Question for retirement saving/mortgage payoff

[Frwinkley]

We currently have less than 3 years left on our mortgage (around $26,000). We've only held the mortgage for 4 years (this is our second home, we are in our mid 50s). We are more than able to pay this off, but the interest rate was fairly low (3.2%).

We have some investments that have done very well this year (thank you stock market). I'm sure a correction is coming, so I've been thinking that now might be a good time to take the earnings (yes, there will be tax implications), paying off the mortgage, and funneling the mortgage payment into our retirement accounts.

Any thoughts/advice/things I might not be considering?

Thank you!

 

[tvguy]

I can only tell you how delighted we are that we paid off our mortgage early and then started using the mortgage money for investing. That was 17 years ago when we were 43. Not having a mortgage hanging over our heads is a huge relief as we are about 3 years from retirement.
Talk to your tax person and your financial planner. But to channel my inner Suze Orman, the sooner your can retire debt, the better.
I am AMAZED at how many people who enter retirement still making mortgage payments. My Financial Adviser is of the mind set that if you have a mortgage, you should not be retiring.

 

[BridgetBordeaux]

This is a case where it might be wise to consult a professional. I can certainly understand your desire to "lock in" the profits of the past 12 months. There are other factors that need to be mixed into the equation. Some issues like...........What are your monthly expenditures and income? What is the likelihood you may need to replace a car in the next 12 to 36 months? How much would be left in your emergency fund? What does your job status/income look like for the next few years? What is the condition/age of your roof/HVAC system? Are there any other large purchases that might occur in the next few years?

What about the prospect of selling off riskier assets and reinvesting in a more balanced, conservative product? It should be somewhat easy to match or beat +/- 3 percent performance.

If only Suze could take your call right now..................

BTW- congratulations on doing so well with your finances. Most people can not do what you are proposing.

 

[scottmel]

As someone who paid their mortgage off at 40, it is an amazing feeling! What I do miss though is itemizing on my taxes - we only itemize if we have a hefty donation etc to write off but aside from that, with no mortgage interest to write off, you do lose the ability to "write off" donations, property taxes, etc. I would not personally sell investments and pay a penalty to then pay off my mortgage to then lose the ability to write off .

 

[sharbear]

I think conventional wisdom would say not to pay off early. You don't know what the stock market is going to do. No one does.

I would not pay penalties withdrawing money from my 401k to pay off a low interest mortgage. If you were 59 1/2 and could withdraw without penalty, then maybe. I probably wouldn't with interest that low because your money is making more in the stock market and it would be tempting to spend the money that you spent on the mortgage instead of saving and making that money up in investments.

If you want to reduce the time you pay on your mortgage, pay more every month. You are going to pay more in penalties than what you would have payed in interest.

You could take a loan on your 401k to pay off the remaining balance if you wanted to. You pay yourself back the interest.

 

[morgan98]

We currently have less than 3 years left on our mortgage (around $26,000). We've only held the mortgage for 4 years (this is our second home, we are in our mid 50s). We are more than able to pay this off, but the interest rate was fairly low (3.2%).

We have some investments that have done very well this year (thank you stock market). I'm sure a correction is coming, so I've been thinking that now might be a good time to take the earnings (yes, there will be tax implications), paying off the mortgage, and funneling the mortgage payment into our retirement accounts.

Any thoughts/advice/things I might not be considering?

Thank you!

Perhaps I am missing it, but are you proposing to pay off the mortgage with savings in retirement accounts (401k , IRA, etc)or from general savings?

This makes a big different. It does not make sense to pay off the mortgage from retirement funds if you have to pay an early withdraw penalty. If it is from after tax savings or investments, it may make sense.

 

[BridgetBordeaux]

As someone who paid their mortgage off at 40, it is an amazing feeling! What I do miss though is itemizing on my taxes - we only itemize if we have a hefty donation etc to write off but aside from that, with no mortgage interest to write off, you do lose the ability to "write off" donations, property taxes, etc. I would not personally sell investments and pay a penalty to then pay off my mortgage to then lose the ability to write off .

Most likely the interest on last few years of such a small balance really does not help much on hitting the itemization threshold unless the other items come up just short of the threshold and this small mortgage interest pushes things over the line.

 

[tvguy]

I think conventional wisdom would say not to pay off early. You don't know what the stock market is going to do. No one does.

I would not pay penalties withdrawing money from my 401k to pay off a low interest mortgage. If you were 59 1/2 and could withdraw without penalty, then maybe. I probably wouldn't with interest that low because your money is making more in the stock market and it would be tempting to spend the money that you spent on the mortgage instead of saving and making that money up in investments.

If you want to reduce the time you pay on your mortgage, pay more every month. You are going to pay more in penalties than what you would have payed in interest.

You could take a loan on your 401k to pay off the remaining balance if you wanted to. You pay yourself back the interest.

Like I said, talk to your tax and financial expert. Taking OR borrowing money from a 401K are usually number 1 and number 2 on the things financial planners say not to do.

 

[Frwinkley]

OP here:

We would NOT touch any retirement savings to pay off the mortgage; that makes no sense at all. We would be using a very small portion of other investments (savings) that have done very well as payment of the mortgage.

Our mortgage interest over the last year is only about $1200; it has very little effect on our ability to itemize our deductions.

Regarding being disciplined enough to actually save the mortgage payment for retirement: we are very disciplined. Every pay raise we get goes straight into retirement. We just increase the percentage that we contribute to our 401ks, thereby decreasing our tax liability also.

House is only 4 years old, cars are fairly new, employment is stable.

I'm inclined to pay off the mortgage. We only have 3 years left on it anyway, but I love hearing various opinions.

Thank you.

 

[bluehen]

Without a ton more personal financial info no one here can give you good advice. As others have said a pro would be a good investment. I will now of course (thank you internet) give you my opinions. That mortgage has a very low interest rate and in most cases you would earn a lot more in investments than you pay on your mortgage. With tax benefits on both sides depending on your tax situations it could even move the calculus farther to not paying off the mortgage. If your convictions that a big correction is coming are that strong then move money out of the market, but keep the mortgage. After the drop reinvest to get the subsequent higher returns you can expect after the correction. You could remortgage the house, but I would assume that rate would no longer be available. Timing the market is hard. I agree with you and have been lightening up quite a bit of my market exposure hoping to reinvest at lower levels.

 

[OrangeBirdGirl]

Since you are not touching your retirement I say pay it off. There is no better feeling then being completely debt free. We are about 5-7 years away from paying off our mortgage, so I don't know the feeling quite yet. However, in the next couple years if my non-retirement savings grows enough I would do the same thing as you're talking about just to not have that payment anymore. Congrats on being so close!

 

[georgina]

Our mortgage is also paid off, and it is a good feeling (our interest rate from the early 90's was much higher though). We have always been able to itemize because of state and local taxes and property taxes along with charitable donations (which is probably going to change) Don't forget that capital gains from selling investments may be taxed at a lower rate than your regular income.

(We don't have a tax person or financial person other than me; I always smile when people recommend that as if it is something everyone has.) We have been going to a few free dinners lately, but I haven't found anyone I would trust more than myself.

 

[Frwinkley]

Georgina:

Loved your response! I too, have always managed our money. We don't have millions that we need to "manage". We are an upper middle class family, work hard and have always been smart with our money. We also do our own taxes. I'm always interested in maximizing what we earn.

My thiught has always been this: it's not about how much money you earn, but rather what you do with your money. I have friends who easily make 3-4 times what my husband and I earn; they spend $500 each month on coffee. That to me is crazy!

 

[cvjw]

Pay off your house. We payed off ours when we were in our 30’s. The feeling of freedom that you get with no mortgage payment is wonderful.

To the poster who said you can no longer itemize with no mortgage interest is incorrect. We write off our property taxes and charitable donations every single year, although we do give lots of money to charity and our church.

 

[cvjw]

Duplicate post

 

[OrangeBirdGirl]

(We don't have a tax person or financial person other than me; I always smile when people recommend that as if it is something everyone has.) We have been going to a few free dinners lately, but I haven't found anyone I would trust more than myself.

Same here! I don't trust anyone enough. I do my own research on different investments, with the exception of our 401's as that is through work but DH & I are still looking at that. Sure maybe someone else could earn me a little more then I am doing myself but fees offset that. Plus the fact that I have the control over it is invaluable.

 

[tvguy]

(We don't have a tax person or financial person other than me; I always smile when people recommend that as if it is something everyone has.) We have been going to a few free dinners lately, but I haven't found anyone I would trust more than myself.

It IS something everyone should have. My daughter's credit union even has a Financial Adviser on staff that members can meet with for free. One that doesn't sell any investments. Just like every adult should have a will and an estate plan, no matter how basic.

 

[viaggiamo]

There is a great community that has some amazing advice and threads regarding retirement and financial options that may not be so mainstream. https://forum.mrmoneymustache.com the blog is great too.

 

[BridgetBordeaux]

Most people would benefit from either using a free resource like mentioned by tvguy, or occasionally consulting with a fee only planner. Their monte carlo model analysis of your assets, their diversity, your future additions, and your withdrawals can let you know if you seem to be on a safe trajectory or if things might be unsustainable 10 to 30 years in the future.

Certain life events like having college bills in the future, or retirement, or receiving an inheritance, are events that may warrant a closer look at everything by an outsider.

Sometimes the 401K company offers this sort of advice for free as well!

 

[georgina]

Maybe. My kids are all out of college, DH is retired, and I read a lot of financial publications/sites. Unless an advisor is going to reimburse me for any losses incurred as a result of his/her advice, no thanks.