And that is where I would appreciate any thoughts, opinions, suggestions. Are we better off putting everything toward paying off house, then work on building up the short term retirement funds? Or some ratio of both. -- Kevin

It seems that most of financial advice is to pay off your debts, then invest.

My personal, non-investment-professional view of the subject is that my mortgage costs me 4% per year (and is deductible). Using your target of earning 8% on investments, are you better off investing at 8% or in essence getting a return of 4% by paying the mortgage faster?

I'm retired and we lived for a little while without a house (rented a condo from our daughter). Last summer, we bought a house and got a mortgage with a balance around $200k even though we could have paid 100% cash. Why? Because it's cheap money and I have a long history of earning more though my investments than that money costs me. So, I usually earn enough from investing that $200k or so every couple months than the annual interest cost. And in an extra month, I earn enough to pay the rest of the mortgage (the principal) for a full year. The rest is gravy. YMMV.

Still, most professionals would never do it this way. But it isn't rocket science.

Rob

Kevin,

Looks like a great plan!

As Rob mentioned, keeping a low interest rate mortgage and leaving money invested can leverage the investments in your favor. The choice boils down to preferences and whether the mortgage feels like weight or not.

Having 6 months emergency funds is a great idea plus your 2 year "early retirement" funds can act as a backstop to the emergency funds. You never know with children ...

At some point as you get closer to retirement, maybe 4 or 5 years before, if you can cut back to part time work, I believe it might benefit you greatly. Too many people have adjustment problems stopping work and having all the time on their hands.

Gene
All holdings and some stats on my profile page
http://my.fool.com/profile/gdett2/info.aspx

Depending on your mortgage rate, I would prioritize maxing out all possible tax-advantaged accounts (401k, IRA, HSA, 529) before paying off the mortgage.

-Steph

Depending on your mortgage rate, I would prioritize maxing out all possible tax-advantaged accounts (401k, IRA, HSA, 529) before paying off the mortgage.
____________

  Also remember, when paying off the mtg, you also are tossing the deduction of interest, so that 4% is actually lower

  ANother aspect, as you work through your calculations, is remember you are going to lose a nice chunk of that 4% withdrawal to taxes, so 4% withdrawal will feel a lot more like a 3% spending amt. 

  You may want to consider a little money going into Roth's as well. You can actually 'store' a little more there because you can take out what you put in without a penalty, so you can be a little safer with 'over saving', for me I did this late as I wanted a little more flexibility if I wanted to do a big draw in any year without jumping a tax bracket. Plus I felt biting the bullet on some of the taxes while working was worth the flexibility. 

  Good luck!

"old man" retirement fund. This consists of a couple 401k... I figure I will need about 10 years of expenses covered.

Roth conversion ladders are an intriguing method to more easily access 401k funds that requires only 5 years.

I stopped working September last year and plan to convert 20-30k into a Roth account this year from my 401k with little tax or penalty hit. 5 years from now that conversion will be available to withdraw penalty free.

Just another strategy to consider.

--
whyohwhyoh

….plan to convert 20-30k into a Roth account this year from my 401k with little tax or penalty hit. -- whyohwhyoh

How do you achieve that?

Is it just because you're in a lower tax bracket now?

Rob

I stopped working September last year and plan to convert 20-30k into a Roth account this year from my 401k with little tax or penalty hit. 5 years from now that conversion will be available to withdraw penalty free.

For those planning on doing this, please be clear that only the dollar amount converted will be available penalty free until you are at least 59 1/2 (or meet some exception). (I'm sure whyohwhyoh is aware, but wanted to be sure that the larger audience is.)

The details on how the withdrawals are withdrawn tax and penalty free will be managed using Form 8606 (form: https://www.irs.gov/pub/irs-prior/f8606--2015.pdf instructions: https://www.irs.gov/pub/irs-pdf/i8606.pdf ) in your tax return each year, so be sure that you are filling those out each year you do a conversion. Also, be sure you keep copies of those forms for when you want to start doing withdrawals, as you will need figures from the prior year forms to fill out the current year forms.

AJ

plan to convert 20-30k into a Roth account this year from my 401k with little tax or penalty hit.
....

How do you achieve that?

For a family of 4 the first ~$28,800 is taxed at 0% by the federal government. So yes, a very low tax bracket now that we are "retired" at the moment.

Then there is the $2,000 child tax credit to help cover some amount of earned income as well. etc...

--
whyohwhyoh

I'm a 63yo geezer, so the 59 1/2 thing doesn't bother me. I'll read over the info in your link….carefully.

Thanks.

Rob

Thanks to all for your replies and info.
Going forward, I will probably do a "hybrid" of paying off mortgage and buliding up short-term savings/investments.
I understand the advantages of carying mortgage while getting better returns and tax deduction. But I also like the freedom and lower monthly expenses of no mortgage. For now will probably go with something like a 75/25 split of every extra toward mortgage/savings.
Since mortgage is still fairly high, about 50% equity, I figure more money toward it early on makes bigger difference. That coupled with the market being mostly sideways, with still a good chance of correction (IMHO) is my reasoning. If market changes drastically, I will look at re-adjusting.
Also, with all tax advantaged accounts maxed, I feel I will conservatively have more than enough and can use something like Roth conversion ladders when house is paid, not working as much or at all, and limit tax exposre that way.

Thanks again to everyone and I appreciate any more thoughts, opinions, suggestions.

Kevin

As far as the mortgage strategy is concerned, on paper it makes sense to maximize other investment strategies first. However, debt is also a personal comfort thing. I hate debt so I always paid a few hundred extra every month towards my mortgage anyway. Over the course of my career, I started out putting 10% of my income to the 401k and 10% to mortgage reduction. As I made more and more $, I added to the 401k, Roth IRA's, SEP IRA's and taxable accounts and just left the 2 or 3 hundred extra for the mortgage the same.

It worked for me. If my home sells as planned by the end of June, I'm going to FIRE then at age 54 debt free, no pension, no SS and pulling out a substantial amount of $ from my IRA's. Just using the SEPP calc, DW and I will be getting 3 times what we need to live on.

Metal

why
I stopped working September last year and plan to convert 20-30k into a Roth account this year from my 401k with little tax or penalty hit. 5 years from now that conversion will be available to withdraw penalty free.

Nice. I'm looking into doing the same thing after I FIRE.

Metal

As far as the mortgage strategy is concerned, on paper it makes sense to maximize other investment strategies first. However, debt is also a personal comfort thing. I hate debt so I always paid a few hundred extra every month towards my mortgage anyway. -- Metal

That's right! Sometimes I think "Maybe I should make an extra large payment once a year to drive it down quickly" because I'd like to not have a mortgage either. But, after thinking about it, I can't justify it for myself financially.

Rob

That's right! Sometimes I think "Maybe I should make an extra large payment once a year to drive it down quickly" because I'd like to not have a mortgage either. But, after thinking about it, I can't justify it for myself financially.
_________________________

That's how I see it too.

At 3.25 where my mortgage is with an additional 25%+local tax discount subtracted as well, I would have to be seeing really bad results on the horizon for the money I am investing to make that trade off.

Not taking out a mtg, with all the additional costs involved can be different, but an existing mtg? I definitely decided not to pay mine down, and have played a lot of spreadsheets to determine if I should actually take out a bit more before my wife calls it quits, but although financially prudent I don't really 'need' it, so why bother, though I do like someone else cutting those Property related tax and insurance checks while I pay mtg with autopay. That give me more time to do nothing in the manner I most enjoy.

lowstudent,

"Not taking out a mtg, with all the additional costs involved can be different, but an existing mtg? I definitely decided not to pay mine down,"

We have used this method for a long time. Currently, we have 2 mortgages. I am looking at paying one off. It is on the "lot" we built our home on. Here is why:

We have maintained our cash cushion in our savings account ( mentioned here: http://boards.fool.com/howard-quotthat-time-frame-needs-to-b... )

It does not earn much but we considered it "spent", not a part of our portfolio. We maintain it around 3 years of expenses.

Some changes we have made over the past few years have produced a different opportunity. We did Roth conversions of our two insurance annuities. They are not "annuitized" and simply pay 4.5% APR, paid daily.

In the past when they were trad IRA's, I used them as brokerage cash for our trad IRA's, draining them down to a minimum in 2000 and 2008 with smaller amount used during a few corrections. I was able to replenish them during good times without any restrictions. Having that on the Roth side was very enticing.

A bit ago, probably because it is getting harder to guarantee the 4.5% payout, I received letters for the two accounts that limited deposits to the original 1982 contract terms. This put the brakes on using them for investing cash because the replenishment period increased quite a bit.

I decided recently to use them for the years 2 and 3 of our expense cash while retaining year 1 in the savings account.

The excess cash in savings will go to expenses until it gets to the 1 year level we need. I may pay off the smaller mortgage since it will simplify cash flow. In the savings account, it earns much less than the mortgage interest.

The other option is push the cash into brokerage. I may put some in. Still thinking about it.

Things change over time ...

Gene
All holdings and some stats on my profile page
http://my.fool.com/profile/gdett2/info.aspx

I am speculating a draw down at 2.5% from my trad IRA, with 1% into roth as a rollover, and cash paying the tax and supplementing pensions

With about a 180k lumpsum payout, I am going with a Betterment account, with about 40% stocks to supplement pension income for my ongoing expenses. I am forecasting about 12k a year supplementing pension and SS when it kicks in from this account. I am budgeting for roughly your expected 4.5 with an expectation that I can manage money out of the trad IRA on a take only when things are up basis. My withdrawal above the Roth will go here and be pushed into my checking monthly.

I have tested that idea on spreadsheets, but it will be a little while until I can attest to it functionally. Actually one of my 'fetishes' is working on an envelope in the AM during coffee on the porch and going over various numeric scenarios.

Fortunately, there is a pension that can cover expenses if I cut back on leisure which I am budgeting at about 25k a year travel etc.

I'll keep a traditional emergency fund amount at about a year, but I will be drawing mthly into that account from the Betterment 'hold' fund, I expect to generate excess that allows for a car now and then and some home improvements.

Living small for a lot of years, working hard and simple tastes have left spouse and I comfortable, but I love talking about this stuff and hearing other's plans. For me, big plan is to die with a lot of toys and take good care making sure those around me I care about have a chance to chase their dreams without knowing I can afford them sloth if that's their dream, but I know accomplishment is so much more rewarding.

As far as mtg, I worked up the entire scenario and looking at a 6% Return with current interest over a 30 year period from just investing fairly conventionally and it yields a nice bucket of cash, and might actually go without ever having to hit the principle from the loan. with 3.5 for a 30yr and tax breaks it is a nice gamble to be honest, but again it is a why bother. But it is as close to a safe bet (assuming you can cover a big drop along the way of that 30 yrs if it happens early) as you get with any historic data return scenario