Pay down house or Invest?

[mrpaseo]

Alright let's see, upon completion of this deployment (Jan 09 time frame) I will have the SUV Paid in Full and no other debt besides the house and the 0% interest cc's I am rolling (I have enough in savings to pay the full balance on two zero percent cc's so basically no debt).

I will have three years left until I reach my 20 year mark and have the opportunity to retire with a 50% pension.

My current home is worth between 108,400 and 122,000 (Depending on who you talk to). I currently owe $65,100.

My current investments to include ROTH IRA's and regular Mutual funds total about $50,000

I have not been contributing to our (Wife and I) ROTH IRA so we can fully pay off this SUV (Purchased new at about $33,000.... I know I shouldn't buy new, but I plan on driving this well into retirement and I do not plan on reselling it, I havn't had a car payment in over 10 years since I purchased my last brand new vehicle (That I am still driving))... Both Toyotas by the way.

After this deployment I will bring home about $4,000 per month, we live comfortably on $3,000. That leaves me $1,000 for whatever.

My question is this, do I put that extra $1,000 on the house and bring bring the mortgage down $36,000 dollars before retirement or do I invest (ROTH IRA and other mutual funds) and ride the mortgage into retirement.

My current mortgage payment is $599.20 per month (Thanks to a refinance) on a fixed 7% 30 yr loan (I know it should be a 15 year loan but I originally planned on renting out the house until I found out I am being re-assigned to the area so we will continue to live in the house)... Also, for the past 10 years I have ALWAYS paid extra which in reality caused the mortgage to be a 15 year loan (I called a loan agency and worked the numbers for a refi to a 15 year and she told me that I was already on a 15 year mortgage if I kept paying as I had been... Though I did not keep up the 300 extra payments, I have always paid extr aon the loan and will continue until it is PIF.

I really think I can pay off the balance before I retire in three years using all extra windfalls (Taxes, wifes paycheck that we do not include in the budget, pay raises...etc.)

If I pay off the house, I will have no bills in retirement (Until I build some of course) but the house and vehicles will be paid in full and I will have a very reliable vehicle (2007 RAV-4 Limited) and a secondary veh. Paseo 1994. My bills will be only water, elec, cable, cell, child expenses (She will be in high school at this time) and vehcile expenses (And of course entertainment/investments). If I chose this route I will have I figure 60,000 in investments.

If I ride the house, I will have a 60,000 mortgage that will cost only 600 per month. However I will have about 100,000 in investments. The value of compounding is purshing me towards this route.

Then there is route three, I fully fund both our ROTH IRAs (10,000 per year) and I drop the entra 2000 on the mortgage and any windfalls on the mortgage. This will drop my mortgage to about 50,000 into retirement.

What say you? Thank you for your opinions and questions.
Ray

[jIM_Ohio]

Being debt free will give you flexibility to your cash flow. You will need less cash. But not investing in lieu if improving cash flow will usually come out behind.

What is the value of the retirement accounts?
What is the value of the pension?
How many years to retirement?
What are expected retirement expenses?

I will present some numbers once you post these and you can make a more informed decision.

[disneysteve]

I will have three years left until I reach my 20 year mark and have the opportunity to retire with a 50% pension.

My current investments to include ROTH IRA's and regular Mutual funds total about $50,000

After this deployment I will bring home about $4,000 per month, we live comfortably on $3,000. That leaves me $1,000 for whatever.

Tell me is this is all correct.

1. You plan to retire in 3 years and start drawing a 50% pension, so you will take home about $2,000/month.

2. Your current monthly expenses are about $3,000/month, meaning you'd have a $1,000/month shortfall, unless your expenses will drop in retirement.

3. You only have about $50,000 in savings right now.

Correct so far?

How do you plan to cover the gap between what the pension provides and what you actually need to live? The 50K can only provide $1,000/month for a few years before it runs out. Will that be long enough to get you to Social Security age? If not, do you plan to work after you leave your current position?

Even with a 50% pension, I don't see how 50K in savings is enough to retire on. You can add $36,000 to it over the next 3 years, but depending on your age, that still may not be enough unless you will continue working elsewhere.

How old are you by the way?

[Like2Plan]

....I will have three years left until I reach my 20 year mark and have the opportunity to retire with a 50% pension....

...After this deployment I will bring home about $4,000 per month, we live comfortably on $3,000. That leaves me $1,000 for whatever. ...
Ray

Ray,
Because you have mentioned deployment, I am assuming you are in the military? In your current take home calculations, do you receive Variable Housing Allowance (VHA) and BAQ?
Can I am assume that you are planning to start a second career after you retire?
Have you found out how much you bring home with the "50%" pension after taxes (and possibly SBP insurance)?

The thing about paying off the mortgage is that in order to help cash flow, it is an all or nothing kind of thing. Even if you pay down your mortgage, you are still going to have that payment until it is paid off completely. There might be another choice where you make investments until you reach the pay off amount and then pay the mortgage off in full. In the meantime, the cash reserves might give you some additional flexibility in your transition mode.

[mrpaseo]

Being debt free will give you flexibility to your cash flow. You will need less cash. But not investing in lieu if improving cash flow will usually come out behind.

What is the value of the retirement accounts?
What is the value of the pension?
How many years to retirement?
What are expected retirement expenses?

I will present some numbers once you post these and you can make a more informed decision.

What is the value of the retirement accounts?
As of 1 AUG 08: $32,534.49

What is the value of the pension?
Not sure what this means but I should be bringing home about $2,300 by then. (Current base pay: $3694.50 (Public info) adjust for years remaining to $4000, 50% = $2,000 minus taxes... about $1,800 take home in retirement).


How many years to retirement?
I will have the opportunity to retire Apr 2012 (20 Years of service = 50%, every year after that I will receive an additional 2.5%)

What are expected retirement expenses?

FIXED:
Water: $40.00
Electric: $150.00
Cable TV/Internet: $100.00
Cell Phone: $90.00
Trash Monthly: $18.00
Life Ins. Q: $20.50
Car Ins.: $150.00
PASEO Registration: $5.00
RAV-4 Registration: $5.00
Health: $50

ADJUSTABLE:
Vacation: $100.00
Child Birthday: $50.00
Christmas: $100.00
Food: $350.00
Entertainment: $400.00
Child Allowance/Lunches: $100.00
Clothing: $100.00
Wife Spending Money: $150.00
My spending money: $150.00
Vehicle Maintanence: $50.00
Vehicle Fuel: $150.00
Animal Care: $25.00

Total: $2,353.50

House: $599.20

New total: $2,952.70

This does not include any further investments.
Ray

[mrpaseo]

Tell me is this is all correct.

1. You plan to retire in 3 years and start drawing a 50% pension, so you will take home about $2,000/month.
I figure about $1,800 take home (See post below)

2. Your current monthly expenses are about $3,000/month, meaning you'd have a $1,000/month shortfall, unless your expenses will drop in retirement.
My wife and I will continue to work.

3. You only have about $50,000 in savings right now.
This is total savings, here is a snapshot:
NET WORTH As of 31 AUG 08: CASH $30,132.15 INVESTMENTS $58,289.24 HARD ASSETS $140,000.00
COLLECTIONS $7,000.00 TOTAL ASSETS $235,421.39
MINUS LIABILITIES $110,722.87 TOTAL NET WORTH $124,698.52

Correct so far? Ahhhh sure.

How do you plan to cover the gap between what the pension provides and what you actually need to live? Hard work (Hopefully not to hard)(As we live today)


The 50K can only provide $1,000/month for a few years before it runs out.
I don't plan on touching any investments...hopfully ever

Will that be long enough to get you to Social Security age?
No way


If not, do you plan to work after you leave your current position?
I do plan on working, that is if I retire, I may do a few more years, time only tells.

Even with a 50% pension, I don't see how 50K in savings is enough to retire on. You can add $36,000 to it over the next 3 years, but depending on your age, that still may not be enough unless you will continue working elsewhere.

How old are you by the way?
Currently my wife and I are 36, we will be 39 when I start drawing the pension (Unless I decide to stay on for a few more years)

Allow me to add, I do not plan on throwing in the towel (Retireing) until I am about 50. I am hoping that by then, I can generate enough passive income in conjunction with my pension to live as I am now, or even a little better.

My (Our) goal is to build up to $500,000 in todays dollars for my future that I can pass on to my heirs (Life long goal) which will probably be 1.5 or 2 mill by then.

[momof1in150]

I am also assuming that he is military so he is most likely retiring around 40 years of age and will have a second career so there won't be a shortfall. He collects 50% of his base pay for the rest of his life.

If 1/2 his base pay is $2K per month then his current pay is most likely not include the BAH (they don't call is BAQ and VHA anymore).

A couple of military retirement reminders - a lot of your pay isn't taxed right now and it will all be taxed when you retire. You also need to check with your local state tax laws as some states tax military retirement (ask me how I know). If you choose to go with Tricare Prime (which I suggest) you need need to pay the premiums ($430 per year) and copays. While it isn't a lot it is something to take into consideration.

If you are serious about retiring when you get home take the course that the base offers for those getting out of the service (whether retiring or other). They give you a lot of information.

[mrpaseo]

Ray,
Because you have mentioned deployment, I am assuming you are in the military? You are correct, Active Duty since 1992.

In your current take home calculations, do you receive Variable Housing Allowance (VHA) and BAQ?
My other income is
BAS (Food): 294.43
BAH (Housing): 1010

I just niticed I made an err in my calculations, I used my deployment take home pay as my base pay.... this is going to get ugly right now, you might want to look away.

BASE PAY: $3,694.50, adjusted to $4,000 for remaining years, 50% $2,000 minus taxes etc. About $1,800 (Ouch)

Can I am assume that you are planning to start a second career after you retire?
I will deffinantly work, as will my wife, until we are at the age of 50, at this point I am going to try to retire fully.

Have you found out how much you bring home with the "50%" pension after taxes (and possibly SBP insurance)?
Nope, just my WAG guestimations


The thing about paying off the mortgage is that in order to help cash flow, it is an all or nothing kind of thing. Even if you pay down your mortgage, you are still going to have that payment until it is paid off completely. There might be another choice where you make investments until you reach the pay off amount and then pay the mortgage off in full. In the meantime, the cash reserves might give you some additionaly flexibility in your transition mode.
Good point, but what about the interest I would be paying, I could not earn 7% anywhere these days.

Thanks for the questions, they helped me find my error.
Ray

[mrpaseo]

I am also assuming that he is military so he is most likely retiring around 40 years of age and will have a second career so there won't be a shortfall. He collects 50% of his base pay for the rest of his life.
39 actually, I hope to pick up a vocation but not do another 20 years, maybe 10 more (Again, hopefully)


If 1/2 his base pay is $2K per month then his current pay is most likely not include the BAH (they don't call is BAQ and VHA anymore).
My current Base Pay is: $3,694.50, BAS: $294.43, BAH: 1,010.00


A couple of military retirement reminders - a lot of your pay isn't taxed right now and it will all be taxed when you retire. You also need to check with your local state tax laws as some states tax military retirement (ask me how I know).
TN no state income tax (Yet)

If you choose to go with Tricare Prime (which I suggest) you need need to pay the premiums ($430 per year) and copays. While it isn't a lot it is something to take into consideration.
Great information, thank you...actally I might have more questions in the future.


If you are serious about retiring when you get home take the course that the base offers for those getting out of the service (whether retiring or other). They give you a lot of information.

I will look into this as soon as I get back home

[Like2Plan]

If 1/2 his base pay is $2K per month then his current pay is most likely not include the BAH (they don't call is BAQ and VHA anymore). .

Thanks

If you are serious about retiring when you get home take the course that the base offers for those getting out of the service (whether retiring or other). They give you a lot of information.

This is very good advice.

[disneysteve]

My wife and I will continue to work.

my wife and I are 36, we will be 39 when I start drawing the pension

I get it now. So you aren't actually "retiring" but rather changing careers from military to civilian.

Do you have to start drawing the pension as soon as you leave the military? If not, is there any advantage to delaying when you take that money? For example, does the benefit increase if you don't start drawing from it for 5 or 10 more years? If you will continue to work and can do without the pension money for a while, that could be helpful.

Forgive my ignorance about military matters. That is one area I know zilch about.

[mrpaseo]

Great questions, really got me thinking.... Retire at 22 is what it got me thinking. I am going to retire near a base and look into securing a GS job before I get out. Hopefully things will work out in that area. If not, it's to easy to stay on for another few years to solidify a portfolio before I retire.

The bottom line is, if (And I fully believe I can) pay off the house before I hit 20, I will not improve my portfolio (Save for the equity in the house) which means nothing if I do not plan on selling. My investments will probably amount to about 60,000 at that point and I will not have enough money to live without working.

If I instead, invest all I can, and keep paying on the house, I may be able to generate enough passive income to make it, though I will add 600 dollars to the budget.

Above all else, we will still have to work (The original plan no suprize here) to cover what I will not with the pension and any future investments.

Now that you all have the full story, what are your opinions? Pay down on the house or max out the portfolio?

Thanks,
Ray

[momof1in150]

I get it now. So you aren't actually "retiring" but rather changing careers from military to civilian.

Do you have to start drawing the pension as soon as you leave the military? If not, is there any advantage to delaying when you take that money? For example, does the benefit increase if you don't start drawing from it for 5 or 10 more years? If you will continue to work and can do without the pension money for a while, that could be helpful.

Forgive my ignorance about military matters. That is one area I know zilch about.

You draw military pension your first month of retirement. There is not other option. He is actually retiring from one job but getting a second. Pretty normal for military retirement.

[mrpaseo]

I get it now. So you aren't actually "retiring" but rather changing careers from military to civilian.

Exactly, sorry about my vaugness

Do you have to start drawing the pension as soon as you leave the military? If not, is there any advantage to delaying when you take that money? For example, does the benefit increase if you don't start drawing from it for 5 or 10 more years? If you will continue to work and can do without the pension money for a while, that could be helpful.
I sure can delay the pension, for as many years as I decide to stay in the service. Otherwise, first check is delivered within 45 days of retirement.


Forgive my ignorance about military matters. That is one area I know zilch about.
No problem, here is a good opportunity to learn, ask any question you might have.

Odd, it said my response is to short, I must add five characters.

[disneysteve]

Odd, it said my response is to short, I must add five characters.

If your only response was within the quote from another post, that doesn't count as it is seen as part of the quote. Only characters outside the quote count.