Planning for Retirement

[spork]

Looks like I'm going to be working for another few extra years now.
Assuming of course I survive the virus.

And . . . the Fed's stimulus attempt just tanked.

Be interesting if we keep moving into a liquidity crisis with an illiterate narcissist and boot-licking toadies at the helm.

[downer]

Looks like I'm going to be working for another few extra years now.
Assuming of course I survive the virus.

And . . . the Fed's stimulus attempt just tanked.

Be interesting if we keep moving into a liquidity crisis with an illiterate narcissist and boot-licking toadies at the helm.

Is interesting the best word here? I'd call it a nightmare, except that I'm sitting on my couch eating almonds listening to Beethoven, while preparing all those online classes.

[dr_codex]

Looks like I'm going to be working for another few extra years now.
Assuming of course I survive the virus.

And . . . the Fed's stimulus attempt just tanked.

Be interesting if we keep moving into a liquidity crisis with an illiterate narcissist and boot-licking toadies at the helm.

Is interesting the best word here? I'd call it a nightmare, except that I'm sitting on my couch eating almonds listening to Beethoven, while preparing all those online classes.

ibid.

Except for the Beethoven. I'm trying to filter out Minecraft soundtracks, from my now-homebound progeny.

Oh, sweet, quiet campus. How I miss you.

[spork]

As I mentioned upthread, five weeks ago I moved half of my retirement account assets from stock index funds to bond funds because I was worried about what to me looked like a global economic slowdown and possible recession. For example, Turkey's estimated economic growth for 2019 was zero, after its currency collapsed in 2018. The 2019 growth rate for the USA kept getting revised downward. It was obvious that growth was slowing in China before Covid-19 appeared. Etc.

But as of today I think we might now also be seeing in the stock markets an effect from margin calls on massively leveraged buys, which will lead to the collapse of the most heavily-indebted investment firms. But I have no data to back up this hunch.

Pigou? Dismalist? Any thoughts?

[dismalist]

No worries. You did good.

No US government, ever again, will let any financial intermediary of any kind whatsoever, fail. No more Lehman Brothers.

[That's outside Dodd-Frank. :-)]

Best of luck to all.

[spork]

Fed cuts its rate to zero and expands the money supply, and stock market futures tank. Again. Maybe the markets have finally figured out that a pathological narcissist as President is not good for the economy.

[AJ_Katz]

Alright folks, I need some points of input on what term to refinance my mortgage versus investing for retirement. 

My goals include retiring at 60 and I also do not foresee that my partner and I will stay in our current location to retire.  We could move in 5 years or maybe in 10-15.  Anyhow, we're approaching our 40's, so planning over the next 20 years right now. Currently, we have a 20 year mortgage, set to be paid off in 18 years.  I could refinance into a 15-year loan at 2.86% that would increase our payment by roughly $50/mo, thus decreasing the total cost of the mortgage by about $35k.  Sounds great....  except when you consider what the value of refinancing to a longer-term loan and investing that money instead.  Let's say that instead I refinanced to a 30-year loan at 3.38%, I could invest an additional $400/mo into my high stock portfolio that might get an inflation adjusted 5.5% return.  Doing that math for 15 years down the road of making lower payments and investing the difference, this choice could amount to a $40k difference in the investment.  However, once you take into account how much is paid in interest during those 15 years, the difference decreases to just $5.5k (but still in favor of longer term loan).  However, let's say we project the future value of that investment to when I am 60, compound interest wins....  increasing the benefit to a difference of about $60k (in today's dollars). 

So, in my scenario, investing more money earlier on always wins over being able to pay off the mortgage faster with a shorter term (which make sense just looking at the interest rate comparison -- 3.38% in mortgage vs. 5.5% for stocks).  BUT... I would really love to have our house paid off!  Despite that desire, I see that there could be a lost opportunity if I am not able to max out my contributions to the 403b and 457b.  Presently, it's a struggle just to max out the 403b and I have never invested so much that I was able to create the 457b (only allows pre-tax contributions).  Any advice on what other factors to consider? 

[Vkw10]

Alright folks, I need some points of input on what term to refinance my mortgage versus investing for retirement. 

You didn't mention costs associated with re-financing. Unless you need to re-finance, it may make more sense just to pay extra on your monthly mortgage payment. An extra $50 a month can cut several years off mortgage for a modest home.

Paying down debt has a guaranteed return. Buying stocks/stock funds doesn't. Plus, there's an emotional component to consider. How will you feel knowing that your mortgage payments will last until you're 70-ish?

If you can handle an extra $50 a month in mortgage payments, you can pay an extra $50 a month on mortgage, start your 457 with $50 a month, or start funding a Roth IRA with $50 a month. Ten years ago, I'd have paid more on house. Today, I'd drop money in savings until I had enough to open a Roth IRA at Vanguard.

[arcturus]

Paying down debt has a guaranteed return. Buying stocks/stock funds doesn't. Plus, there's an emotional component to consider. How will you feel knowing that your mortgage payments will last until you're 70-ish?

If you can handle an extra $50 a month in mortgage payments, you can pay an extra $50 a month on mortgage, start your 457 with $50 a month, or start funding a Roth IRA with $50 a month. Ten years ago, I'd have paid more on house. Today, I'd drop money in savings until I had enough to open a Roth IRA at Vanguard.

I agree with Vkw10.  While the math often appears to favor investments, there is a fallacy in the assumptions: you are not guaranteed any particular rate of return in stocks/bonds. Yes, the historical average is positive growth, but there are definitely long periods of low or negative returns.

Another thing to consider: our lives are not solely a cost-benefit analysis based on net-worth. The psychological benefits of being debt-free (my house is paid off!!!) are non-negligible.  I, personally, am glad that I chose to put my extra dollars into my mortgage early on. I now know that I have a place to live with the only expenses being property taxes (low in my state) and utilities.  That peace of mind is "priceless."

However, as Vkw10 notes, investing in a Roth IRA is also important. If you haven't done that, or if you do not have an emergency fund, I would put money toward either of those over paying additional dollars on the mortgage.

[Hegemony]

AJ_Katz, you don't say what rate your current mortgage has. The rule of thumb is that it only pays to refinance if you are going down at least one percentage point and staying in the house longterm, which might not happen. It doesn't sound as if you quite have that situation. I think you'd be better off paying down the current mortgage with extra payments. One thing to know is that the interest is not evenly distributed along the length of the mortgage. Most of it is front-weighted, so that in early years you are paying a lot of the interest, and as it comes to the final years, you are paying mostly the principal. So if you devote extra money to the principal in early years, you save a lot more in interest than if you devoted the same amount to the principal in the later years. 

So to my mind, you should devote some extra to the principal right now, but also follow Vkw10's wise words and fund your tax-advantaged accounts as fully as you can. That would be an IRA or a 403(b) or 401(k) and the like. That reduces your tax burden, which is an extra boost probably at least equal to the boost of saving interest on the mortgage. Plus that money will grow without being taxed, which is also advantageous. You can invest as prudently or as recklessly as you like. Nowadays people make fun of investors who stick to safe investments like CDs. But my mother had seen her family lose everything in the Depression, and she was very risk-averse. She never invested in anything but guaranteed-rate CDs in her whole life, but she amassed a tidy sum. If she had risked the stock market, she might have ended up even more affluent. But she was affluent enough for her taste, and she never had a sleepless night over her investments.

[AJ_Katz]

Hi everyone!  Some great suggestions here... 

You didn't mention costs associated with re-financing. Unless you need to re-finance, it may make more sense just to pay extra on your monthly mortgage payment. An extra $50 a month can cut several years off mortgage for a modest home.

Closing costs are already included in my estimates.  Refinancing from my current 20-year to a new 15-year would produce a total savings of $36k and pay off the loan 3 years sooner.  So if we only consider the mortgage cost, that option is a no-brainer.  Refinancing to a 30-year loan would not reduce the cost of our mortgage, but it would free up more of our present monthly income to increase investments. 

Paying down debt has a guaranteed return. Buying stocks/stock funds doesn't. Plus, there's an emotional component to consider. How will you feel knowing that your mortgage payments will last until you're 70-ish?

I likely won't be paying when I'm 70, even if I do refinance to a 30-year today. I would just be re-financing to the 30-year to increase investment ability in the next 10-15 years.  We'll either move before then to a new house and/or have more income to be able to pay off the mortgage more quickly at that time.  But what I won't be able to do is go back in time and make investments into retirement accounts that have annual caps, nor take advantage of the compound interest that an additional 15 years would provide.

If you can handle an extra $50 a month in mortgage payments, you can pay an extra $50 a month on mortgage, start your 457 with $50 a month, or start funding a Roth IRA with $50 a month. Ten years ago, I'd have paid more on house. Today, I'd drop money in savings until I had enough to open a Roth IRA at Vanguard.

Paying an extra $50 per month would result in approx. $5,000 in savings and pay off our house 1 year sooner.  Investing $50 per month that has a net interest rate of greater than 3.5% results in more value over the life of the mortgage, which does not include compound interest generated after the life of mortgage. 

...start your 457 with $50 a month, or start funding a Roth IRA with $50 a month. Ten years ago, I'd have paid more on house. Today, I'd drop money in savings until I had enough to open a Roth IRA at Vanguard.

Yep, I'm leaning the same way regarding the investment opportunity.  It would be different if the mortgage interest rates were higher, but with them being so low at the moment, it seems to make sense to get a long-term mortgage and invest the additional money instead.  This would also provide me with greater financial flexibility because if something happens that affects my finances, I could always decrease the amount that I am contributing to the investments.  Whereas if I've committed myself to a very high mortgage payment, a financial hardship would mean that I would need to refinance to get a lower payment, which, in some situations can be difficult (for example, someone loses their job). 

I agree with Vkw10.  While the math often appears to favor investments, there is a fallacy in the assumptions: you are not guaranteed any particular rate of return in stocks/bonds. Yes, the historical average is positive growth, but there are definitely long periods of low or negative returns.

I'm not sure if I'd call it "fallacy" in assumptions, however, they are assumptions nonetheless!  Because we have 20-25 years to retirement, my strategy is to invest in high risk stocks and not touch them as they ride the waves.  As we get closer, those can be transferred to lower risk options. 

Another thing to consider: our lives are not solely a cost-benefit analysis based on net-worth. The psychological benefits of being debt-free (my house is paid off!!!) are non-negligible.  I, personally, am glad that I chose to put my extra dollars into my mortgage early on. I now know that I have a place to live with the only expenses being property taxes (low in my state) and utilities.  That peace of mind is "priceless."

Yes, I think it is this element that persuades me to go for the shorter term loans.  It would be glorious to pay off the house in even 10-years... which we could do...  but I also wouldn't see my investment accounts get as large!

However, as Vkw10 notes, investing in a Roth IRA is also important. If you haven't done that, or if you do not have an emergency fund, I would put money toward either of those over paying additional dollars on the mortgage.

I have a 401a (pre-tax), 403b (Roth), but no separate Roth IRA.  For emergencies, we have savings to cover several months of expenses and credit cards as an option as well.  If more funds are needed, we could even take a loan from our 403b contributions, though that's certainly a last resort emergency option.

[AJ_Katz]

AJ_Katz, you don't say what rate your current mortgage has. The rule of thumb is that it only pays to refinance if you are going down at least one percentage point and staying in the house longterm, which might not happen. It doesn't sound as if you quite have that situation. I think you'd be better off paying down the current mortgage with extra payments. One thing to know is that the interest is not evenly distributed along the length of the mortgage. Most of it is front-weighted, so that in early years you are paying a lot of the interest, and as it comes to the final years, you are paying mostly the principal. So if you devote extra money to the principal in early years, you save a lot more in interest than if you devoted the same amount to the principal in the later years. 

Current rate is 4.25 @ 20 yrs with 18 yrs to go, ReFi options I'm considering are 2.75% @ 10 yrs, 2.88% @ 15 yrs, and 3.85 @ 30 years.

Refinancing to the 10 year saves $53k, to the 15 year saves $36k, and in the first 15 years the 30 year saves $1,500k and over the life of the 30 year loan it costs $67k more.  All savings include closing costs etc.

We currently do not have room in our budget to make extra payments to the principal because I am using any extra money to try to max out our 403b Roth option.

So to my mind, you should devote some extra to the principal right now, but also follow Vkw10's wise words and fund your tax-advantaged accounts as fully as you can. That would be an IRA or a 403(b) or 401(k) and the like. That reduces your tax burden, which is an extra boost probably at least equal to the boost of saving interest on the mortgage. Plus that money will grow without being taxed, which is also advantageous. You can invest as prudently or as recklessly as you like. Nowadays people make fun of investors who stick to safe investments like CDs. But my mother had seen her family lose everything in the Depression, and she was very risk-averse. She never invested in anything but guaranteed-rate CDs in her whole life, but she amassed a tidy sum. If she had risked the stock market, she might have ended up even more affluent. But she was affluent enough for her taste, and she never had a sleepless night over her investments.

Our goal is to achieve financial independence, where our investments income is sufficient to fund our current standard of living for the rest of our lives.  There are a lot of variables in this calculation, so although my rudimentary calculations suggest we are on track, my preference is to be more conservative and over-save.

[arcturus]

Yes, I think it is this element that persuades me to go for the shorter term loans.  It would be glorious to pay off the house in even 10-years... which we could do...  but I also wouldn't see my investment accounts get as large!

[...]

I have a 401a (pre-tax), 403b (Roth), but no separate Roth IRA.  For emergencies, we have savings to cover several months of expenses and credit cards as an option as well.  If more funds are needed, we could even take a loan from our 403b contributions, though that's certainly a last resort emergency option.

I am biased due to my own personal experiences. I paid off my mortgage at a time when the stock market was severely down. So I was able to buy stocks "on sale" and also be debt free. Had I put that money into the market, I would have been at a (significant!) net loss at that time, rather than being debt free and buying.

Regarding the Roth IRA: This is one of my financial regrets. I did not start to invest outside of my 403(b) contributions until significantly later in life. That means that I cannot retroactively invest that money in this tax-advantaged style of account, since those years of potential contributions are past. By my own projections, my RMDs from non-Roth 403(b)s etc will be significantly higher than my current salary. That's a nice problem to have, but it means that my tax liability will almost certainly be higher than my current tax rate. Thus, the more I can put into Roth retirement accounts the better (since I expect that my current tax rate will be lower than my future tax rate). My institution only recently offered a Roth 403(b) option, so I have just recently done this analysis for my own financial future. I think whether you contribute to an IRA or to your 403(b) may not make a difference if you are not yet maxing-out the Roth 403(b), but I also like having some of my retirement funds outside of the University system.

[clean]

IF you had a paid off house, would you refinance it to invest in the stock market?

IF the answer is "yes" then do what you want.  There is no bad decision.  Your tolerance for risk is great and that is fine, and whatever comes will be a satisfactory (risk adjusted) answer.

IF you answer is 'no' then do what you can to pay off the house earlier.  The 10 year plan sounds pretty good, especially if you can still contribute some into your retirement accounts.

Concerning your rate discussion, you mentioned a 5.5% return for stocks. However, those involve a lot of risk!  The standard deviation of that 5.5% number is pretty high and there will be times that you could (and will) lose A Lot! The 3.x% on the mortgage is a risk free value.  So be sure that you are considering the risks!

Long ago, in the other forum, (think 2007-2008) I was advocating paying down the mortgage (which I did) and I was told I was crazy not to be borrowing MORE to invest in the market!  Remember what happened to the market shortly after that period?  IF I had followed that 'sage advice', I would have owed twice the value of my investments and also faced a huge mortgage! 

Again... Think back to 2018 between September and December.  My account values went down more than the value of my house.  I didnt worry about it because my house was paid off and my contributions were buying cheaper priced financial assets (they were on sale).  What happened just a few months ago?  From a Dow Jones perspective the market went from over 30K to just over 18K in weeks!  How would you feel IF you Could Have had a Paid OFF house, but instead invested in the market only to have all of those investments disappear (for how long) And STILL be staring at debt on the house?


You have to decide how you feel about debt.  Is debt on your house a bigger mental issue, or is it the Fear of Missing Out of a potential return in the market a bigger concern?  Understanding what bothers you more (which makes you lose more sleep) will help answer your questions.

I will end by telling you part of my story. (If you PM me, I ll give you a more detailed version).  The bottom line is that when I was young and handsome and about 40, I decided to pay off my house.  I was already debt free otherwise, and I sent all my extra money to the bank to pay down the mortgage.  Only a few years later (in less time than I had expected) I was debt free and I took what was a mortgage payment and put that into my 403 B (by then the Roth version was available).  I am still saving about $44K  a year by maxing out my 403B contributions, plus the required contributions and the university matching contributions (and being over 50 now the additional contribution limits kick in too).  My retirement accounts dropped over $200K in six weeks.  Fortunately, they have recovered almost all of that loss in the last few days.  However, if China issues flare, if N. Korea or Iran, or who knows what hot spot flares, or if the CV19 resumes its threat soon, that could disappear again.  However, as long as I can pay my taxes, I have my house!  That is a nice feeling!

I have always taught as many summer classes as I am allowed (or that make) but I live on less than my 9 month wage. The extra money that once paid down my mortgage now goes to pad my retirement accounts, or my investment accounts. 

If you are debt free, have an emergency fund, have a car replacement fund, and if you have children have begun to prepare for their college, then by all means it it time to pay off the house and boost your retirement savings.  At only 40, you are on track to retire at a reasonable age.  (IF you want to retire at 50, then you have some work to do. If you want to retire at 60, again, you may have to do more). 

For what it is worth, and in closing, I hope to be ABLE to retire in about 5 years.  I may not be WILLING, but to have a paid for house and the ability to retire will be a really good mental place to be!  Imagine not being dependent on your screwy administration to decide your teaching schedule!  Imagine choosing to do whatever you think that you want to do because money is no longer an issue!  (You can not do that IF you owe on your house).

[monarda]

For me, it comes down to how long you plan to stay in your house.  And your age. I didn't really start saving in earnest into my 403b and 457b until I was 55. That was late, but I've done a good job catching up. So... if you start your contributions (in earnest) after your house is paid off, you'll also be just fine. (Even though contributing a little more while you're young is the more standard recommended approach)

Over the life of your loan, you say you'll save $35K. But then you say you might move in 5 years. How much would you save in your refinance  then?

If you really won't move until 10-15 years, then the 15 year loan is a good deal. Or even the 10 year.
Last summer, we refinanced to a 12 year loan, at 2.99%, with $149 total closing costs. The rate for those 12 year "rapid refinances" now is 2.75% at our credit union. We also have set up a HELOC, in case we feel like we need a large chunk of money out. Those rates are also fantastically low. Those usually cost nothing to set up, and offer a reservoir of low interest cash that's easy to pay down on your own schedule.

Do what you can to max your tax advantaged accounts, but I'm risk averse, and I would not put any "extra" into the market now. The prices are still too over-inflated for my taste. If the market goes 'on sale' again for a more extended period,  I might change my mind. I haven't changed my monthly contribution since the onset of Covid.

There's quite a bit of detailed discussion along these lines on the Mr. Money Mustache forums, if you are not familiar with the boards over there.