10 year/15 year vs more to 401K

[pillpusher]

Hi,

Yes, it's another one of those questions...haha. So, here's my situation. I'm 41, make about 135K (including bonuses) and have about 220K in my 401K (12% invest + employer match). I recently bought a new house. I am (hopefully, fingers crossed) finally going to sell my old house, so I'll finally be able to take the proceeds from that and refinance the new home. Originally, my plan to was refi it into a 10 year and get it paid off as quickly as possible. Rates seem to be running right about 3% on a 10 year. Then I noticed the rate is about the same on a 15 year, and that, while paying 5 more years, my monthly payment would be about $500 less as well, so I started thinking... Should I:

1) As planned, refi into a 10 year mortgage, and continue putting 12% into my 401K, or

2) Refi into a 15 year and throw most of the $500 difference into my 401K and max it out annually, even though my employer match is already maxed?

My heart wants the freedom of being debt free ASAP, but my head is telling me that the smart move (math wise) may be to put more into the 401K and pay on the house 5 extra years. Thoughts?

Thanks in advance

[bjl584]

I'd guess that you can beat 3% by investing the money and taking a longer mortgage.

So, the math would tell you to do the 15 year. But, there is something to be said for a paid for house. Especially if you have other plans and goals during that time frame.

[Jluke]

you're behind on retirement if you use the one rule of thumb of 3x your salary by age 40.

at your salary, you should be putting 18k in the 401k each year - I didn't get the impression that you are doing so.

10 year - paid off at age 51
15 year - paid off at age 56

do you have a goal to retire early?

do you have an EF?

do you have an IRA of some sort (if eligible)?

Have you considered taking the proceeds from your old home and using it in another capacity other than re-fi?

think we could use some more details.

[bigdaddybus]

you're behind on retirement if you use the one rule of thumb of 3x your salary by age 40.

at your salary, you should be putting 18k in the 401k each year - I didn't get the impression that you are doing so.

pretty much sums it up

[Goldy]

If the rates between the two loans are similar you can always just pay extra on the 15 yr loan to make it effectively a ten year loan. This has the added benefit of keeping your required payments lower so if some hint happens and you need to tighten your financial belt you can simple stop making the extra payment instead of worrying about making your 10 year loan payments. Lots of people do this with a 30 yr fixed loan to essentially make it a 15.

I also agree you are behind in retirement and at your income you should be maxing your 401k and Roth.

[AJ444]

Keep maxing the 401k, at this point you have lost a lot of contribution opportunity, I wouldn't want to lose any more.

[StormRichards]

I agree that you need to focus more on retirement. If you don't have a Roth, open one and try to max out the 401k and Roth each year.

[StormRichards]

Found in a Retirement article. Not quite the same as what Jluke posted, but based on below you should have a little over twice your annual salary at your age.


Here are the guideposts:

At age 35, you should have saved an amount equal to your annual salary.
At age 45, you should have saved three times your annual salary.
At 55, you should have five times your salary.
When you retire at age 67, you should have eight times your annual pay.

http://business.time.com/2012/09/21/what-you-should-save-by-35-45-and-55-to-be-on-target/

[pillpusher]

Thanks everyone. Clearly, I wasn't always making that amount. Also, about $35k-$40k of that annual income is bonuses, which they don't deduct from to deposit into the 401K. Either way, I think I like Storm's guidelines better...lol...jk. So, the consensus seems to be to forego paying off the house sooner and do the 15 year while maxing my 401K. Correct?

In regards to the Roth, I had always thought that a Roth is only a good idea if you anticipate being in a higher tax bracket when you retire than what you are in now, which I wouldnt think would be the case for me. Is that accurate?

[greenskeeper]

15 year, pay extra if you so choose. Or split the difference of the surplus 1/2 going to 401k and the other 1/2 going to pay down the mortgage

[Captain Save]

is this your place of residence? or an investment property?

[pillpusher]

is this your place of residence? or an investment property?

Primary residence

[scfr]

What are you currently doing with the annual bonus? Could you use it to make extra payments toward the mortgage if you took a 15-yr?

Regarding "maxing" your 401k, check your company's policy and make sure you don't risk losing out on the maximum company match by maxing out too early in the year.

[LivingAlmostLarge]

When do you want to retire? That will influence the decision. maybe if you decide to retire sooner then 10 years makes sense. If you are going to work to 56 then 15 years makes sense. I'd time payoff for when you want to retire.

[snafu]

Like greenskeeper, I'd elect to keep my options open, 15 yr making extra payments as the target. Perhaps dedicate all 'snowflake' sums to mortgage principal. If moving is on the horizon, start selling anything you won't be taking to the new house. Next sell all the items you do not use and likely don't need to kick start your pay-down campaign. Less packing, less moving costs.

I'd attempt to negotiate the very best rate from lenders, not just the financial one you work with primarily. Every point matters especially with a new mortgage and front loaded interest. I suggest asking the lender to run an amotorization table.

Do you understand how your existing 401K works? Is there anything negative in increasing your contribution? Is your asset allocation inline with your risk tolerance?
Your salary will likely increase and I think you need a Roth as another income stream.