Thoughts on Retirement Savings vs. Living Mortgage-Free - Page 2

[crunchy_mommy]

Originally Posted by velochic 

No, actually, you don't.  Let's use a round number: $100,000.  Over the course of a typical 30 year loan, calculated at today's rate of 4.5%, you will pay an additional $82,000 on your mortgage loan.  So your house costs you $182,000.  If, however, you have $100,000 in diversified investments, with compounding interest at a fairly reasonable rate of 4% interest over 30 years, you will end up with about $325,000.  So, in truth, taking out that $100,000, you end up with $60,000 after taxes and penalty... and it just cost you close to $150,000 PLUS the taxes and penalties.   It just does NOT make any sense.  Unless you LOSE money over 30 years (which is possible, but not likely if you are smart about how you invest), keeping the mortgage (with today's rates) and continuing with your 401(k) will most assuredly put you ahead.

ETA:  You are probably looking at your total payment instead of just P/I.  You're including taxes and insurance, and those you have to pay no matter if you own outright or have a mortgage.  So, over the course of 30 years, yeah, insurance and taxes are going to double how much you pay, but you have to pay those anyway.

LOL this is getting beyond my mental reach... or maybe it's just 'cause it's bedtime lol. I think I get what you're saying but I will have to re-read it when I'm more awake!!

[velochic]

Originally Posted by crunchy_mommy 



LOL this is getting beyond my mental reach... or maybe it's just 'cause it's bedtime lol. I think I get what you're saying but I will have to re-read it when I'm more awake!!

Well, I'm just saying that when you have savings and investments, compound interest far outweighs any benefits you have by paying off your house early, from an absolute financial standpoint.  (And I was using very round numbers in my example, so they don't add up exactly, they were just to make the point.) 

[crunchy_mommy]

Originally Posted by velochic 

Well, I'm just saying that when you have savings and investments, compound interest far outweighs any benefits you have by paying off your house early, from an absolute financial standpoint.  (And I was using very round numbers in my example, so they don't add up exactly, they were just to make the point.) 

OK I think I get what you mean. I think what throws me off is that there is no solid interest rate for my 401k or whatever. It's like leaving it all up to chance -- and chances are that it will be way more profitable but it's like saying that I can either DEFINITELY save $100K or POSSIBLY save $300K, KWIM? So it's hard not to want to put more money toward the house!!! And the word 'investment' scares me!!

[velochic]

Originally Posted by crunchy_mommy 



OK I think I get what you mean. I think what throws me off is that there is no solid interest rate for my 401k or whatever. It's like leaving it all up to chance -- and chances are that it will be way more profitable but it's like saying that I can either DEFINITELY save $100K or POSSIBLY save $300K, KWIM? So it's hard not to want to put more money toward the house!!! And the word 'investment' scares me!!

You're right, though about there being no guarantees.  But you can't build wealth without risk.  Investing is not a guarantee.  But neither is it a guarantee that your house will appreciate... perhaps you are socking money into something that is going to lose you money when you sell (IF you can sell when necessary).  It's not even a guarantee that inflation will not wipe out any savings you might be able to put aside.  Nothing is guaranteed and, I don't see a home as a guaranteed INVESTMENT.  Everyone has to have a home, but I don't see it as an investment because so many people have discovered that a home can be a money pit and you can end up with a loss there, as well.  There is no solid interest rate for your "investments", but there is no solid interest rate for house appreciation, either.  The interest saved is known, and yes, that is the one guarantee,  Yes, you may save money paid over time if you pay your mortgage off early, but if that is the only place you are putting your excess money, you are, as I said, "putting all of your eggs into one basket".   With a balanced portfolio, you are spreading the risk, and historically, over the course of 30 years, you will be ahead.  Far more than if you only put your money into a home that may or may not worth as much in 30 years.

FTR, in the spirit of full disclosure - We do pay extra on our mortgage and will have it paid off in just a few more years.  However, we also save to pay cash for cars, invest in dd's education, contribute to retirement, have an emergency fund, have smaller savings to replace things like carpet, appliances, our grill, etc. (that we know will have to eventually be replaced), and have taxable investments, as well.  If we had only one thing we could put money toward... it would not be to pay extra on our mortgage.  And no way in frickin' heck would I take money from a 401(k) to pay off a home (which is ultimately the question here.)

[monkey's mom]

Originally Posted by crunchy_mommy 



OK I think I get what you mean. I think what throws me off is that there is no solid interest rate for my 401k or whatever. It's like leaving it all up to chance -- and chances are that it will be way more profitable but it's like saying that I can either DEFINITELY save $100K or POSSIBLY save $300K, KWIM? So it's hard not to want to put more money toward the house!!! And the word 'investment' scares me!!

Yes....no guarantees is the only guarantee! lol

This is a very often debated topic on many investment boards and among financial experts.

There is no one right answer as far as I can tell. There are many variables for each person's situation.

For ME, unless I am getting a 0% interest loan, I'm not going to borrow. There is a level of security from not owing on one's house that I hear over and over from folks who have chosen to pay off their mortgage vs. hold onto to it and hope their investments outperform. Because that's just what it one is doing: "hoping."  I take risk w/ my money to a certain degree by investing, but I would much rather have the peace of mind knowing that my house is 100% mine.

[crunchy_mommy]

Originally Posted by velochic 

You're right, though about there being no guarantees.  But you can't build wealth without risk.  Investing is not a guarantee.  But neither is it a guarantee that your house will appreciate... perhaps you are socking money into something that is going to lose you money when you sell (IF you can sell when necessary).  It's not even a guarantee that inflation will not wipe out any savings you might be able to put aside.  Nothing is guaranteed and, I don't see a home as a guaranteed INVESTMENT.  Everyone has to have a home, but I don't see it as an investment because so many people have discovered that a home can be a money pit and you can end up with a loss there, as well.  There is no solid interest rate for your "investments", but there is no solid interest rate for house appreciation, either.  The interest saved is known, and yes, that is the one guarantee,  Yes, you may save money paid over time if you pay your mortgage off early, but if that is the only place you are putting your excess money, you are, as I said, "putting all of your eggs into one basket".   With a balanced portfolio, you are spreading the risk, and historically, over the course of 30 years, you will be ahead.  Far more than if you only put your money into a home that may or may not worth as much in 30 years.

OK don't laugh but, this led me to look at my 401k, about which I am a complete idiot & know nothing lol. So I'm looking a the numbers, and I see my contributions, and I see my company match, and they add up to the total. I don't see any interest or anything, so how am I making any money off of this??? (Sorry that it's such a dumb question, and maybe I need to start a new thread so I don't detract from the OP's question!!)

[velochic]

Originally Posted by crunchy_mommy 

OK don't laugh but, this led me to look at my 401k, about which I am a complete idiot & know nothing lol. So I'm looking a the numbers, and I see my contributions, and I see my company match, and they add up to the total. I don't see any interest or anything, so how am I making any money off of this??? (Sorry that it's such a dumb question, and maybe I need to start a new thread so I don't detract from the OP's question!!)

You have to know what the cost basis is, which is a moving target, as you are dollar-cost averaging.  Right now, you are probably not going to see any gains.  The markets are severely volatile the past 3 years and more violently so this past week.  You can ask your brokerage company for a statement (you should be getting them a few times a year, anyway) that reflects your overall gains or losses.  But a 401(k), you have to look at it over the course of decades, not years.