Should I "save for retirement" when I have a mortgage?

[Optatron]

Let's put stock market, Federal Reserve, commodities and other magic tricks with investment aside.

The main argument I hear about "saving for retirement" is "tax deferred".

But if you're around 30, and retirement is 30 years from today.

Doesn't it make sense to pay off your mortgage first?

You won't see what you saved for your retirement until you retire, and that's about 30 years away.

Would you save more in taxes by saving for retirement? Or paying your mortgage?

Either way, why let somebody manage your money for 30 years when you can get out of mortgage debt a few years early?

 

[Original_Intent]

The only way retirement makes more sense is if you can get a pretty much guaranteed better return than the rate on your mortgage. I am 45 and am a true believer in having a mortgage burning party.

The "smart" investment people would say that is crazy even in this investment environment. The advantage of the mortgage I supose is the interest paid is deducted for tax reasons. I contribute to 401K to get the company match, but I only contribute the maximum that the company will match.

Really taking all things into account it is a tough call. It will be a very secure feeling having my house paid for though.

p.s. I don't think many of us are going to get to retire at 60, if at all.

 

[brandon]

Many reasons.

Working a middle class job, It takes at least 30 years to save up enough to retire. If you start saving later you will be working until you're 70.

As you mentioned it's tax deferred, which is always a good thing. Additionally, many employers will match your 401k contributions up to a certain extent. Mine will match up to 5%, which is huge. That means you can have an instant 100% return on what you put in. Also, the compound interest over 30 years really really adds up.

Also, you can loan yourself money from your 401k, which can be really useful. For example, say your car needs $2000 worth of work and you just don't have the money. You can loan the money to yourself from your 401k if you have it and pay it back to yourself instead of putting $2000 on your credit card.

 

[Optatron]

The only way retirement makes more sense is if you can get a pretty much guaranteed better return than the rate on your mortgage.

How the hell can they guarantee that 30 years in advance?

I am 45 and am a true believer in having a mortgage burning party.

The "smart" investment people would say that is crazy even in this investment environment. The advantage of the mortgage I supose is the interest paid is deducted for tax reasons.

So in short, for tax purposes, it comes down to
whether you pay more on your mortgage interest, or to retirement, because whether it's tax deducted or tax deferred, it's just going to be "amount paid"x "income tax rate".

I contribute to 401K to get the company match, but I only contribute the maximum that the company will match.

Really taking all things into account it is a tough call. It will be a very secure feeling having my house paid for though.

yes, which was my point.

if you lose your house, you might as well have never paid it.

but can you lose your retirement savings by not making payments?

 

[Optatron]

Many reasons.

Working a middle class job, It takes at least 30 years to save up enough to retire. If you start saving later you will be working until you're 70.

Yes, but if it means I save 5 years later than you, but am 5 years mortgage payment free, wouldn't that be nice?

As you mentioned it's tax deferred, which is always a good thing. Additionally, many employers will match your 401k contributions up to a certain extent. Mine will match up to 5%, which is huge. That means you can have an instant 100% return on what you put in. Also, the compound interest over 30 years really really adds up.

Are you guaranteed to get back the numeric amount of what you put in in principal? But even if you get it back, you don't get it back all at once, do you?

Also, you can loan yourself money from your 401k, which can be really useful. For example, say your car needs $2000 worth of work and you just don't have the money. You can loan the money to yourself from your 401k if you have it and pay it back to yourself instead of putting $2000 on your credit card.

.........why didn't I save $2000 to myself in the first place?

rather than give to somebody, borrow against it with interest, then pay it back with interest again?

 

[brandon]

Are you guaranteed to get back the numeric amount of what you put in in principal? But even if you get it back, you don't get it back all at once, do you?

No it depends on where the money in your 401k was invested. If you look at any 30 year period in history you will see stocks grew drastically, well above the rate of inflation.

You can take the money out (all of it at once) when you turn 59 1/2 years old. You can take it out sooner if you want but you have to pay a fee.

.........why didn't I save $2000 to myself in the first place?

rather than give to somebody, borrow against it with interest, then pay it back with interest again?

You are saving the $2000. The $2000 is in your 401K, and you pay the interest back to yourself.

 

[Scribbler de Stebbing]

If taxes are higher in 30 years and/or you're in a higher tax bracket, tax-deferred isn't really a great thing. With our skyrocketing national debt, I don't see how taxes could be lower then.

But I am NOT a financial adviser, so take that for what you paid for it.

 

[Optatron]

If taxes are higher in 30 years and/or you're in a higher tax bracket, tax-deferred isn't really a great thing. With our skyrocketing national debt, I don't see how taxes could be lower then.

But I am NOT a financial adviser, so take that for what you paid for it.

thanks

 

[Optatron]

No it depends on where the money in your 401k was invested. If you look at any 30 year period in history you will see stocks grew drastically, well above the rate of inflation.

You can take the money out (all of it at once) when you turn 59 1/2 years old. You can take it out sooner if you want but you have to pay a fee.

So you can take it all out at once, but what you have put in might've lost value (nominal value, inflation aside) if it's poorly invested?

You are saving the $2000. The $2000 is in your 401K, and you pay the interest back to yourself.

what i meant to say was, if I wanted an emergency fund (which anybody should have), I'd just put money in a mattress account, and when I need it, I can take it interest free, penalty free.

 

[brandon]

So you can take it all out at once, but what you have put in might've lost value (nominal value, inflation aside) if it's poorly invested?

Sure it could lose value. But it's very, very unlikely that a fund would yield a negative return after 30 years.

what i meant to say was, if I wanted an emergency fund (which anybody should have), I'd just put money in a mattress account, and when I need it, I can take it interest free, penalty free.

You could, but then it wouldn't be tax deferred. Really you should do both though; contribute to your 401k and save up cash outside of your 401k that is liquid in case of an emergency.

 

[Optatron]

Sure it could lose value. But it's very, very unlikely that a fund would yield a negative return after 30 years.

You could, but then it wouldn't be tax deferred. Really you should do both though; contribute to your 401k and save up cash outside of your 401k that is liquid in case of an emergency.

Cool, but what I'm still thinking of, is what's not heard very common.

Why not focus on paying off mortgage? WOuldn't being a few years ahead in getting out of mortgage debt be even better?

 

[Anti Federalist]

Cool, but what I'm still thinking of, is what's not heard very common.

Why not focus on paying off mortgage? WOuldn't being a few years ahead in getting out of mortgage debt be even better?

It takes a little soul searching.

What is your mortgage deduction v. your tax deferred savings?

Why are you not in a Roth IRA if you are saving for retirement? (That's a no brainer to me, tax FREE investment income, with NO limits?!)

Is there going to be any such thing as retirement in the coming years?

What is the realistic value of your home going to be in 30 years, best guess?

All that said, I'm also a firm believer in not having debt, so my money is going into the property. But, that's 12 acres of sub dividable land in a fairly "desirable" location.

 

[Zippyjuan]

My take on the mortgage vs retirement account issue- first let me say it does not necessarily mean you have to put all your money into one or the other- you can contribute to both. Paying off the mortgage means you need less money for the same standard of living if you did not have a home paid for. Take the example of what used to be a standard of having one third of your take home income going to housing expenses (it is probably higher than that today for most people but we can use it anyways for illustration purposes).

Say you take home $30,000 a year after taxes- one third ($10,000) going towards housing leaves you with $20,000 to live on. If you pay off that home, you will eventually realize the full $30k available to live on- a 50% increase over what you had available to spend on other things. How much money would you have to have saved up to get an annual return of half of your income? You still own that asset and can resell it if you need money or do a reverse mortgage if you need money or decide to move into a retirement home if you become unable to take care of yourself in your own home.

If you decide to save the money instead, that money is not coming out of the $30,000 you take home but out of the $20,000 since you will still be putting one third of your income towards housing (probably in the form of rent). Again, can you put aside enough of that $20k a year to be able to earn a guaranteed $10k a year from it? For me, this is the value of owning a home. Not to hope it goes up in price. In fact until you actually do sell, it does not matter if it goes up or down in value. Owning means needing a lot less in investments or savings in retirement. That does not mean you do not need savings and investments for retirement- it just means you do not need to have as much saved up.

I plan on having mine paid off in the next probably four years (maybe less) and I am under the age of 50.

 

[satchelmcqueen]

all i know is not having a house payment is very nice. i paid my place off in 9 months! granted its a mobile home, but at 27 (then) that was a great accomplishment. now im 34 and have been able to do whatever ive wanted with my money. mostly ive saved for retirement on my own. i dont trust the system and have seen many loose everything in the last year including their 401k money. i say if you plan on keeping your home, then pay it off first. who cares about the value of it, if your not going to sell. then youre free to do what you wish worry free.

 

[Optatron]

It takes a little soul searching.

What is your mortgage deduction v. your tax deferred savings?

Why are you not in a Roth IRA if you are saving for retirement? (That's a no brainer to me, tax FREE investment income, with NO limits?!)

Because I'm not aware of what it means and entails.

In other words, you invest/save as much as you can in your Roth IRA, and like the above, it's money you can't touch until you're about 60.

Is there going to be any such thing as retirement in the coming years?

Exactly my point. But housing bubble is another concern.

What is the realistic value of your home going to be in 30 years, best guess?

Double at best?

All that said, I'm also a firm believer in not having debt, so my money is going into the property. But, that's 12 acres of sub dividable land in a fairly "desirable" location.

 

[Optatron]

all i know is not having a house payment is very nice. i paid my place off in 9 months! granted its a mobile home, but at 27 (then) that was a great accomplishment. now im 34 and have been able to do whatever ive wanted with my money. mostly ive saved for retirement on my own. i dont trust the system and have seen many loose everything in the last year including their 401k money. i say if you plan on keeping your home, then pay it off first. who cares about the value of it, if your not going to sell. then youre free to do what you wish worry free.

you my hero!

 

[Zippyjuan]

On a Roth IRA (which does have contribution limits- the same as a reguar IRA- which depends on your income level- you pay taxes on your contributions but the money you take out including any gains in asset values is not taxed later. Unless they change the law on that. There are of course restrictions on taking money out early. More info about them: http://www.money-zine.com/Financial-Planning/Retirement/Roth-IRA-Rules/

As for housing bubbles, if you find a home you like and can afford and stay in it until after it is paid off they do not matter for you (unless they may effect your property tax amount- in California your property taxes are based on your purchase price- not what the guy across the street sold his for last month). It is like buying gold. There are two prices which will matter- what you paid for it the day you bought it and what it is worth the day you sell it. If the price goes up or down in between does not matter. The value of my place was more than triple what I paid during the housing boom. It is still worth a bit more than twice what I paid but I don't get that money. When the value fell by nearly a third from its peak, I did not lose a penny.

 

[JRegs85]

I don't like the Roth IRA and many other retirement vehicles over the next thirty years....I think that by the time you are 60 or so, the Federal Debt will be so large that your retirement savings will be taxed at a much higher rate or simply confiscated.

The retirement model of our parents and grandparents is dead or near death. We'll have minimal to no Social Security, we can't rely on the stock market to product consistent 7% annualized returns....your realistic goal should be to have enough savings such that when you are in your 70s you work part-time in order to have a stable standard of living.

 

[Optatron]

I don't like the Roth IRA and many other retirement vehicles over the next thirty years....I think that by the time you are 60 or so, the Federal Debt will be so large that your retirement savings will be taxed at a much higher rate or simply confiscated.

Or depreciated relative to the purchasing power.

But point being, that's all speculation, and the reason I ask is, I wanted to see if some people here do a drastically different or opposite way of saving or spending, and how it's worked for them.

The retirement model of our parents and grandparents is dead or near death. We'll have minimal to no Social Security, we can't rely on the stock market to product consistent 7% annualized returns....your realistic goal should be to have enough savings such that when you are in your 70s you work part-time in order to have a stable standard of living.

some hobby work I do today I can actually do until 80 I think

but not sure if there's always a market for this kind of easy work.

 

[tmosley]

all i know is not having a house payment is very nice. i paid my place off in 9 months! granted its a mobile home, but at 27 (then) that was a great accomplishment. now im 34 and have been able to do whatever ive wanted with my money. mostly ive saved for retirement on my own. i dont trust the system and have seen many loose everything in the last year including their 401k money. i say if you plan on keeping your home, then pay it off first. who cares about the value of it, if your not going to sell. then youre free to do what you wish worry free.

Yup, I paid mine off this month. It's going to be nice having an extra $500/month. I'm probably going to start construction on a self sustaining house with the extra money.