Originally Posted by taubel
I agree, and this is something we probably would never do. I just wonder why everyone feels it's better to invest our retirement in 401(k)s than in a home. What if we sold the home 20 years from now, and used that money as part of our retirement. We could downsize to a small ranch or townhome, or rent senior housing.
What if in 20 years that home were completely unsalable? What if something happened, such as has happened in the last few years, that when you NEED the money, you cannot access it because it is tied up and or worth less than you originally paid? Don't get me wrong... I think that real estate can and should be part of a balanced retirement portfolio if you have sufficient funds to remain diversified. However what you are talking about is the equivalent of "putting all your eggs in one basket". That is a poor financial strategy. Real estate, stocks, ETFs, bonds, precious metals, commodities, munis... ANYTHING... if it's your sole investment, is not just risky, it's foolish. With a 401(k), you are also getting a match from your employer. (If not, you should not be investing through your 401(k) and should be utilizing a Roth IRA... hopefully you are doing both). A 401(k) allows you to be diversified with your investments. It grows tax-deferred. You home's mortgage interest and property tax are tax deductible. There are a lot of reasons to not pay off your home. There are good reasons to do so, but NEVER is it a wise decision to use funds that will be penalized, taxed, and will wipe out any gains. Using your 401(k) for anything short of saving a person's life is not sound financial decision making.
There are also personal reasons you might not want to own your home outright. This is our situation. We could pay off our mortgage if we wanted to without touching any retirement savings. We have the cash to do it. Right now, though, being liquid is more important to us than owning our home outright. (Plus we don't owe much and our mortgage payments are very, very low.) You have to really look at your long-term goals. Right now, money is cheap (that is, you can borrow it cheaply) and you cannot finance your retirement. Think on that and you'll probably come to your own conclusions. Best of luck with your decisions!!
ETA: With penalties and taxes, you do realize that by using 401(k) funds, you've just increased the price of your home by 40%? Seriously, if someone were to say to you, "You owe $100,000 on your home, but you have to pay me $140,000 to own it"... would you really do that? These funds are not 1:1 ratio. You're not paying $1 for every dollar owed if you use cash from your 401(k)... you're paying $1.40 for every dollar owed. It's like going into the store to buy a $20 shirt, but being told you have to pay $28 for it. It just doesn't make sense! Also, if you are borrowing from your 401(k), do you know that if you lose your job, the entire amount is due to be paid back in 60 days from the date of severance? that is, if you borrow $100k, are you able to replace that money in two months if necessary. One more point... you can borrow only up to 50% of your 401(k)... would that be enough to pay off your mortgage in the first place?
Edited by velochic - 8/10/11 at 4:24am