Which is better -- up 401K or pay more on mortgage?

[branv]

I know usually these things depend on the individuals situation, but I'm wondering what the basic rule of thumb is: is it better to increase your 401K withholdings or is it better to pay more a month to your mortgage. I won't go into numbers, but right now DH is 33, not at the maximum withholding. Company stopped matching last year, may replace part of it later this year. We still have 25 years on our fixed-rate mortgage (value of house is still above what we owe...where we are in TX we avoided those inflated increases/rapid decreases in value), content with interest rate.

Thoughts?

 

[dawson5]

I would think compound interest would work in your favor. I read a book once by David Bach, said something along the lines of an 18 yr old contributing $2000/yr for 10 yrs and then stopped would have more in the bank/retirement than someone who started at 30 and continued until retirement.

 

[wdwfan16]

Bases on what you have supplied I would max out your 401K first and then pay more on your mortgage.

 

[bettymae1121]

Basicly, for most people you should take care of all your other savings goals first, before paying off the house early. I'm sure there are a few exceptions to the rule, and everyone should do what makes them most comfortable.

In my opinion, one should (in this order):

-Have 8 months (or more) living expenses in liquid savings.
-Fund any other needs (new car, home repairs, etc.)
-Contribute minimum needed to get full company match in your employers 401k, then max out IRA (Roth or traditional).
-Save for children's college (if needed)
-Pay extra towards mortgage

 

[QVCshopper]

Suze Orman says contribute up to the match in the 401k (in your case, nothing); fully fund a Roth IRA (up to $5,000/year for your age), then go back to look at the 401k and/or other investments.

Not knowing specifics, I would fully fund the Roth for you and hubby; then invest some in the 401k to diversify your taxes later in life. And try to pay at least 1 extra mortgage payment a year. But, that's without knowing your info. I should mention that a major benefit of investing in the 401k is reducing your income as far as federal taxes are concerned.

I'm 33; DH is 35. We paid off our house almost 4 years ago (for personal reasons, but ultimately was a great decision for us). We fully fund Roth IRAs, then put in max to 401k for hubby; I'm putting in 24% right now + 6% company match to make up for some lost time due to kids. We also have 529 plan and ESA for the kids. Probably should look at putting more into those soon.

 

[MrsPete]

Basicly, for most people you should take care of all your other savings goals first, before paying off the house early.

I know that I'm going against conventional wisdom here, and it's probably because I grew up without financial security . . . but I absolutely love knowing that my house is 100% paid for, and it's mine, mine, mine.

Your stock holdings and so forth may increase or decrease over time, but your house will always be there available for you to live in. It's different from all other investments because it's USEFUL as well as just being wealth building up. It might go down in value, but the living room will still be there.

My husband is amazed that he hasn't lost his job in this difficult economy, and knowing that our house is paid for is VERY COMFORTING. Having the house paid for means that we could live on my teacher salary alone -- with a few cut-backs, yes, but we wouldn't have any problems.

 

[HeyIt'sMe]

I vote for upping the 401k - - a paid off house won't pay your bills when you're retired.

 

[MrsPete]

I vote for upping the 401k - - a paid off house won't pay your bills when you're retired.

But taking away the mortgage payment will drastically slash your monthly bills, which may allow you to retire.

Really, BOTH are important.

 

[mickeytattoo95]

If you ever read any Dave Ramsay he says to give 10% away (tithe or a charity), have 6 months expenses in easy access savings, save 15% in 401k or IRA and then plug extra monthly income into the house. Not that all my little debts are paid off yet, but I can see house this would work. His snowball method sure has worked for me!

 

[HeyIt'sMe]

I vote for upping the 401k - - a paid off house won't pay your bills when you're retired.

But taking away the mortgage payment will drastically slash your monthly bills, which may allow you to retire.

Really, BOTH are important.

Oh, I agree. I just voted for one of the choices given by the OP.
My personal belief is to fully fund retirement first and then pay extra on your mortgage.

 

[TnTWalter]

I know usually these things depend on the individuals situation, but I'm wondering what the basic rule of thumb is: is it better to increase your 401K withholdings or is it better to pay more a month to your mortgage. I won't go into numbers, but right now DH is 33, not at the maximum withholding. Company stopped matching last year, may replace part of it later this year. We still have 25 years on our fixed-rate mortgage (value of house is still above what we owe...where we are in TX we avoided those inflated increases/rapid decreases in value), content with interest rate.

Thoughts?

Are you already contributing 15%? If so, then I'd go for the mortgage. If not, up to 15% and see what you have left.

Great to be thinking about these type of dilemnas!

 

[miprender]

I'm in the minority, but given the option I would put it on your mortgage.

After my company went bankrupt last year we were forced to take our 401k and either invest in an IRA (which I did) or take a 10% penalty to use the money (I tried to convince DH to by DVC). To me the 401ks have too many restrictions with my money!

 

[prncess674]

I'm in the minority, but given the option I would put it on your mortgage.

After my company went bankrupt last year we were forced to take our 401k and either invest in an IRA (which I did) or take a 10% penalty to use the money (I tried to convince DH to by DVC). To me the 401ks have too many restrictions with my money!

OMG - the reason there are restrictions (and tax benefits) is to encourage you to save the money for retirement. The penalty for withdrawing early is to encourage you to SAVE IT. Please tell me your husband used good sense and didn't squander his retirment savings on DVC.

If you were to use all your retirment savings for DVC what do you plan on using to live on during retirement????

 

[gullyf]

Do you prefer a bird in the hand or two in the bush? I think I would play it both ways as much as possible. While there is no company match, and the economy is questionable, I think I would put more towards your mortgage principle. That is firstly a guaranteed return, and, secondly, it is a return that becomes worth less as time goes on, so now is the time! Look at any amortization schedule and you'll see that the majority of your mortgage payment goes towards interest for many years. On a 30 year mortgage, you haven't paid half the principle until the 20th year or so.

You can always review the decision later, and make a change. And as the mortgage ages, more of your payment goes to principle, so paying additional on it becomes less effective. Just do up a quick amortization schedule in a spreadsheet and you can play what-if to your hearts content. I've got an old one laying about if you want one.

Of course, if you have other high interest debt you are probably better hitting that first.

Disclaimer: I am biased. Ours has been paid off for more than a decade and I've never regretted it, unlike some other investments I've made over the years

Gully

 

[slice67]

You should sent some to each. Split what ever money you want to put torwards the 401k. This way you are making progress in each direction.

 

[enchantingodin]

You should sent some to each. Split what ever money you want to put torwards the 401k. This way you are making progress in each direction.

I was gonna say exactly the same.

 

[TnTWalter]

I'm in the minority, but given the option I would put it on your mortgage.

After my company went bankrupt last year we were forced to take our 401k and either invest in an IRA (which I did) or take a 10% penalty to use the money (I tried to convince DH to by DVC). To me the 401ks have too many restrictions with my money!

Glad your husband didn't buy DVC with RETIREMENT. Smart man!

 

[kydisneyfans]

My interest rate on the house is locked at 4 3/8%, my 401K had a 31% gain for 2009. I get to deduct interest on my home, reducing my federal taxes. My money deposited into the 401K is done on a pre tax basis, lowering my taxable income by nearly 10K a year.

I would be nuts to pay extra on my mortgage now.

 

[RadioFanatic]

Suze Orman says contribute up to the match in the 401k (in your case, nothing); fully fund a Roth IRA (up to $5,000/year for your age), then go back to look at the 401k and/or other investments.

what is a roth IRA? and why would you do that before a 401K? thanks!

 

[bettymae1121]

what is a roth IRA? and why would you do that before a 401K? thanks!

There are two types of IRA's, a traditional and a ROTH. A traditional works much like a 401k. You put money in over the years all tax free (you take a deduction on your taxes) and when you withdraw the money in retirement, you pay income taxes then.

A ROTH, you put in money post-tax, meaning you pay taxes on that money today....but when you retire you take that money out, including capital gains, tax free!

Virtually all experts recomend that you have both types of accounts, so you can take advantage of pre-tax dollars today with a 401k/IRA, and tax free money later from a Roth. If you have a 401k with a match, it's usually best to contriute as little as nessesary to get the full match (nothing beats free money! ) and then put the rest in a Roth. There are a few exceptions to the rule, like your are making HUGE income now but expect to only need a very small income in retirement, in that case you may want to take the deduction now because your taxes will (likely) be higher today than in retirement. But for most it's best to have a mix of both so you have flexability down the road.