Should I add the allowable contribution of $6000 to my Vanguard Target Retirement Account or pay down my mortgage which has a 4.25 interest rate? I could save $111,148 interest on mortgage by doing so.
Paying down debt or investing is a bit of a “shades of gray” question. There are many variables that can factor into the decision that you may wish to share. The variables can include your attitude towards debt, your age, any additional debt that you have and whether you on track with your retirement savings.
I am 45 and need to build up my Target Retirement Fund as I am an independent contractor without any other retirement fund. I hate wasting money on interest for the mortgage and have funds currently to pay it off early. I would then continue to add to my Target fund and possibly other investments. Or should I contribute $6000 to Target fund as a priority and pay down mortgage as much as possible? Not sure which should be the priority.
If you’re an independent contractor, you can open an Solo 401k, and then you can contribute much more than $6,000/year. If all you’ve been putting into retirement up until now is the IRA limit, you have a long way to go to catch up.
That said, if you pay the mortgage off in a lump sum now, you’ll free up the amount of your mortgage payment every month to save for retirement. But even that is different than your original question of where to apply this particular $6,000 (retirement or mortgage). If I were in your situation, I’d either pay the mortgage off entirely and direct that monthly payment amount to a Solo 401k, or I’d not pay a penny extra on the mortgage until I’d maxed my IRA and Solo 401k every year.
Two points about your question:
- You CAN retire with a mortgage, but you CANNOT retire without savings
- A Target Retirement Account and a Mortgage are NOT risk equivalent choices.
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I’m so grateful for your perspective. Thank you.
You mention a maximum contribution of $6,000. Are you talking about a Roth IRA? I can’t think of anything else with a $6,000 contribution limit.
Yes, a Roth IRA
That’s what I figured. Yes, I would definitely prioritize maxing out your Roth IRA. It grows tax free, and that growth is not taxed when you withdrawal it later.
Also, and this is important, you only have a certain window of time to contribute to a Roth IRA each year. If you miss contributing one year, you CANNOT make up for it years later. Best to contribute when you can. I regret a few years that I did not fully contribute.
If you’re new to all this, I would highly recommend The Money Guy podcast or YouTube channel. They talk about things like this all the time. It’s actually two guys now, but they have their financial order of operations (FOO) that helps you know what to do with the next dollar you have to save, invest, or whatever. I like their approach. They’re not complicated. No get rich quick schemes. Just common sense advice.
Sounds great. Convert the 30 yr into a 15 year.
Let’s say you invest that $500/mo. Even at 6% you’d have approximately $474,350. At 10%, $986,800
Let’s say you invest $0 but years 15-30, you invest $1,600/mo and earn 6%, you’d have approximately $447,000. At 10%, $610,000
But if you only earn 5%, paying off your mortgage makes more sense than investing as you’d have $414,000 from paying off the mortgage and $398,000 by investing for 30 years
Have you seen mortgage rates recently?
Ignore any advice to shorten the term of your mortgage. You can always pay it off faster if you want. Keeping it at 30 years gives you flexibility if things got tight for you financially.
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Yes I was mistaken. I was saying though incorrectly using the term by paying an extra $500/mo on the mortgage you could be reducing the time period from 30 years to 15 years.
I locked in at 2.625%
How did you derive the additional $1100 at year 15-30. Was it an attempt to represent his current mortgage amount?
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A 4.25% mortgage payoff is mathematically equivalent to a risk-free 4.25% investment because you’re “getting rid of dis-savings”. Well that’s not great because risk-free investments are about at that level. Where is the incentive to pay it off early? I don’t see it. You lose flexibility by funneling cash into it. If interest rates crash again, yes, pay it off. If it were me I would not bother.
If you had an 8% mortgage like I did in 1992 well yes, pay it off. I paid my mortgage early only after I maxed out every possible retirement account. I cut a 30 year into 20, I enjoyed that, but I enjoy the portfolio size as well.
If we had a historic bear market in 2023 2024 2025 (I’m not trying to predict mind you) you’d wish you had kept the cash for investment. “Cash is a call option on every asset in the world”.
Yes put it in a Roth because you can only “manufacture” Roth tax free space at a fixed rate per year, no do overs. If you miss the chance now, you cannot claim it later even if you have the money. Claim the space now.
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And you do want to factor in risk in the equation thus a fully equity position needs to earn 8.25% if you have an equity risk premium of 4%
Yes. Cash can be deployed at any time. If you’re timing the market, you have a huge opportunity cost.
Since you have $7,000/yr it is a good idea to take advantage of the Roth for tax free growth
Yes I was thinking how an extra $500/mo could change a 30 year mortgage into a 15 year mortgage.
I’d pretty much say if you can get a mortgage under 4%, investing is probably a good idea but if it’s more than 6%, paying off the mortgage can be prudent
We recently wrote an article on this topic, so here is Clark’s take!
People seem to ASSUME that having a mortgage is similar to making a retirement investment. They are two different things, regardless of the financial advantages. A mortgage means that you MUST make monthly payments, or lose your home. That is a huge risk, especially if you are retired. For me, I chose to pay off my home, while also saving as much as possible for retirement. Now I don’t have to worry if I become unable to make a mortgage payment, for any reason. Can you really stay retired if you are facing a large monthly payment for years and years? If you lose your home, will it matter that you have a larger IRA? Would you be able to replace your fore-closed home with one of the same value at the same place? Being homeless at an old age is difficult. I would sacrifice some investment money to prevent that possibility.
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Yes, this ==^