When I get to that situation where I don’t have any debt more expensive than my mortgage I think I will invest first once I get emergency funds and whatnot established. I’m in the early stages of my financial plans right now so that may change as time progresses. My mortgage is at 4.25% so there’s a good chance that guaranteed investments will outperform the mortgage when I get to that point.

Looking back on it, I think we did the right thing. Had we dabbled in the high risk stock market, we probably would have not seen the 4.7% that the loan gave us.

Now that we are completely debt free, we are finally making the purchases that all of our materialistic friends have been doing for years (it’s just were doing it guilt free). I suppose this spending spree should stop at some point and start thinking about retirement…but that’s 35 years from now!

I’ve read about half the blogs here and have been enlightened by the different opinions on non-mortgage investment options.

Cheers!

I currently have a condo in Chicago land area that i’m renting out
700 a month for rent(renting to friends). I have a 30 year fixed 100K loan which i used to purchase a foreclosed property. It just needed lots of work but having construction backround i flipped it no problem.It got appraised for 125K after repairs. I currently pay 1000 extra a month for principle just to pay it off faster. Within 2 years the mortgage went down to 75k. My goal is to pay it off within the next 5-6 years.
After its paid off buy another one =]

I am 21 years old =]

Yes, I’m coming to that conclusion: wait a while and use the IRA funds (conservatively invested amount) to pay some extra principle payments throughout the year to reduce the balance while allowing the remaining balance to grow. Also if taxes remain the same or increase only slightly, then there may be no rush – other than psychological. We live in IL and there is no tax on IRA distributions (yet); however I’m keeping an eye on that variable too.

You have to be careful about giving up forever the tax-advantaged treatment in an IRA or Roth IRA if the numbers don’t work out. I am all for the psychological benefit of a paid off mortgage, but want to make a reasonable numbers-based decision, too. One option, if the numbers don’t work out, is to establish a “mortgage account” within the IRA with the full payoff amount invested there in something fairly conservative and use it to payoff the mortgage over time. This could give you the psychological benefit of knowing the mortgage is “taken care of” and that you could pay it off at any time, while keeping the tax benefits of the IRA.

I just read through #10 and it’s conveniently skewed to make it very attractive to keep a mortgage. I particularly like the part where the same person who is paying the mortgage off early keeps no cash. By the very nature ofthe early payoff strategy, it appeals to fiscally conservative people. This means that the odds of having someone work to payoff a mortgage early AND not have any cash set aside are about as good as being struck by lightning. I’m sure it happens, but not too often.

Also, if you take a look back at rolling 5-year periods for the major indices, you will find that the odds of having an 8% average annual return over that period is below 50%. (It’s only around 2/3rds for a positive return).

One thing that I really, really loved was the ‘opportunity cost’ reference because in the example, it assumes a ‘bubble’ fantasy where the only opportunities are extremes. Minimum down and invest everything versus everything down and invest nothing.

As listed in previous comments, an early mortgage payoff strategy should be employed only after sufficient cash reserves and insurance coverage is in place AND tax favored retirement vehicles have contributions that project out to a comfortable retirement. The ‘bubble’ that is listed on the Edelman website isn’t very close to reality.

This all sounds very good. The only question I would ask is if the mortgage could potentially be paid off through income rather than dipping into the retirement accounts. Based on current tax rates and the high likelihood of tax rates increasing over the long-term, it would be preferrable to keep money in a Roth IRA intact and payoff through other means. Just a thought.

Thanks for your comments. I know about splitting the conversion as income over two years (reporting as income on 2011 and 2012 returns), but your point of why convert to Roth if I plan to take it out and pay the mortgage makes sense. I guess I could pull enough to pay the mortgage and taxes, and be done with it. I’m just itching to have no mortgage payment – and concerned about the end of the Bush tax cuts eff 1/1/2011 if I wait to do it or split it over the 2 tax years.

Mike

The other question is, why convert to a Roth if you are going to withdraw it in a year? Generally, you get the benefit of a Roth as it grows over a longer horizon. Noone knows what the market will do next year, so you don’t really know if you will make 5-8% or lose money.

If you are paying 25% of $80,000=$20,000 tax, you won’t save nearly that much on your mortgage payoff.

I’m I crazy to do this?

There’s a handful of people who got it right, and with very few exception, it’s never a good idea to pay off your mortgage for most people.

Thanks to whoever posted the link to Ric Edelman’s website.

Go to http://www.ricedelman.com/cs/e.....g+Mortgage and read reason #10.

If I have a 3.25% HELOC, should I use it to payoff my 5.625% mortgage which has only $10,000 left?

first:
age 39
income over 500k/yr,
plan to slow down work at 45-47
max out on 401k
max out in espp (employee stock purchase plan)
no credit card debt
still have 90k on school loan (5% over 30yrs)
2 houses still with about 500k in mortgage
emergency funds very adequate
no car loans
single no kids

just wanted your comments, i was thinking of paying off my triplex mtg of 340k @6.5% (600k purchase)over next 2-3yrs. rental income is about 3300/mo. by doing this, i get peace of mind and collecting income. rough guess since no mtg, 3300/mo x 12 is appx 40k/yr (about 32k/yr after overhead taxes and utilites and vacancies) then 32k x 25yrs of income is appx 800k plus the 600k in interest payments i save if i keep for next 25yrs. once fully paid, this is making money to help payoff another rental property, i call it a domino effect. once i reach a certain amount, i can buy and payoff properties rather quickly say if my net rentals were 100k, that would paydown a newly acquired rental sooner as well.

as for my other obligations, my current income can easily cover that should i decide to stay with the company.

good idea? or should i refinance (i will still have a positive cash flow) and instead of paying down my mortgage, put it into the stock market?

losing sleep over this, cuz im inpatient

As for the topic under debate…I’ve been debating this subject and happy to hear it is not so clear cut. I’m in the fortunate position making this choice and although I don’t want to drag my feet in the decision making, right now I’m just making extra payments, trying to match my interest rate and vow to maintain the funds to payoff if I so choose. I must say I like the liquidity and I guess if I get sick of having to make the payment I can opt to payoff.
Lily

Can’t wait to be done dealing with these thieves!

The piece of mind that having a paid off home mortgage, especially in today’s economic climate is priceless.

With that in mind, that is why a more diversified approach to saving and investing is favored over an ‘all or none’ approach like paying the mortgage off first, then moving onto the next step of saving for retirement. Even the ‘gazelle intense’ master, Dave Ramsey, favors a more balanced approach to saving (investing is a different story with him) by wiping out all debt except the first mortgage, then shoring up the emergency fund, then saving 15% for retirement, and finally paying off the mortgage.

Of course, the biggest problem with waiting 15 years to begin saving for retirement is the time value of money. With the past decade of investment returns having vanished, the odds are heavily in favor of better returns over the next 30 years. As a result, participating in these returns is very important to securing your retirement. Once you’re behind the 8-ball, it is very difficult to catch up to the power of the time value of money.

Now that the high level discussion is out of the way, let’s get down to your situation. If you are still paying PMI, I would favor dropping contributions to retirement to only monies that would be matched by an employer sponsored retirement plan like a 401k, SIMPLE-IRA, etc. I would set a goal to get rid of PMI within two to three years because this is a cost that has no tax benefit and getting to 20% equity is an important step.

If you want to go with your plan of paying off the mortgage first, then saving, it’s not going to kill you…as long as you get the mortgage paid off quickly. Go to http://www.bankrate.com and use their mortgage calculator to see what your payments would need to be to get it paid off in 10 years instead of 15 or more. If you can’t make it happen, consider selling the house.

Ideally, you should leave yourself 20 years or more to work and save for retirement. The reason for this is that if you are saving 25% of your gross income after the mortgage is paid off, you will be able to save 5 times your gross income which equates to between 9 and 10 times your net expenses (100% gross income – 25% savings – 20% taxes = 55%, 500% / 55% = 9+ times expenses). While you’ll need to get to 20 times expenses or more for a secure retirement, having 9+ times expenses from pure savings coupled with investment returns over the 20 year period (which are more certain compared to 15 or 10 years) should be enough to fill the gap.

One other point, there isn’t a major asset class in the world that responds well to hyperinflation. It doesn’t matter if it’s real estate, bonds, stocks, etc. Hyperinflationary periods do not possess an asset class that produces the kinds of real returns (net of inflation) that stocks do during periods of modest inflation (typically inflation + 4% to 6%). However, it is a great time to accumulate shares of stock that will eventually rise sharply after inflation has passed. In other words, during hyperinflation, no one really ‘gets ahead’, but soon after the inflation subsides, there has ALWAYS been substantial growth in the equity markets.

(1) If you can payoff the mortgage by the time your child(ren) go to college while continuing to max out retirement contributions (assuming this will put you on track for retirement), do the 15 year and sacrifice the 529 contributions. This way, you can pay for college via earnings instead of the 529 plan. While this may be less tax efficient, it is a lower risk scenario since the 529 plan will endure the ups and downs of the market. I am NOT a fan of fully prefunding a child’s education with a 529 plan and typically only recommend up to 50% of the projected cost be put into them (the reasons for this are many and it could be a topic for another day).

(2) If your child(ren) will begin college before you can payoff the mortgage, take the 30 year mortgage and amortize it over 19 years so you can retire debt free. If it takes longer than 19 years to get the mortgage paid off, you can always decide to downsize at retirement or time out some distributions based on prevailing tax rates in the future.

While it sounds like you’re already locked into the home and have made your decision, a really crazy plan would be:

Take out a mortgage equal to your annual income and buy whatever you can at that point with your equity carryover. Pay it off in 5 years, then upsize to the same sized house you want today with a 5 year mortgage that is again equal to your then current income. This means you would own the house you’re looking at right now with no mortgage in just 10 years. This is a bold plan that many find laughable, but owning a home outright in 10 years with cash versus 15, 19, or even 30 years is a pretty good deal. Ideal personal traits are patience and discipline. Ideal market conditions are for stable real estate markets.

By the way, I didn’t see IRA in your asset listing, but you may want to consider dropping money into an IRA and converting it to a Roth next year (I’d even use some of the equity from the sale of your home to max it out this year and next). You shouldn’t have much growth to pay taxes on, but you will get tax free distributions from the Roth when you retire. Just a thought.

we are married, both 41, both with permanent federal jobs taking in $180K combined income annually. We like our work and probably won’t retire for another 20 years.

we are now selling our home and getting $180K in cash, using $100K of proceeds to make 20% down on a replacement home (450K) in a stable/desirable college town housing market. Some proceeds ($20K) will go to renovations. We are maxing out tax-deferred TSP and college 529K contributions for one daughter.

so, we have the same question as many others – should we be paying down more on the house with a higher down payment and 15 yr mortgage, or investing the difference in the market through our fairly conservative broker (we can’t be bothered to play the market ourselves)

thanks for any input – a couple of pretty smart people who are very dumb about all this!

squimp

What you need to do is construct a high level budget by eliminating the stuff that won’t be there when you’re retired. This is a much simpler way of figuring out what your ‘lifestyle’ budget looks like. After you eliminate all of your debt payments, the money you’re paying for college, the financial support you are lending to your children, and the amount you are currently saving, you wind up with what your ‘lifestyle’ budget is.

The reason this is so effective is because when you enter retirement, you hope to be debt free with adult children that are supporting themselves. As a result, your retirement income needs are typically far less than your current income.

Once you have that number, planning becomes much easier.

Now, your question is definitely best suited for a fee based advisor sitting across from you because there are a number of issues that need to be properly addressed. That said, here is a quick synopsis of the things you need to workout:

1. How much annual retirement income do you really need?
2. When will you sell your house? (notice that this is not an IF discussion)
3. How much equity do you need to realize from the downsizing of your house? (this will tell you what size/value house you can afford during retirement)
4. To determine the available retirement assets you will need (available assets are anything outside of your retirement house and pensions/social security), take your retirement income from #1 and subtract out the annual income from pensions and social security. Next, take this difference and multiply by 15 (low end) to 22 (high end). This is the amount of assets you’ll need to realize from your savings and the downsizing of your home.

The feeling that you have of dog paddling and sinking is very common. To get rid of it, you’ll have to put in the hard work of planning your retirement and making some very difficult decisions along the way. If you want some professional grade retirement planning software, you can go to http://www.efinplan.com that offers a relatively easy to use, but sophisticated retirement plan (the most important output is a monte carlo projection that will give you a percentage likelihood that your nest egg will last through your life expectancy).

From your iteration, it is apparent that you have a family first attitude. Just remember that as you go through this process of planning retirement and then actually doing it, you’ll need to move your and your husband’s interests higher on the priority list.

By the way, congratulations on getting your children through college. I am several years out, but it is a major accomplishment to be sure.

One last thing, if you want to try to find an advisor that can really help you, look for one that is in their 50s or 60s, does NOT have a CFP, runs an independent practice, charges by the hour, and has been in the industry for 20 years or more. These attributes will be most likely to land you with someone who isn’t overly numbers driven, can relate to your life experiences, and has enough experience to know that numbers are a small part of the equation. Look for advisors affiliated with Raymond James, LPL, Cambridge Investment Research, Commonwealth, or those that have their own Federally Registered Investment Advisor. You’ll be able to tell the difference on their websites by reading the little disclosures at the bottom of each page.

Good luck.

Husband 64 (federally employed for past 20 years, and expecting to need to work for possibly 5-6 more yrs He will have a modest pension plus social security.)

Me 57 and contribute very little to our income (part time work from home plus two days work at school in exchange for 3/4 of children’s tuition).

Besides 189,000 and 27 yrs. left on a mortgage at 5.6% (house worth 700,000 right now); 36,000 and 16 yrs. left on an equity loan @ 6.4%; 16,000 left on credit card at 7.9%; 140,000 in our 401K, we have a very modest emergency fund. We have a great desire to pay off our debts and become financially fit, but do find it hard to stay focused…with a large family and several children in college, the priorities are always shifting.

I would appreciate any kind suggestions from you or your clear-sighted viewers regarding steps we definitely should be taking to achieve financial health. We have tried a financial planner once or twice, but it always ended with “make a budget” then come back. Please don’t say only the same thing…believe it or not, I think about this all the time and perpetually crunch numbers, but would like to move forward instead of dog paddling and sinking! Thanks!

Does this question belong on a different line of questions?

-If you are able to save more than the amount stated in the plan, designate this for early mortgage payoff and/or beefing up your emergency fund
-If you are unable to save more than the amount stated in the plan, put all of your dollars into the 403(b) while knowing that you should keep the term of your mortgage to your retirement date or earlier

Put more simply, make sure you’re on track for retirement first, then consider paying down the mortgage earlier.

As to the question of whether or not to re-fi, if the difference in payment is significant AND the APR is equal or lower, do it. This will give you greater flexibility with your cash flow and if the rate is lower, you will ultimately save money that can be used elsewhere.

Helpful next actions:

1. Construct a retirement plan
2. Identify the amount you need to save monthly or annually to reach retirement on time
3. Compare the retirement savings requirements to your available cash flow
4. If you don’t have excess cash above retirement savings requirements, re-evaluate paying the mortgage off early when cash flow improves. If you do have excess cash above retirement, put the money first to fill up your emergency fund and second towards paying off the mortgage early.
5. Examine the costs and APR of the proposed new loan.
6. If the costs are within reason and the APR is lower or equal, do the re-fi to create flexibility in your cash flow. If the costs are excessive, look for another loan provider. If the costs are reasonable, but the APR is higher, skip it.

I hope this is helpful.

The main reason you want to be able to absorb the losses or at least match them with gains as soon as possible is because of the time value of money. While waiting to use your capital loss carryforward, your money and the deduction will be worth less every year out from today. You might want to drop a line to your Congressman to see if they can at least index the $3k to inflation, but I doubt we’ll ever see any significant changes.

As for your habits, always remember that you are the exception and not the rule. There are very, very few who can save at the rate you have, and even fewer who will take the time to research their investments. In my decade plus of experience as an advisor, I met exactly one person that had this combination of qualities. After I met him for the initial appointment, I told him, “you don’t need my help; you’re doing just fine on your own.”

Don’t forget to throw a proper mortgage burning party when you pay it off. You can get as creative as you want, but invite all of your friends. This is a tradition that used to be widely known, but has seemed to dwindle over the last couple of decades. It is a great lesson for friends and family to know that living without a mortgage is possible and they know someone who is doing it. Sometimes your financial footprint needs to be seen by others before they can follow you.

Thanks for the kind words on my blog, and best of luck in securing your financial future. You also might want to start figuring out what you’d like to do with that early retirement you’re tracking;-)~

By the way, thanks for the compliment on my savings habits. I wish I could take full credit for them but have had some pretty good influences in my life that helped to get me focused. As a result of those influences, I now enjoy researching investments, reading 10-k reports, and can’t walk by a newspaper without reading the business/financial sections.

I am officially off the fence and racing towards the finish line. I hope to cross it before my 40th B-day in a couple months.

Thanks again. I just bookmarked your wealth uncomplicated blog (It’s awesome). keep sharing.

The short answer is: Slow down.

Divorce is always a bitter pill and adding financial suicide by a spouse to the list is never helpful. I would hesitate making any decisions until you get settled into being divorced and the emotional side of things has dissipated. There will be plenty of houses available six, twelve, or eighteen months from now, so take your time and figure out what your new life is going to look like.

The only things you MUST do is pay the attorneys and complete all of the paperwork to move the assets into your name. Aside from this, you may even want to park your money in cash until you have a very clear plan as to how you want to proceed.

Also, I am guessing hubbie went out and racked up some pretty nice sized debts. If that is the case, make sure the divorce decree forces him to put those debts solely in his name. I’d also sign up for LifeLock or something similar to lock down your credit for a period of time until everything is under his name. Even if the decree requires him to pay debts that also have your name, it will still impact your credit report until he pays them off or moves the debt under his name. Beyond the credit report, LifeLock or similar services can help you prevent future identity theft. The likelihood of this is much greater from people that know you and your not-so-secret information (like an ex-spouse). These services are usually anywhere from $10 to $30/month and they’re definitely worth paying for until things settle down.

From here, take a few months to:

1. Create a retirement plan
2. Create a housing plan
3. Develop an investing plan for long-term money
4. Sit down with a CPA to figure out how best to buy your home (a lump sum all at once will likely be a terrible tax outcome that could do irreparable harm to your retirement plan)
5. Figure out what you want to do with the rest of your life

I can’t tell you how many divorcees I’ve met that made a series of bad decisions immediately following the divorce (like cashing out a retirement plan). Take your time and explore all of the options. You have experienced a major change, treat it as such.

Good luck, and if you need help, don’t hesitate to reach out to an hourly fee advisor in your area.

In all seriousness, the hesitation that you are feeling probably relates to the market losses and the really low interest rate that you have on your mortgage. The odds are that the market will not move past 1999 highs until 2015 or later and we’ll trade up and down without solidly moving higher for a number of years. In addition, the interest rate is nice, but with only $75k on a mortgage, much of your interest is probably being eaten up by the standard deduction anyway. If you believe the market isn’t going to move significantly higher AND you take a hard look at your taxes with and without a mortgage, you will find that paying off the mortgage is in your best interests.

If you’re concerned about losing out on the market move upward, keep in mind that at your young age, you will have more than enough time to dollar cost average into the market and put you back ahead of where you would be without paying off the mortgage. In stagnant markets with many ups and downs, dollar cost averaging is the most effective way to stabilize your portfolio returns when compared to a lump sum (like the $75k you’d have to sell).

In my opinion, you are a perfect candidate for an early payoff of the mortgage.

The only thing that might be a bad deal is if you have massive capital losses that would be set to carryforward. If this is the case, you should try to get the loss recapture within the next three years or so.

In the grand scheme, paying off the mortgage will significantly reduce the amount of capital required to retire, act as a stabilizing asset to your overall financial condition, and allow you greater freedom in your career choices.

If this comment isn’t enough to get you off the fence, go to a CFP in your area that charges by the hour and let them know that you will not be moving assets to him/her and you only want help with this single decision. This will eliminate biases since an advisor that charges based on assets will not have the cloud of “If I recommend not paying it off, I can make money on the other $75k”. That’s why hourly is much better than asset fees. For $200 to $500, you can get all the information you need to make a good decision. What you get for that money should be a tax projection with and without the mortgage and monte carlo retirement probabilities with and without the mortgage (where without the mortgage you dollar cost average the amount you’re paying on the mortgage today and with the mortgage, you keep the $75k invested). Having those analyses completed should give you the confidence you need to put this decision to bed.

Here is a bit more info. I have a fully funded 401k with a balance of approx 400k, I just opened an IRA within the past couple of years and have a balance of nearly 5k. I have non-tax advantaged accounts of about 90k. If I use the non-tax advantages assets to payoff the mortgage, I will have about 16k left as emergency funds.

Intrest rate on the loan is 4.625%

I have no other debts and am 39 yrs old.

Please help me get past my paralysis.

Your blog looks great, by the way! I added it to my Google Reader RSS.

Thanks again!
Heather

IF you decide to go down the path of taking money out of the retirement account, consider a 72t distribution program that would allow you to take a small percentage of the account out annually before 59 1/2 without penalties. Sometimes 72t distributions are referred to as substantially equal periodic payments (SEPP) and what it amounts to is you are making a permanent election to take money out at least yearly from the retirement account. To break down the term SEPP, ’substantially equal’ means that you will have to take out similar amounts each year. This can be tabulated as a percentage or dollar figure that must come out each year. ‘Periodic’ means that you must take them out periodically and the IRS requires this to be at least annually. ‘Payments’ just means withdrawals. This will save you the 10% penalty, but it will also eliminate your ability to take a lump sum or the entire balance at once. If you deviate from the SEPP arrangement, all distributions are subject to a 10% penalty going back to day 1.

What is attractive about the SEPP route is that you can have a little more freedom about what to do with the money. If you maintain your job and can continue to support your family, then you can use the withdrawals to pay down the mortgage. If you lose your job later, you can use the withdrawals to live off of. If you payoff the mortgage earlier than 59 1/2, you can simply increase your employer sponsored retirement plan contributions to offset the distribution. It just gives you more options while reducing your tax burden and still accelerating your mortgage burning party.

Also, since your husband is back in school, you are likely eligible for the $2,500 tax credit meaning that you could withdraw in a lump sum the amount that corresponds to that tax credit and still be even up on your tax rate from last year. (if you’re in the 25% bracket, it would correspond to a $7,142 withdrawal inclusive of the 10% penalty).

You should also check into your state’s returning student financial aid package. Some states require early filing of the FAFSA, but many states offer grants to adult students and I would not be surprised to see some kind of grant/tax credit/tax deduction from states hit hard by auto industry layoffs.

In short, you’re not crazy to want to do this, but from a risk perspective, you will do better by delaying the distribution or setting up SEPPs. IF you do decide to do the lump sum anyway, sit with an accountant or use a tax prep software package to see if you would be better served taking the distribution this year, next year, or both. The way you figure it out is by computing your marginal tax bracket based on your income and deductions. I’m sure you can do a Google search to find a basic tax calculator and I believe the IRS has one on its site too.

Hope that helps.

J.

We are thinking about paying down our 15 year mortgage (was $215K originally, now $140K, so about 6 years to go) by absorbing the penalties on his current IRA and using the remaining $50K after taxes/penalties (he’s 48, not retirement age) to pay DOWN our mortgage. (We are doing fine making regular payments with my income.)

Now — the penalties are about $30K, but will we save more in interest at this point in our mortgage by doing this?

We are planning on aggressively starting over with an IRA when his nursing career begins.

Is this nuts???

H.

Or is it that you prefer to pay a higher amount of taxes, reduce total compensation paid to individuals by employers (by leaving the match on the table), and would prefer to completely ignore the tax-free withdrawal benefits offered by a Roth IRA. Tell me you’re kidding.

@Tom Layne – The reason it matters if you lock in at a low rate today and inflation (and consequently interest rates) spikes later is the risk of a liquidity event–meaning if you had to move and sell your house. If you sell your house and hold these lower yielding bonds, then you could be forced to purchase your next home with a higher interest rate mortgage AND either have to continue to hold low yield bonds OR sell them at a significant loss.

Also, there is something known as managing ROI for relative returns. What this means is that you want to be near appropriate benchmarks over time and not have significant +/- performance in any given year because you are assuming that the average historical rate of return will be achieved over the long-term. Passive investors like Bogle and his followers use this approach. They don’t care (at least not as much) that the market drops or interest rates are horrible in any given year. They diversify their assets so they can meet the benchmark index and over time they will achieve their expected rate of return.

The other school of thought on ROI is absolute returns. This is more likely something that you would appreciate since you’ve indicated a preference for more conservative investments. In this school of thought, you try to achieve say an 8% or 7% rate of return every single year. Sometimes this means shifting into stocks, long bonds, short bonds, etc., but what you try to do is get to a stated rate of return consistently using the ‘best’ asset class each year. The problem with absolute return strategies is that if you set your target return too high, you’ll find it extremely difficult to manage to the number. If your target is say 5% instead of 10%, you’ll have better luck. Of course, the problem with this is inflation.

If inflation is 5% and you receive 5% on your investments, you have a net return of zero. That’s why CDs have historically been a poor investment because they offer a near zero net rate of return. When a CD is paying 15%, it’s likely inflation is around 14%. When this happens, if you can buy long maturities at the top, CDs can potentially offer a significant premium over inflation. However, timing is hard to pull off and that’s why relative performance is used by so many.

As for your specific situation, here’s what you should do:

1. Construct a retirement plan that will tell you if you are on track or not. You can use something like MyPlan from Fidelity or something similar.
2. If you’re on track, you have more options that we can get into offline. If you’re not on track, you’ll need to increase your contributions for retirement in this order:

If you qualify for the Roth IRA:
-Contribute to 401k to match level (you’re already there)
-Max out Roth IRA contribution for you and your wife
-Max out 401k or to the level you need to be on track for retirement
-Consider a low-cost variable annuity for post 59 1/2 retirement money OR a taxable account with tax efficient investments for pre 59 1/2 retirement money

If you don’t qualify for the Roth IRA:
-Contribute to 401k to match level
-Contribute to 401k to max
-Contribute to a non-deductible traditional IRA
-Consider a low-cost variable annuity for post 59 1/2 retirement money OR a taxable account with tax efficient investments for pre 59 1/2 retirement money

Keep in mind that these accounts only designate how you are taxed currently, on the investment returns until withdrawal, and on the withdrawal. In other words, these accounts designate tax status, not investments held.

For clients that were on track for an early retirement, we would typically max out tax advantaged contributions until they were on track for their post 59 1/2 portion of their retirement and then do a second retirement plan for their retirement age until age 59 1/2. This way, we made sure we had money that wouldn’t be subject to more limited 72t distributions and we could be sure they would have plenty of liquid assets for their pre 59 1/2 retirement days.

I hope this helps, but if you have additional questions, feel free to hit my blog and drop me an email.

I wholeheartedly agree that each individual situation needs to be addressed, problems identified, implications of the problem outlined and then viable solutions to the problem implemented using goals and strategies that are tailored to the individual situation.

Let me state that 401Ks and most tax deferred plans are approved by the Federal Government for the benefit of the Federal Government and implemented by financial planners for the good of financial planners. A smokescreen of complicated products and services have been created over decades that are to the detriment of the average consumer.

That is not to say that financial planners etc are dishonest, it is just the way the system is built. ROI is the big come on when actual ROI after expenses and taxes is much lower. Lower ROI instruments that are not taxed or are favorabley taxed make a lot more sense in the long run.

Sorry I am ranting. I am just tired of seeing people investing in high powered investments that invariably lose over time.

As for using 401K money to start a business?? Well I know hundreds of unqualified people that have gone down that path and failed. The only ones that gained were those that got them into the business, or promoted the myth that “anyone can do it” or it is a “no-brainer” or everyone uses this product (not to mention that a ton of people are promoting the same product). NOT everyone is qualified or should be in business for themselves. Most small business people have traded on kind of JOB (Just Over Broke) for another JOB.

If you decide to go that route go to your State Department that handles training, find out where to get tested to see if you are in fact the type of person that should be a small business owner, own a franchise or should actually work for someone else.

Well let us see how many toes I stepped on this time. I am passionate about helping people and getting older and wiser by the day.

Have a great 4th of July.

There are so many variables to consider here that there is no one right solution-it depends on your circumstance. No financial planner would encourage a client to pour into his/her mortgage extra payments and not have a cash cushion for emergencies. Likewise, financial planners will certainly encourage early mortgage payoffs when there is a reasonable long term retirement cushion and emergency reserves.

Not discussed, but critically important, any investments, be they to pay off the mortgage early or place money into 401k’s are passive uses of money, not active ones.

Instead, think of the use of extra money to BUILD A BUSINESS. This use of money becomes active, not passive, and trumps any passive investment. Of course, actively invested money into your own business is the riskiest type of investment, but with the greatest rewards. So, if one is foregoing the risk of developing a business to come home and write a check to pay off his/her mortgage, that person may have lost out on the biggest potential source of financial freedom.