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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 10:59 AM
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Wife(36) is a Stay @ home Mom. I have 3 girls (1) 2yrs old, and (2) 7 month old twins. I have 27 years of mortgage left, which I can still deduct interest.

My scheme of the day is this:
1) Reduce my 401(k) contributions to 5%. This will allow me to continue to get the match & profit sharing.
2) Put 5% (After Tax) in my Roth
3) Put 5% (After Tax) in a 529 for the girls
4) Any extra monies, put towards mortgage (which should leave me with < 20 years of mortgage payments)

I'm thinking I should be paying the tax on that 10% now(#2 & #3), instead of later. Since I have 3 little tax deductions, & a mortgage, my tax liability is fairly low, right now.

According to my calculations, I could very well be in a higher tax bracket when I retire. (aiming for age 55)


What's the interest rate on that mortgage? I can think of a few reasons that paying it off early don't make sense, but these may or may not apply to you. First, if the interest rate is low, you may be able to make more by using that money to invest. For instance, I have a 15-year FRM at 4.75% so it makes no financial sense to prepay my mortgage since I can get a better rate just by putting the money into a money market account. Second, you will build up equity, but you lose access to that money for any other need you may have along the way. In fact, it might make more sense to put that money into an investment account to have it grow because that would leave you access to the money, and you could still decide down the road to take some of it and pay off the mortgage.

Although 529s can be a good option for college, I don't care for the inflexibility of having the money there. Plus, you have a twin issue where if one twin goes to college and the other doesn't or quits part-way through, you may not have enough time left to switch the funds to the other twin, so you may end up paying penalties to get your own money back or switching the beneficiary to someone else that may not have been in your plan. My twins are high school sophomores, so college planning is something I've been doing for a while, and I think you will have some of the same issues.

To retire early, I'd be more inclined to put the money that would go to the extra mortgage payments into a taxable account and invest from there. Even with your low income tax rate, capital gains are only taxed at 10 or 15%, so that would still be low for accessing your money later. If you end up being in a higher tax bracket, you'd just be paying the 15% taxes on the capital gain since the invested money would be after-tax dollars.

Personally, I also don't see how you would be able to have enough money to live on if you want to retire at 55 if you're not doing more saving now, so I think I'd be looking to do more investing either in taxable or tax-deferred accounts, but the last place I'd be putting my dollars would be into the house.
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