My husband and I are looking at retiring in about 3 years. I’m drawing a pension from my 37 years of federal service, and I’ve gone back to work as a temp to pad our savings a bit. I’ve got a nice TSP balance (the gov’t equivalent of a 401k) and my husband has his 401k, so we can be fairly comfortable in retirement.
The big thing we’re wondering is about our mortgage. At retirement, we’ll still have 15 years to go till it’s paid off. If I take about half of the TSP money out at the time, we can eliminate the mortgage, which is the largest chunk of our monthly budget. The year I take the money out, we’ll have a huge tax burden (we’ll withdraw enough to cover that) but afterwards, all we’ll need is a few hundred a month to cover taxes and insurance. However, it would take away a big chunk of money that could be available in an emergency.
The other option is to use TSP and 401k monthly withdrawals to pay the mortgage and live off my pension and our social security, assuming that still exists, as well as our savings. Neither of us is likely to inherit much from our respective parents, so we haven’t even considered that in our planning. And we don’t intend to leave this house till we’re physically unable to live here safely - in the last few years, we’ve done all the major improvements - roof, HVAC, new well, new windows - and I expect within the next 10 years, we’ll replace most of the appliances, so we don’t think we’ll have and scary big issues. (Yeah, I know, no one expects the Spanish Inquisition… but overall, the house is in good shape.)
So, I put this question to those of you with money savvy - should we pay off the mortgage in one fell swoop, paying more in taxes one year, but much less in interest over the ensuing 15 years, or should we let our 401k monies gradually erode it? Would a reverse mortgage make sense if we still have that many more years to pay? Is there something else we should consider? Incidentally, *not *retiring is not an option - we really don’t want to work till we die…
I suggest calling an accountant to help you figure it out. The extra taxes you pay for the lump sum withdrawal could outweigh a lot of the mortgage savings from paying off early, especially in these ultra low mortgage interest times. We don’t know enough of your finncial situation, especially what your tax obligations are or would be.
Also, look at the interest rate you’re paying on your current mortgage loan. You might be able to refinance and get a shorter-term loan with a much lower interest rate for the same monthly payment amount. Some banks offer a 10-year mortgage; if you can get one of these at a good rate and then stretch your budget to make an extra payment to your principle every month, you might be able to pay off the house in 5-6 years without having to touch your retirement accounts.
What is the interest rate on your mortgage vs the interest you’re earning on your retirement accounts? If they’re even close then the tax hit would definitely make the monthly payment plan the best option.
Our mortgage rate is 4 1/8%, my TSP only pays about 2.5% - I hadn’t though in those terms…
As to paying extra every month, we’d thought about that also. I’m thinking it might make more sense to do that rather than tucking the extra into savings, which might pay 1%. I’ll find an on-line calculator and see what we can do with that.
Generally, if you pay an additional amount toward your principle that is equal to 1% of the original loan amount (e.g. $1k for a $100k loan), the loan should be paid off in 7 years (if not less).
So, for a $50k loan, paying an additional $500 should knock it out in a little less than 7 years total. Since you’re half way through your loan, it should be even fewer years than that (but not by much)
The other advantage to this approach is that if (God forbid) you suddenly found yourself facing a financial emergency, you can stop making the extra monthly payment to conserve your cash, and you’ll just be in the situation you’re in now. When the financial difficulty is over, you can then resume the extra payments. You get the advantage of paying your mortgage off faster plus some financial flexibility in the event of an emergency.
Even if you can’t afford to make an extra payment every month, see if you can save just by splitting the normal payment into two and paying half early. This can save a ton in interest under some circumstances.
With the interest you are now getting on your money and the tax deduction you will get on your interest paid it may serve you better just to keep making payments.
So from the variety of answers here, it sounds like our best bet is to sit down with a professional and our numbers and come up with an answer that way. Silly me - I was kind of hoping there was a quick and dirty rule of thumb that we could apply. Had we stayed in the first house I bought or the first house we bought together it would be paid off by now. Alas, life required moves and we ended up here a bit more than 8 years ago, and even refinancing to a 20 year note still leaves us making payments till 2031. So no easy answers.
Thanks for the input, tho. It made me realize that this is a much more complex decision that I’d originally thought.
There have been similar threads in GQ - you might want to search for them to get some input from people more expert than people posting here. But it boils down to an investment decision. If you have a chunk of money, do you get a better return through investing it or by basically taking over your mortgage (which is theoretically what you are doing by paying it off.) If you had $100K which you were getting a 10% yield on and a $100K mortgage you were paying 4% on the choice would be obvious, wouldn’t it?
Some people clearly have psychological hangups about being debt free, but that can lead to a bad decision. Talking to someone who can look at the numbers dispassionately is the way to go.
I have read opinions that raiding your 401k is a bad idea. You lose the earnings that you would have otherwise had if you hadn’t taken out the loan. I would suggest staying away from raiding your 401k and TSP and looking at other ways to pay off or pay down the mortgage. Refinance for a smaller number of years, pay off part and refinance the rest for 5-7 years, etc. Of course, talk to your financial advisor since he’ll be able to see your exact numbers.
