen this option in our town), then in the afternoon - the teachers will teach the same content to the online group (currently about 23-34% signed up for this option), but only for a shortened version for 2:30 hours. That will be a degraded learning experience for both groups, but hopefully it is not going to be like this for the entire academic year. Who knows?

My spouse has been busy getting all organized and ready on how she is going to handle the scheduling and shortened sessions starting this coming month as her school year kicks off. I'll be teaching all of my college classes online from home this Fall semester and until things improve.

Regardless, let's not put the fear of any job cuts to the OP and his spouse for their respective positions. Rather, I wish them all the best of teaching through this pandemic and coming out strong and healthy on the other side of it.

CyclingDuo
States aren't like the federal government. They cannot spend what they don't have. So even though the need for primary educators may exist, some locales may simply be unable to cover their paychecks. I'm not saying that there will be rampant layoffs. What I am saying is that the seemingly common view that those in education are virtually immune to economic woes. You are proof of that.

I'm not trying to instill fear into the OP, just a reality check that may help them keep their eyes open and be prepared for possibilities. I too wish and hope for the best for them.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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willthrill81
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Re: I agree that Investing is better than paying off mortage but.....

Post by willthrill81 » Fri Jul 31, 2020 1:46 pm

Ron Ronnerson wrote:
Fri Jul 31, 2020 1:34 pm
I’m a teacher as well. Assuming you have good investments available in your 457b accounts, I would prioritize it over the 403b since you plan to retire in your early 50s. You will be able to access the funds in your 457b accounts without penalty once you separate from your employer. I think it is totally possible for you to be in the 12% bracket and I’d make that a goal.
100% agree.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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CyclingDuo
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Re: I agree that Investing is better than paying off mortage but.....

Post by CyclingDuo » Fri Jul 31, 2020 2:30 pm

willthrill81 wrote:
Fri Jul 31, 2020 1:45 pm
States aren't like the federal government. They cannot spend what they don't have. So even though the need for primary educators may exist, some locales may simply be unable to cover their paychecks. I'm not saying that there will be rampant layoffs. What I am saying is that the seemingly common view that those in education are virtually immune to economic woes. You are proof of that.

I'm not trying to instill fear into the OP, just a reality check that may help them keep their eyes open and be prepared for possibilities. I too wish and hope for the best for them.
Yup. Expect to see various state tax increases to fund public schools. Probably cuts in AP programs, electives, some extracurricular programs, etc... as well. Unfortunately there is a correlation between spending and student outcomes both on the increased spending as well as decreased spending side of cycles.

This looks to be a deeper funding issue for states than even the Financial Crisis, but perhaps shorter lived.

Image
https://www.cnbc.com/2020/04/28/states- ... go-up.html

My comments on it being tough to cut public school teaching staff were based on last year's numbers where the US had the highest enrollment in public schools in history (which bodes well for college enrollment down the line with the current number of students going into the 9th grade and below). That's a different #'s problem than the one that wiped me out which is what currently is a dry spell in the age demographic #''s at college age students down to the 10th - 12th grade group. Looks like 2025 and beyond will start to look more optimistic for feeder students into colleges and universities once again for those schools and faculty that can hang on by their fingernails as those who will be going into the 9th grade eventually reach freshmen in college age come 2024-25 academic year and beyond...

Not sure what grade levels the OP and spouse teach, but 9th grade and below is a very large group of students at the public and private school level right now that will need to be served. Total public elementary and secondary enrollment is projected to increase between fall 2020 and fall 2028 by even more.

CyclingDuo
"Everywhere is within walking distance if you have the time." ~ Steven Wright

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Re: I agree that Investing is better than paying off mortage but.....

Post by emoore » Fri Jul 31, 2020 2:38 pm

My opinion would be to just invest it for now and pay it off when you can completely. That way you will still have liquid assets if you need it and it's not all tied into your house. Another option would be to split the extra 50/50.

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