Return to the Household Finances Forum | Post a Follow-Up

 o
pay off mortgage or retirement invest

Posted by behaviorkelton (My Page) on
Fri, Jun 8, 07 at 13:27

Ok... so here's another reason why one shouldn't pay off their mortgage. I don't think I've seen this explained yet in this forum.
Tell me if I have my head straight on this:
My main reason for wanting to quickly pay down a mortgage is for one reason: To have no debt... being debt free is something I value. This alone is worth something that often isn't figured into financial planning. (Sort of like buying a great new car is financially unwise, yet has another sort of value. Granted, new cars are probably FAR more financially damaging than paying off a mortgage!)

Ok. Getting to the point...so here is my thinking and it's very simple.

Instead of paying off the mortgage, take that same money... the extra principal that you were putting into the mortgage...and put it into your 401k/403b.
By investing tax free, you are getting to keep money that would otherwise be taxed away. By doing this, it seems to me that even with a very, very conservative investment you would come out much better off instead of using the money to pay down a mortgage.

I understand that this money will be taxed in retirement...but I expect my income in old age to be rather modest and taxed at a lower rate.

So is using the money for retirement rather than mortgage payoff a true "no brainer"?... or are there other factors to consider?


Follow-Up Postings:

 o
RE: pay off mortgage or retirement invest

IF you do indeed invest it, and, no, I don't mean the lottery, I see no reason to pay down the mortgage. Even if you've maxed out the IRA/401, etc, a balanced investment plan beats making extra payments.
The only exceptions I see is if you have a high interest 2nd mortgage or are being charged PMI due to a high percentage principle balance.

I'm no expert, but I saw a Holiday Inn last week.


 o
RE: pay off mortgage or retirement invest

Everyone's situation is different, and there's too many variables to say it's a no brainer. Just to name a few, your age, when you bought the house and how long you plan to stay in it, interest rates, when you want to retire, kids, college, marital status...

I don't like any kind of debt, even mortgage debt. I met with a financial planner who also doesn't like debt, and told me the key to retirement is to be debt free.

If one plans to stay in their house and have a mortgage for years after retirement, why take retirement savings to pay the mortgage and increase one's income at the same time?


 o
RE: pay off mortgage or retirement invest

I agree, Mona. I am planing to complete my mortgage about 2 years before I retire. I wil then use the $2,000 a month to fatten up my ready cash reserves.


 o
RE: pay off mortgage or retirement invest

Definitely agreed that HOW to invest is certainly not a "no brainer."

However, THAT it is financially wiser to invest more, earlier, is indeed a no brainer.

LEAVE as much of the mortgage balance ALONE as you can. Pay off the tax-deferrable debt AFTER you have accumulated enough of a lump sum to do so, all in one final payment.

Frittering away your early investment dollars by niggling away your tax-preferred mortgage leverage is tantamount to driving with each foot firmly stamping on the gas & brake pedals simultaneously... not the best & brightest way to get to your destination while preserving the value of your vehicle.

By all means eliminate your non-advantaged consumer debt as immediately as possible, and stay out of it as best you can.

Comfortably carrying your tax-preferred mortgage balance WHILE sending all discretionary money straight into tax-deferred or tax-free retirement investments is NOT normally intuitive... but is absolutely the more certain way to arrive at a safer, more secure retirement.

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner


 o
RE: pay off mortgage or retirement invest

Don't forget that earnings during your retirement years can also trigger taxation of your Social Security benefits. Thanks to our wonderful Congress not indexing the allowed income to inflation, the actual value of the $$'s we can earn before triggering that extra tax is decreasing every year.

I can't tell you what those amounts are, but it should be easy enough to find out. I do know that I resent having any of my social security taxed - in effect, the years that we earn more than allowed, our last earnings are taxed double.


 o
RE: pay off mortgage or retirement invest

If you decide to see a financial planner, avoid the ones who spam internet message boards with their services.


 o
RE: pay off mortgage or retirement invest

I'm assuming you are not talking about Mr. Donhoff. I enjoy his input.


 o
RE: pay off mortgage or retirement invest

Behaviorskelton,

I don't think it matters how you do it. If you can meet your retirement goals at retirement, then you have achieved your objective.

If your objective is to have as much money as you can at retirement or at anytime, then you may need to maximize every potential there is. If your goal is to have enough at retirement without spending too much time at it, then follow that path.

If paying off your house gives you a peace of mind, then it is pricelss! Go for it.


 o
RE: pay off mortgage or retirement invest

Don't forget that earnings during your retirement years can also trigger taxation of your Social Security benefits

That's something to keep in mind. I'm retired (but not working at all). Here's what the letter from SS said to me, "In the year you reach full retirement age, $1 in benefits will be deducted for each $3 you earn above the annual limit ($33,240 in 2006) until the month you reach full retirement age. After that your benefits will not be reduced no matter how much you earn. (emphasis was in the letter)

In the years before you reach full retirement age, $1 in benefits will be deducted for each $2 you earn above the limit ($12,470 in 2006).

I'm drawing SS even thgough I'm not yet full retirement age (in my case that would be 65), so I could earn a whopping $12,470 before my benefit would be deducted. Note that "full retirement age" depends on when you were born....


 o
RE: pay off mortgage or retirement invest

Is SS reduced only by earned income?
And after full retirement age there is no limit on income, earned or otherwise?
I'm not there yet, but want to plan ahead.


 o
RE: pay off mortgage or retirement invest

Is SS reduced only by earned income? That's correct

And after full retirement age there is no limit on income, earned or otherwise? That's how I interpreted the letter sent to me from the SSA

I'm not there yet, but want to plan ahead.
Smart, be sure to find out what YOUR "full retirement age" will be. For example, if you were born in 1960 or later, your full retirement age is 67. Not many people I know want to work full time that long.

Here is a link that might be useful: Plan Your Retirement


 o
RE: pay off mortgage or retirement invest

Only pay off a mortgage early if all your other investments are met - max IRA, max 401K (or whatever retirement accounts you're allowed).

And never pay it off early unless you are w/i 15 years of retirement (for maximum benefit).


 o
RE: pay off mortgage or retirement invest

>>If you decide to see a financial planner, avoid the ones who spam internet message boards with their services.<<

Mona could not be speaking of Dave Donhoff, whose input I also enjoy and respect immensely. Dave is NOT a financial planner, nor does he pass himself off as one. He is, however, very knowledgeable in his field, which is mortgages and equity - how people handle their debt, in other words.

The only true financial planners are Certified Financial Planners (CFP), who specialize in estate and financial planning, either through annual fees (percentage of investible portfolio) or hourly. They are registered and licensed. No stock broker or any kind of financial advisor who is not a CFP, has any true fiduciary responsibility when handling your money. Note I said handling, not advising. You can take advice from anyone, even me or Dave. But you don't want anybody EXCEPT someone with fiduciary (e.g., legal) responsibility, to be handling your money.

Many people get confused and think financial planners are those guys who give "free" seminars and then try to railroad you into buying insurance you don't need or wild'n'wacky hedge funds. But people who are the "real deal" in the CFP world don't operate that way. It isn't worth their while - most of them have minimums of at least $250K for a client's portfolio. Those are liquid funds for investing, not your house equity or stock options. And many go even higher, to $1M+ needed in liquidity before you can become a client.


 o Post a Follow-Up

Please Note: Only registered members are able to post messages to this forum.

    If you are a member, please log in.

    If you aren't yet a member, join now!


Return to the Household Finances Forum

Information about Posting

  • You must be logged in to post a message. Once you are logged in, a posting window will appear at the bottom of the messages. If you are not a member, please register for an account.
  • Posting is a two-step process. Once you have composed your message, you will be taken to the preview page. You will then have a chance to review your post, make changes and upload photos.
  • After posting your message, you may need to refresh the forum page in order to see it.
  • Before posting copyrighted material, please read about Copyright and Fair Use.
  • We have a strict no-advertising policy!
  • If you would like to practice posting or uploading photos, please visit our Test forum.
  • If you need assistance, please Contact Us and we will be happy to help.


Learn more about in-text links on this page here