Pay off mortgage or save for retirement?

[Nae]

Hello ! This is great to have this forum for financial advice...

Our situation:
We own a house in Ohio and a house in Utah. Our house in Ohio is paid off. Our house in Utah still has about $30,000-40,000 mortgage. We want to move from Ohio to Utah in the next couple of years. When we move, my husband and I both will most certainly be taking pay cuts with any new jobs out west. With that in mind, once we sell our Ohio house & save for 2 more years, we could pay off the rest of the mortgage on the Utah house before moving - resulting in us having just about no debt at all - which would be nice since we are all about debt elimination AND the fact that both of us will be making less money. But, started thinking that we actually do not have alot of money saved for retirement yet. Do you think it would be better for us to not pay off that entire mortgage and save some of that money towards retirement instead? We are in our mid 40's. Thank you for your help !!

[bjl584]

This question gets posted here at least once a week. Here is the responses that you are most likely to receive:

"Please provide more information concerning your finances. How much do you earn and how much do you have saved?"

"I would pay down the mortgage to be debt free."

"I would save the money for retirement since you will get a better return on it than paying the mortgage off."

"I would do a little of both."

That all being said, you will need to provide more information about your financial picture before anyone can confidently give you one of the above responses. It sort of comes down to personal goals, ambitions, and plans as to what approach you should take.

[Nae]

More info

Thanks Brian for your response ....

If this helps ....

Right now my husband & I earn together about $70,000-80,000 a year
When we move, most likely will be earning about $50,000 or 60,000 (hard to say)

We only have saved about $60,000 for retirement right now but I earn a pension from my work too.

Our original plan was to pay off all debt (which we have done right now other than that Utah existing mortgage of $30-40,000) and then with all extra money, save for retirement. We actually are so glad we went this route (pay all debt versus saving) with our current Ohio home since stocks have really taken a beaten lately.

But, then got to thinking that maybe taking some of the extra money now towards retirement may be better than paying off the rest of the mortgage?

And maybe it's a personal thing too - how comfortable do we feel with each case scenario?

Thanks for all feedback -- thought I would just post this out there to see if anyone has any thoughts we may not have thought about.

[Phenomenal Woman]

I would think by paying off the mortgage, you would save yourself from spending more money on the interest of the loan. What would be the differences between the interest on the loan and the amount you would be contributing to retirement in both scenarios?

[bjl584]

How much do you anticipate to net from the sale of your Ohio home? Will it be enough to pay off the Utah mortgage and still have money left over?

Do you have any plans in the next 5 years or so that could change your financial picture? Kids? Travel? School?

What is the interest rate and monthly payment on the mortgage that you currently have in Utah? Once you move I'm guessing that you will have a tax advantage to keeping the note since it will be your primary residence? Can you possibly refinance the existing mortgage to free up more money each month for retirement?

What is the 60K that you currently have invested in and how much are you contributing to retirement each month currently?

The more detail the better.

[Nae]

More info

We would net about $150,000 from our home in Ohio. Not enough to pay off the mortgage for Utah home, but close (within $30,000).

We don't really have any additional plans over the next 5 years other than moving out west.

Interest rate on our Utah mortgage is 6% because we are renting the home out & it is a 2nd home.

The 60,000 is in saving bonds and a 403B. We are only contributing about $200-250 a month towards retirement now because of our debt elimination plan we were on....which was to pay off all debt first - save later. That is what I am questioning for the future ...

Should we continue our route of paying off all debt (including the Utah home) and then start saving for retirement? Or, is it a better idea to perhaps put some of that money towards retirement right away & keep a mortgage? I kind of like the idea of doing a little of both. Always keeping in mind that we both will be making less money out in Utah once we move, than we do here in Ohio.

Thanks again!

[bjl584]

You can probably be a bit more agressive with your savings since you are in your 40's and still have a ways to go before retirement. I would get out of some of the savings bonds and get into some no load mutual funds. (You will want to speak with a financial planner about the details of this.)

I like the idea of a little bit of both too, as that is what I do. You may want to continue on as you are until your Ohio house sells and you actually move. Once you ave the money from your Ohio home and you are settled into your new Utah home with your new jobs, then you can re-evaluate your situation. At that time, it will become much clearer as to what kind of income you will have coming in and what kind of budget you can set up for yourselves. Things will be a lot clearer at that time. There are too many assumptions right now. It isn't a sure thing that you will get 150K for the Ohio house, and it isn't a sure thing exactly how much income you will have from your jobs when you get to Utah. Until things shape up, I would continue to pay down the Utah home as you have been. I would also suggest that you up your contributions to your savings. If you are saving $250 a month, at a 75K annual income you are only saving 4%. That's way too low especially for your age. I realize that you have been focusing on the debt, but your savings number needs to come up closer to 20%.

[jIM_Ohio]

Hello ! This is great to have this forum for financial advice...

Our situation:
We own a house in Ohio and a house in Utah. Our house in Ohio is paid off. Our house in Utah still has about $30,000-40,000 mortgage. We want to move from Ohio to Utah in the next couple of years. When we move, my husband and I both will most certainly be taking pay cuts with any new jobs out west. With that in mind, once we sell our Ohio house & save for 2 more years, we could pay off the rest of the mortgage on the Utah house before moving - resulting in us having just about no debt at all - which would be nice since we are all about debt elimination AND the fact that both of us will be making less money. But, started thinking that we actually do not have alot of money saved for retirement yet. Do you think it would be better for us to not pay off that entire mortgage and save some of that money towards retirement instead? We are in our mid 40's. Thank you for your help !!

I suggest problems like this be put on a financial timeline. You have a finite amount of financial resource (current salary, minimal savings, equity in current house). Your objective is to use that existing resource and accomplish at least 2 goals (retire and pay off house).

Some of this is about "returns on investment"
Some of this is about risk... to some carrying debt is really risky, to others its a means to an end, to others carrying debt is about returns on investment, and to others its about liquidity- tough to get cash out of a paid for house once the house is paid off.

What we "know" is most people want a paid off house when they retire... and to some they retire when the house is paid off...

Is the order of those steps important? Meaning can you retire and still have a mortgage? (there is risk to this, but its about rates of return in this situation...)

Or do you think house will be paid off then 5-10-15 years later you will retire?


Of the current 80k gross income, what percentage is saved? I suggest 20%, meaning 16k is saved. Paying down mortgage (faster) is a form of savings, as would be investing in 401k or IRA for self and spouse. If you are not saving 20% the success of any plan, regardless of timeline, is probably going to fail or fall short. Especially considering age. If you can bump the rate up to 25% or 30% success is much more likely (or much faster/ earlier in life).

20% of 80k is 16k. If you are not putting 16k per year to retirement or mortgage paydown, that is step 1... this will really help when you move as well and are earning lower salaries (you could cut savings rate and not drop standard of living too much in the move and job change). Because you are anticipating a drop in salary, I suggest getting savings rate to 30% now (24k per year) and then drop that rate to about 15% when you move and have lower salaries.

Now- 30% of 80k means you save 24k and spend 56k
move- 15% of 60k means you save 9k and spend 51k
this means after the move you lose only 5k of spending power, and if you plan this right, its possible that 5k is also the amount taxes drop (Ohio has high taxes, I speak from experience).

Then going back to financial timeline, apply the 24k to one of 3 possibilities

1) pay down mortgage now (only)
2) invest it all (only)
3) a mixture of the two (pay down mortgage some and invest some for retirement)

and as you play with the variables see how the timeline changes.

For example...

24k invested at 8% for 15 years is $703k
703k allows for an income of 28k in retirement (assumes 4% withdraw rate- see trinity study if you need that 4% justified).

if you are 45 now and 60 in 15 years, you can then see investing 24k per year is not going to give you enough.

so you change spreadsheet to be 24k invested at 8% for 25 years
that is $1.8 M invested for an income of 72k when you retire.

if you are 45 now and 70 in 25 years, you can see you will have more than enough in 25 years.

You can then see working only 15 years is not in the cards for you, and working 25 years is too much. The question would then be can you get mortgage paid off between 15 and 25 years without adding extra to the mortgage payment (if you only invested the money).


The opposite would be this
Pay down mortgage with 24k per year. If you owe 36k on mortgage, this pays it off in 36 months.

This means you delay investing 24k for 18 months
this would shift the years above by 2. Because you owe so little on the mortgage, this would favor paying off mortgage before investing (in your case).


Some things to add.
1) at some point you will sell a house and add a lump sum into the retirement investment
2) I did not include current 40k of retirement assets into calculation.
3) You did not mention your savings rate. The 24k per year is a high amount, as this amount lowers, it will favor the investment more.
4) If you do most of this on a spreadsheet, its easy to tweak numbers and percentages to find your sweet spot.

If you do a spreadsheet, here is what I have in front of me right now
a) one sheet with two investments. I plug in the monthly investment, multiply by 12 and get annual amount invested. I plug in expected return (8%) and then reference one set of columns to the 24k and 8%, adding interest and using end of year balance of one year as start value to add 24k to the next year before multiplying the 8% again.

I then put an integer (counter) by each row, so I know how many years money was invested.

My second investment is the "offset" when someone delays something for 2 years. That's a nice to have, not a requirement (if you can calculate how investment will compound annually, that is the goal).

b) On another sheet, download an amortization table (I download from Microsoft, there are others). This is free. I plug my mortgage numbers in and make sure I have the right 30 payment schedule. Then I add in my extra payments (2k per month in this example).

c) Then either compare sheets, or use a third sheet to get data to other two sheets. For example- what is payoff schedule and amount invested if you invest 18k annually and send 6k per year to mortgage.


For investments, if you have 51k of expenses, you will need about 1.275 M to retire on (using 4% withdraw).

If you are spending more than 51k per year now (those expenses include income taxes, property taxes and all household expenditures), you should take those expenses and either multiply by 25 or divide by 4% (same thing). For example if you gross 80k and spend 60k... 60k/.04= $1.5 M. This means you need 1.5 M to retire on, so when you go to the investment tab of spreadsheet, you are looking for where the amount invested is $1.5 M.



There is more than one way to come to a solution. Because you have a pension, that reduces the amount you need to save. If you need to figure that out, take the expenses I used (51k or 60k) and subtract the annual pension benefit- for example if pension is 900/mo that is 10k per year, subtract 10k from the total expenses (51k-10k=41k or 60k-10k=50k). Then divide that new number by 4% (41k/.04 or 50/.04) when calculating what the investments need. If you expect a social security benefit, you can use that to reduce savings even further.

My suggestion- include the pension, do not include social security. Because this is planning more than 15 years out, I would not include social security until you are eligible for a reduced (early) benefit at age 62 or 65. If you do not get access to the pension until age 66 and you think you want to retire at age 62, I would not include the pension in any calculations either (for accumulation and if paying off mortgage makes sense).

As retirement comes close you factor those things in for an income.
The 20% goal I listed is moderately assertive... if you are not saving 20%, then my whole post is really optimistic... if you are saving about 5% now, paying off mortgage will probably cost you many years of working after you move (is my guess).

[Nae]

Wow

Wow - you guys are SO helpful - thanks very very much! I will play with the scenarios that you gave, like you suggested & see what happens. I really appreciate you taking the time to figure this out & post here.

[Hector]

Try not stressing out this much. You didnt mention about your emergency savings here.

Anyways, sell your house in Ohio for 150K. Pay a major portion of that amount towards your home in Utah. After your move, once you land with the job, assign 6-8 months of emergency fund and pay rest towards mortgage.

After that, focus on paying off your mortgage unless you are sure about making 2-3% more on retirement over interest rate towards mortgage.

[DavidKimball]

Nae, do you have written financial goals? A written spending plan (budget)? A 5 year plan of where you want to be financially?

When you have these in place, then make each decision based on getting closer to your written plan.

I am a firm believer in always paying off the house first and getting out of debt. The psychological relief that brings is unspeakable. The tax write off does not even become a blip on the screen in comparison to the interest being paid.

And then also make sure you have a solid 6 months of expenses in the bank.

David

[GregOlney]

It depends if you want to do it mathematically or emotionally...It would be awesome to have no debt and the security that comes with it. But mutual funds also do about 12% long term. This is much higher than your interest rate on a mortgage...

[Nae]

Thank you everyone. My husband and I are firm believers in the debt elimination plan that we instituted by John Cummata and that is how we are (almost) debt-free today and feel so much less stress - it's great. So, I would be inclined normally to pay off all debt first. My main worry is that if we pay off our Utah home with all existing extra money we have (well, we do have an emergency savings and 403B savings, etc), and I know both of our incomes will most likely drop when we move to Utah - that we won't have much extra money at that point to save for retirement. That is why I thought, while we had the extra money, maybe putting it towards retirement would be best? No, we don't really have a financial plan for 5 years out because we don't really know what we will be making out in Utah yet.

[BTC]

You would net 150K from the sale of your Ohio home, and that's not enough to pay off the 30K-40K remaining on your Utah home? Could you elaborate on that because the math ain't working for me.

[Nae]

Sorry to be confusing - Our Utah home mortgage is a total of 180,000. We are guessing we can get around $150,000 for our Ohio home. We actually have saved the remaining $30,000 aside right now - we could pay the entire mortgage off that way, but really have nothing left off to put in our retirement fund. And we don't have much retirement $ right now - a little. Our plan was to pay off all debts and then start saving for retirement and with what we make now here in Ohio, would be completely doable and have us saving enough for retirement in 15-20 years. But, now with us wanting to move - that changes things a bit in our plan - as we know that my husband won't make as much as a hair stylist out in Utah - at least for some time, as he has amassed a clientile here, and I am an executive asst. for a CEO here in Ohio (which of course took me awhile to work up to in our company) and make pretty good money with that - but hard to come by a job like that out in Utah again unless I'm very lucky. So, we are reasonably sure our income out there will be quite a bit less. Hope that helps!