Pay off mortgage versus conservative savings investment

[River616]

Good morning, everyone. I was directed to this site by a friend who posts and have read through several threads looking for advice/suggestions, but haven't found too similar of a situation.

A brief bio (I promise, this is the 'Clif Notes' version!). I'm recently divorced, have a 15 yo son, a relatively secure job, and have always been a saver.
In the settlement, I was awarded the house (and remaining mortgage, <$60k at 5.25%), the savings I built up (approx 4 years of my current income), a nice chunk of retirement via deferred compensation, as well as another decent lump sum in lieu of ex's pension due to me within the next 18 months. I moved my previous small 401k into a Roth and will move another approx $50k from savings into this account to comply with min balance for the int % when I signed up. I have stock from an inheritance that's only worth about $10k, but I leave that alone as it's Exxon and tends to recover eventually.
I've not included child support in my income as it will go for exactly that, and ends in 3 years. I'd rather see any excesses in this area as nice surprises. Ex is also having to pay back child support for the next year as well.

Now...my question(s).
Should I pay off my mortgage and move the rest of my savings (minus 6 months of EF) into Mutual Funds/Retirement? This seemed like a no-brainer to me at first....but after reading through various articles, I've seen conflicting pros/cons.

Since I'm attempting to re-establish credit in my own name, will paying off the house have an impact (+/-)? I only have one credit card and I pay that off every month. I've been told this doesn't help my credit score at all. Initially, the mortgage was in both of our names. We refinanced and only have 8 years left on loan, but it ended up in his name. BOA bought Countrywide's loan and have already instructed me to go through the approval process in order to get ex's name off of loan and mine on it. I'm not sure what this would cost....but surely there are fees.

Because of my income, I've found the standard deductions from IRS are better for me...so losing the mortgage interest and taxes don't appear to throw off the savings. (Last year's totalled about $8000.)

Am I missing other considerations?

I hope I didn't ramble too much! Thanks for any advice!

[snshijuptr]

How are you moving $50k into a Roth IRA in a single year? I'm a bit confused on that point.

What do you have saved for your son's education? How far away from retirement are you? Do you have any other savings goals in the future besides these?

4 years of income is pretty excessive in regular savings so I agree that you should move the money into other areas. I'm a fan of preparing for your son's education, maxing out 401k and Roth contributions, then paying down the house. Note that for financial aid purposes a 529 Plan counts as parent's assets not child's assets and so will not reduce your financial aid. Also in some states, a 529 Plan is treated like a 401k for tax purposes.

[jpg7n16]

Good morning, everyone.

Hey welcome to the forums!

Now...my question(s).
Should I pay off my mortgage and move the rest of my savings (minus 6 months of EF) into Mutual Funds/Retirement? This seemed like a no-brainer to me at first....but after reading through various articles, I've seen conflicting pros/cons.

1st some questions:

How old are you? (or how long until you plan to retire?)
What is your current income? How much extra do you have after expenses each month? ($0, 100, 250, 500, 1000?)
Are you able to handle the full mortgage payment on your current income?
Are you currently contributing from your normal income to a retirement account? (I saw the deferred comp above)
Are you wanting to pay for your son's college? Do you have any set aside for that purpose yet?

This will help us determine priority for splitting your 4 years of cash between EF, retirement, college savings, and debt elimination.

Since I'm attempting to re-establish credit in my own name, will paying off the house have an impact (+/-)?

At first it will be positive, then negative. If you've seen some of my posts around, you probably know I'm very cynical of the whole credit score program. 1) You will have repaid a loan as agreed (+), but 2) you will no longer have debt outstanding (-). The credit score likes to see you with more debt than $0. Houses and car loans are great to build it, but once they're paid off - it will start to go down.

I don't worry about my credit score at all. You shouldn't either. Do what's best for you financially, and the score will take care of itself.

My point is, if you determine that paying off the mortgage will be best for you (financially, emotionally, psychologically) - then don't make your decision based on "how will it impact my credit?"

I only have one credit card and I pay that off every month. I've been told this doesn't help my credit score at all.

That's not true. Consistently using and paying off the card before the month's end is a great way to trick the credit system. The card will report a balance each month (shows use and probability of paying interest - so your score increases) But when you pay it off, you get $0 interest charges, so you win there.

Initially, the mortgage was in both of our names. We refinanced and only have 8 years left on loan, but it ended up in his name. BOA bought Countrywide's loan and have already instructed me to go through the approval process in order to get ex's name off of loan and mine on it. I'm not sure what this would cost....but surely there are fees.

I'd kinda like to see the answers to some of the questions above 1st - but this is a plus for paying off the mortgage straightaway.

Because of my income, I've found the standard deductions from IRS are better for me...so losing the mortgage interest and taxes don't appear to throw off the savings. (Last year's totalled about $8000.)

True - you should be able to file as head of household, so there are no tax benefits from the mortgage interest. You should treat it as any other 5.25% debt.

[jIM_Ohio]

Good morning, everyone. I was directed to this site by a friend who posts and have read through several threads looking for advice/suggestions, but haven't found too similar of a situation.

A brief bio (I promise, this is the 'Clif Notes' version!). I'm recently divorced, have a 15 yo son, a relatively secure job, and have always been a saver.
In the settlement, I was awarded the house (and remaining mortgage, <$60k at 5.25%), the savings I built up (approx 4 years of my current income), a nice chunk of retirement via deferred compensation, as well as another decent lump sum in lieu of ex's pension due to me within the next 18 months. I moved my previous small 401k into a Roth and will move another approx $50k from savings into this account to comply with min balance for the int % when I signed up. I have stock from an inheritance that's only worth about $10k, but I leave that alone as it's Exxon and tends to recover eventually.
I've not included child support in my income as it will go for exactly that, and ends in 3 years. I'd rather see any excesses in this area as nice surprises. Ex is also having to pay back child support for the next year as well.

Now...my question(s).
Should I pay off my mortgage and move the rest of my savings (minus 6 months of EF) into Mutual Funds/Retirement? This seemed like a no-brainer to me at first....but after reading through various articles, I've seen conflicting pros/cons.

Since I'm attempting to re-establish credit in my own name, will paying off the house have an impact (+/-)? I only have one credit card and I pay that off every month. I've been told this doesn't help my credit score at all. Initially, the mortgage was in both of our names. We refinanced and only have 8 years left on loan, but it ended up in his name. BOA bought Countrywide's loan and have already instructed me to go through the approval process in order to get ex's name off of loan and mine on it. I'm not sure what this would cost....but surely there are fees.

Because of my income, I've found the standard deductions from IRS are better for me...so losing the mortgage interest and taxes don't appear to throw off the savings. (Last year's totalled about $8000.)

Am I missing other considerations?

I hope I didn't ramble too much! Thanks for any advice!

I read you have 4 years expenses in the bank- this is a flag to me...
I did not sum up your retirement accounts (present value) now. The pension distorts this some, but I can help with the math in a few paragraphs.


The basics are this:
1) Spend less than you earn (you are already doing this)
2) Track expenses- what are current expenses?
3) track income- what is current gross and net income?
4) track investments and contributions and account balances and mortgage balances

I think you have a handle on 1-3
I don't think you have a handle on retirement assets to make an informed decision yet.


Here is what I would do
a) add up account balances for retirement (this is what you have). I added up 60k above, but there is also a pension and I think more there, but need to know specific- what do you have now

b) calculate current annual expenses. Make sure to include one time bills like property taxes, car registration and similar.

c) multiply b) by 25. This is what you need, to retire today.


Depending how far off C is (retirement target) from actual account balances (now) will probably tell you how much of mortgage to pay off, vs how much of that 4 years expenses you want to invest for retirement. Make sure you list your age when you do this calculation... meaning if you are 50 with $400k saved for a retirement which will cost you $800k, that is much different than a 42 yo person with $300k saved for a retirement which will cost you $1 M.

Much of the discussion once you know the above (retirement account balances and retirement target amount) will be when do you want to retire, will mortgage be paid off before you retire without doing a thing, and how much risk you want to take getting there.


**edit to add, here is how I account for the pension**
Take current expenses multiply by 25, this is retirement target- if you have this much saved, you can retire by withdrawing 4% of assets per year.
If you have a pension, take the pension off the expenses, then repeat the math. If you have social security, this also works for giving you a value for SS.

Example If you have 40k of expenses, the 25X number is $1 M ($1,000,000). If the pension is worth $10k per year, subtract 10k from 40k (30k) then multiply 30K times 25 (4% withdraw is 25X=1/.04=25X) 30k times 25 is $750k, so when pension kicks in you need 750k saved, if you want to retire before pension kicks in, you want $1 M saved.

In general, that math works well for short term planning (retiring within 10-15 years). Each time expenses change, you need to redo the math (calculate a new 25X number). For example you have one set of expenses now which includes gas to commute to work, business clothing and a mortgage. When you retire those expenses go away, so you need to factor that in.







Good luck with this, post questions as needed.

[River616]

Hi and thanks to each of you for responding!
I'm usually guilty of giving too much detail so I apologize for not giving enough. (My friend is likely laughing as she reads this!)

Okay, I'm 44. (Shhhh!) I am a novice so forgive me if I get the terminology wrong. I moved my former job's 401k into an IRA. I was a stay-at-home mom for many years and never touched the 401k earned before I was married, so it earned very little in the time I didn't work. I just wanted a safety net. It is only about $22k. I am currently contributing the max to another retirement program through my current employer. I've only been doing this a short time, so it's only worth about $8k.

I absolutely plan on helping my son with college. In the divorce decree, my ex is required to pay 50% of tuition, fees, labs, books, room/board, organizations, etc.(I realize this is very rare...particularly in Texas!)
I work for a university presently and have learned more about college than I ever knew when I was going! I am not going to count on scholarships but do plan on having him try for any and every one. If I'm still with this particular university when he's ready...he could receive a significant tuition waiver....but that's not something I'm counting on, either.

I messed up on my initial post. I moved the 401k into a Roth and opened an additional account in which I need to contribute around $50k more in order to receive the higher interest rate. Still conservative...mutual funds. So...with this firm, I'll have $22k IRA, $70k Mutual Funds, $10k Exxon stock, and approximately $100k from ex's deferred comp to either put in Mutual Funds or other safe...but not stagnant allocations. I've also started a savings account for my son to help with college. He now has about $13,000 that he's not allowed to touch!

Meanwhile, being "cheap" as my ex puts it, I saved approximately $150,000 over the past 5 years. (Not to bore you all, but I did this on my small income and what turned out to be less than half of ex's as he was financing girlfriends' expenses with the other half. Yes....I was very, very ignorant for many years.) I didn't invest this savings b/c we were looking for a house that was much more than I wanted to pay, but ex had the say in the matter. To be responsible (I've never lived beyond my means!), I put away all I could so we could have at least $100k to put down on the new house and still be okay should I lose my job. He's a cop so he had more job security than I.

My monthly expenses are minimal. My car is paid for. I pay off the card every month (thanks for the clarification on that part!). Now that ex is paying child support and back support, right now, I have about $2000 leftover after expenses. This does NOT include putting aside money for savings.

I will talk to the financial guy where I have the IRA, Exxon, etc. about where to move the current savings. I want it to make money for me, but also want it to be accessible should the need arise.

I really appreciate the time/effort you are all putting in to this. I feel like an idiot at times and question everything now. Thanks for the clarifications on the 529 and the formula for planning for retirement. Honestly, it's a bit overwhelming and scary!
I have a master's degree and am considering going back (again) for either a second master's (different field) or at least a graduate certificate. Yay....more expenses!

Ack....see, now I'm rambling!

[jIM_Ohio]

A couple of points

I have about $2000 leftover after expenses

You are doing well. Take a deep breath and relax, you are spending less than you earn, the rest is just details and percentages.

opened an additional account in which I need to contribute around $50k more in order to receive the higher interest rate

This sounds like an annuity of some kind? Usually not the best retirement plans- if this is an annuity, do not fund it (probably do not fund it) until other options are exhausted.


Here is what I would do

1) Define how much risk you want to take investing. There are various questionaires on web sites like Vanguard and T Rowe price- take them both.

2) Use the risk defined at #1 and come up with an allocation which "defines" that risk- its usually expressed in terms of % stocks-% bonds- (and maybe % cash).

3) Allocate all current retirement monies, and all future contributions to the allocation in #2.

Some of this will be in a 401k or 457 type plan
Some of this will be in rollover IRA type plans
Some of this will be in Roth accounts
Some of this will be in taxable accounts

All of it together makes one allocation.

Okay, I'm 44. (Shhhh!) So...with this firm, I'll have $22k IRA, $70k Mutual Funds, $10k Exxon stock, and approximately $100k from ex's deferred comp to either put in Mutual Funds or other safe...but not stagnant allocations

$202k for retirement? Plus another 150k to either allocate to retirement or pay down mortgage?
60k is mortgage balance at 5.25%...

Here is my thought

I don't know your expenses, but guessing they are about 40k per year, which means you need $1M to retire on. You are age 44, and I am guessing you will work another 20 years until age 64.

$1M is 25X 40k. If that seems high, then remind us what your current monthly/annual expenses are and we can redo this math.

I would take 60k (out of the 150k) and pay off mortgage. You cannot get 5.25% on cash, and because son is going to college in 3 years, you will need any college monies in cash, so best return is 5.25% on mortgage.

With the 90k remaining, I would put 3 months expenses in cash. With the remaining money, I would open a TAXABLE investment account which is two fold- it might be retirement money, it might be college money. Consider something like bonds or something conservative. Two suggestions are RPSIX (T Rowe Price Spectrum Income) or PRPFX (Permanent Portfolio). There are many ways to invest conservatively. I own both funds and they are the two most conservative funds I own. These funds will fit into allocation I suggested you figure out above- because texas has no state income tax, I suggest holding normal bonds and not muni bonds, and holding them in a taxable account would not be "bad".

With the $2000/extra per month, I would do the following:

allocate $500/mo to same account where the conservative investment is. This money is for college or maybe retirement or maybe an emergency.

allocate $1500/mo to retirement accounts. 202k at age 44 is a little low, but if you have low expenses, then you might be OK... focus on getting retirement accounts to have between 6X to 12X expenses before age 50 and definitely before age 53.

--
minor alternative

Invest all 150k in a taxable account (keep money liquid). 3 months expenses cash, remaining in something conservative.

With the $2000/mo surplus, allocate enough to pay off mortgage within 3 years (so 60k/36=$1667/mo is worst case) and the other $333 to retirement accounts.

The pro here is you keep liquidity high if you think you will need access to 150k soon. If you have low expenses, this option will help pay for college too. Then when son starts college, take the $1666 you apply as extra mortgage payment to college tuition (because mortgage will be paid off when he's 18 in 3 years).

[jpg7n16]

Hi and thanks to each of you for responding!
I'm usually guilty of giving too much detail so I apologize for not giving enough. (My friend is likely laughing as she reads this!)

Usually when you need advice, you don't know which details to give. If you knew all the right questions and all the right answers, you wouldn't need the advice!

Okay, I'm 44. ; I moved my former job's 401k into an IRA; It is only about $22k. I am currently contributing the max to another retirement program through my current employer.; it's only worth about $8k.

I view your retirement as your #1 financial goal at the moment. You've got a good start, but now would be a good time to set a good foundation for your future.

I absolutely plan on helping my son with college.

Given the circumstances you have surrounding college, I view this as a lower priority. It should still be addressed, but I feel that retirement is a more pressing matter.

I messed up on my initial post. I moved the 401k into a Roth and opened an additional account in which I need to contribute around $50k more in order to receive the higher interest rate. Still conservative...mutual funds.

I'm with Jim on this one - that doesn't seem like a mutual fund. It may something like a "variable annuity" which may have returns based on some mutual fund... But there are no such thing as mutual funds with guaranteed rates of return. Either you didn't understand - or he didn't explain well. There are annuities with promised rates of return, but I'd suggest you stay away from them. Invest directly into the mutual funds and skip the middle man.

So...with this firm, I'll have $22k IRA, $70k Mutual Funds, $10k Exxon stock, and approximately $100k from ex's deferred comp to either put in Mutual Funds or other safe...but not stagnant allocations.

I would suggest putting about 85% of this money (85% * 192k = 163.2k) into a target date fund such as: VTTHX Vanguard Target Retirement 2035, mutual funds, quote, price - Morningstar or FFTHX Fidelity Freedom 2035, mutual funds, quote, price - Morningstar
and put the remaining 15% into an intermediate bond index fund.

Ask your IRA guy about a low cost intermediate bond index fund.

And depending on your knowledge of the Oil industry (or lack thereof), you should likely consider selling the Exxon stock and adding that to the diversified funds.

I saved approximately $150,000 over the past 5 years.

From this, I would finish off funding of a Roth for the year. (5k max for the year).
I'd probably keep about $2k in my checking, and $10-15k in savings (depending on your comfort levels)
I'd probably pay off the mortgage - rather than pay all the fees to refi into your name.
The rest I would split 50/50: one half into something short term to be available for college expenses if needed (see Jim's post for ideas), and the other into an index fund of some kind (DIA is the Dow Jones ETF, SPY is the S&P 500) or split this half between the two.

My monthly expenses are minimal. My car is paid for. I pay off the card every month (thanks for the clarification on that part!). Now that ex is paying child support and back support, right now, I have about $2000 leftover after expenses. This does NOT include putting aside money for savings.

See you've got a good cash flow situation right now. It would improve further without the mortgage being around. I would take care of necessities, then start increasing the amount you have invested in the index funds.


Take the attitude that you are trying to buy up as many shares of those ETFs as you can. That would get you into the mindset of loving low prices cause they let you buy more shares for your money.


----------------------------------------------------

I understand how this can all be overwhelming. So in a nutshell, here's what I'm suggesting you do:

1) Move the retirement account money into true mutual funds
2) Keep enough in cash for living expenses and 3-4 months EF
3) Fund your retirement accounts as much as you can
4) Pay off the mortgage
5) Keep a chunk of safe investments to have around for college expenses if needed
6) Start building up the stock index investments as much as you can
7) Update your will and any beneficiary information from bank accounts, life insurance, etc.


7's a bonus- I'll throw that in at no extra charge