Save For Retirement OR Pay Down Mortgage

**puck36** · 02-08-2010, 07:29 AM

You should put 15% of your income in retirement and the rest on the mortgage thats if you have no other debt.

**PaydayLoner** · 02-08-2010, 07:44 AM

One way to look at it is that you're "investing" your money at 4.375% whenever you pay down the mortgage, compared to investing it at whatever return you get in your retirement account. Tax consequences would affect that too, of course.

So the two things to consider are: which gives you a higher rate of return including tax savings, and which "allocates your assets" best, like the investors say. A lower return might be okay if there are other advantages, like easy access to your money or more flexibility.

The disadvantage of paying down the house is that you can't easily get the money back out, if circumstances change and you need it. On the other hand, it's not easy to get the money out of an IRA either, without either paying a penalty or getting old.

So, gee, that didn't help much, did it? But maybe it's a way to approach the question and help decide.

**jIM_Ohio** · 02-08-2010, 07:45 AM

Originally posted by ricksample View Post

Since we are currently adding over $500/month to our retirement accounts, in our budget that only leaves us $60 extra/ month to pay towards the mortgage. Before we were putting $560/month towards the mortgages principle. So right now we are putting a lot more towards our retirement than towards our mortgage. Our mortgage should still be paid off in 10 years by the time I am 35. After our mortgage is paid off, we are going to take a portion of what we were paying to our mortgage (Around $500/month) and put that towards retirement because we want to retire by the time we are 55-60.

That one section told me you have a specific retirement goal. Have you analyzed if you are doing enough to meet that goal?

Check this thread if you need some pointers

Saving Advice Forums

http://www.savingadvice.com/forums/investing-banking/50669-questionaire-people-starting-retirement-planning.html

Information which would help:

1) what is current balance of retirement accounts?
2) how many years do you have until you retire (or post your exact age- 22 is different than 29)
3) what is your annual amount of expenses?
4) have you put your financial life on a timeline?

If you have a timeline, put today's date, then list financial milestones (retirement, mortgage paid off, kids college) and list the sequence you think they will happen in.

The come up with ways to estimate the value of each expense.
For example, retirement estimate is 25X your annual expenses. It can be less than 25X, but 25X is a 4% withdraw, which is accepted for long retirements as being "safe".

List the "costs" to pay off mortgage at a given date. Do an opportunity cost analysis to see if that money is better spent somewhere else.

Most people which have paid off mortgages do not regret that decision (paying it off early). The issue which is unique to everyone (or common to everyone) will be the opportunity costs of using the money for something else. Only you can make that decision.

Best thing to do is look at your opportunity costs

could you work until age 75 if your mortgage was paid off?
could you retire early and still have a mortgage?
could you have kids borrow for college with a paid off mortgage?
could you have kids education paid for and work until age 75?

Set up a timeline, put the financial goals on it, and see what works for you.

In my situation, I put 20% towards retirement (22% of gross income)
I put about another $50/mo to mortgage
kids college fund is small because only contributions are from grandparents.

That is the way it is until other cash flow is freed up to pay down the mortgage.

**ricksample** · 02-08-2010, 01:54 PM

1). We just started so we have around $3,000 with around $500 added monthly.
2). We're 26 and would like to retire no later than 60.
3). Our expenses aren't to bad. The only debt we have is our mortgage. No car payments or credit card bills. We have a budget on excel. We input our monthly net income, subtract our expenses including retirement, food, fuel, etc. Whatever is left over each month is what my wife and I split. We call this "Mall Money". Which means we can pretty much buy anything we want with it.

**ricksample** · 02-08-2010, 01:58 PM

Originally posted by PaydayLoner View Post

One way to look at it is that you're "investing" your money at 4.375% whenever you pay down the mortgage, compared to investing it at whatever return you get in your retirement account. Tax consequences would affect that too, of course.

So the two things to consider are: which gives you a higher rate of return including tax savings, and which "allocates your assets" best, like the investors say. A lower return might be okay if there are other advantages, like easy access to your money or more flexibility.

The disadvantage of paying down the house is that you can't easily get the money back out, if circumstances change and you need it. On the other hand, it's not easy to get the money out of an IRA either, without either paying a penalty or getting old.

So, gee, that didn't help much, did it? But maybe it's a way to approach the question and help decide.

That's the main problem I'm having at the moment. I don't know what my investments will return. I had mine in fixed income earning very low percentages each month. So last month I transferred everything to stocks/bonds. It wasn't very much, $3,000. Then the stock market went down. Right now I'm at -2.11%. I'm new to investing, so it's hard making a decision to put my refund in my retirement account if it's negative at the moment.

If I have been investing for years and actually seen some double digit returns in my account, I wouldn't hesitate and I would put my entire refund in my account. The fact that I'm negative right now is why I just want to put a portion of my refund in since I'm new to the stock market.

**jIM_Ohio** · 02-08-2010, 02:42 PM

Originally posted by ricksample View Post

That's the main problem I'm having at the moment. I don't know what my investments will return. I had mine in fixed income earning very low percentages each month. So last month I transferred everything to stocks/bonds. It wasn't very much, $3,000. Then the stock market went down. Right now I'm at -2.11%. I'm new to investing, so it's hard making a decision to put my refund in my retirement account if it's negative at the moment.

If I have been investing for years and actually seen some double digit returns in my account, I wouldn't hesitate and I would put my entire refund in my account. The fact that I'm negative right now is why I just want to put a portion of my refund in since I'm new to the stock market.

Check that questionnaire out I linked to earlier... it will help you. Post any questions you cannot answer to this thread. The questionnaire is designed to make your planning self sufficient.

Originally posted by ricksample View Post

1). We just started so we have around $3,000 with around $500 added monthly.
2). We're 26 and would like to retire no later than 60.
3). Our expenses aren't to bad. The only debt we have is our mortgage. No car payments or credit card bills. We have a budget on excel. We input our monthly net income, subtract our expenses including retirement, food, fuel, etc. Whatever is left over each month is what my wife and I split. We call this "Mall Money". Which means we can pretty much buy anything we want with it.

I see you have 34 years to retire... if you get a 9% return (on average) you can possibly double money 4 times (doubles every 8 years at 9% return).

If you focus on getting 3X your annual expenses invested "soon", compounding and time will get you 6X, 12X and 25X without you doing much else.

Some further advice- focus on a few key things-
a) the savings percentage you invest. Meaning investing 20% of your income is better than investing 10% of your income. Investing 10% is better than investing 5% of your income. Regardless of whether you invest in CDs, penny stocks, or Florida swampland, your personal savings rate is something you have direct control over, and that will determine if you meet the retire by 60 goal you stated above.
b) Is it better to have $30,000 earning 2% on average or 3% earning 9% on average? Ask yourself that question. Its in the questionnaire, and there are more like that to make you think... what is important to you?
c) If you did not retire at 60, what would life be like (how important is the goal)?

Another little exercise for you-
take the expenses you have
multiply by 25.

If someone gave you that amount of money today, could you retire?

when would you expect to have 12X of that money, or even 6X? Is paying down your mortgage more important than those numbers?

In my situation, I want 6X my expenses in retirement accounts before mortgage gets my attention (it has some of my attention now, but it will get a lot more once I know I have much of what I need to retire already invested).

But each person's answer is unique to them.

Do not let 1 year returns in the market trick you into thinking you are doing it wrong. I lost about 50% in 1998 (maybe that was 1999?) and lost another 40% in 2008. There was also 1997 and 2009 which were really really good years (+50% and +30%). If you want the good, you need to accept the bad and learn how to capitalize on it. For example in 2008 when market was going down, I was buying financial stocks and real estate stocks. My financial fund was among my biggest winners in 2009 because I bought it so low.

BTW- those questionnaires are on my blog too, in smaller chunks.

Read up on investing and retirement planning. You can do most of the planning yourself, but entering into investing with only a date picked out is not really the most effective plan.

Know "when" you anticipate having certain amounts set aside (2010 is year I expect to have 3X expenses set aside). Knowing milestones like that help you know if you are doing it right.

**creditcardfree** · 02-08-2010, 05:22 PM

Your investments are not 'down', but on sale! You can now buy more shares with the same dollar amount. Those shares over the span of your working career will earn dividends and increase in value. Buy as many shares as you can.

I'd go 50/50 with your tax refund...and maybe put more into retirement than the house.

Save For Retirement OR Pay Down Mortgage