Pay off Mortgage or Max TSP?

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EricDeLee

EricDeLee

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Kinda in a bit of a delimma here and would like to gather some advice for a general perspective of the forums:

The wife and I have decided to work out the kinks and work towards financial independance.
The goals are pretty simple: Pay off everything right now, and invest as well.

Simple, but going about it is what I'm curious about.
I figured out I can pay off my mortgage in 4 1/2 years. With that, the two cars will be paid off in the next year, and the only other debt we have is two minor credit card balances (with a total of less than $5k for both of them).

The question I have is this:
Is it better to pay off the mortgage now, and then start maxing out the TSP once that is complete, or stretch my mortgage out until later and add more to the TSP now?

I can see advantages of both situations. But what concerns me is once the bigger payments are made towards the house, I'll start cutting into tax advantages. No more intrest to write off on the taxes. And that will actually happen within roughly 2 years, being that I'll be dropping roughly $34K into house payments. While doing so, I am currently giving TSP 10% of my base pay.


What I am considering doing, is to continue paying off the house at the alccelerated pace, but each 6 months or so, increase my TSP percentages by adding an additional 2.5% (which will place me around 30% on the fourth year... thus decreasing my overall AGI for taxes). That'll put me at contriputing max (maybe more... so I'll need to look at that) at the time my house is paid off. At that point, all of our income (hers and mine) will be going towards our retirement nest, normal expenses, and we'll be debt free. That puts me on schedule to be debt free 4 years before I retire from Active Duty.

But is it better to throw that money in NOW so it can compound? or will my method work ok to still help reduce my tax bracket? We currently don't have other retirement accounts (aside from her 401K) Just trying to figure out what others have done.
 
The important fact to take into consideration is that we are in a rampaging bull market that will last for another decade. The opportunity cost is your decision to make. I wouldn't accelerate the mortage pay down but would rather open a separate Roth IRA to produce tax free income at a later date - and you can always pull from it if necessary without penalty - just not the gains. Grab the bull by the horns.
 
What is the interest rate on your home loan and do you have other investments (i.e. Roth IRA)?
Me, personaly, I probably would not pay off the house unless I was going to be really strapped for money when I left the military.

BT and Frixxx will jump on this one..wait for a reply.
 
EricDeLee said:
Kinda in a bit of a delimma here and would like to gather some advice for a general perspective of the forums:

Simple, but going about it is what I'm curious about.
I figured out I can pay off my mortgage in 4 1/2 years. With that, the two cars will be paid off in the next year, and the only other debt we have is two minor credit card balances (with a total of less than $5k for both of them).

The question I have is this:
Is it better to pay off the mortgage now, and then start maxing out the TSP once that is complete, or stretch my mortgage out until later and add more to the TSP now?
Click to expand...
Eric, as you have already figured out its not an easy question.:)
1. You may want to focus on the credit card debt first, then the cars, and then the mortgage. Its more of a cash flow deal since you will have more available to pay down debt out of your regular budget if you do it that way. Check out the Dave Ramsey debt snowball discussion on his website.
2. The second part of your question i.e. to pay off house first or build up retirement has a math component. How much profit do you think you can make in your retirement accounts (net of taxes which will be due when you take it out since these are tax-deferred accounts) vs. how much interest you are paying on your mortgage (also net of tax deduction benefit). For example, if you think you can make 8%-2% taxes or 6% net vs. a 6% mortgage rate- 1.5% tax benefit or 4.5% net cost you would be slightly ahead by putting the money in the retirement accounts. The other side of the coin is that the mortgage payoff is essentially a guaranteed return on your money. Also, paying your house off provides you a paid for roof over your head which the retirement account doesn't. I personally like paying the mortgage off first better but can certainly see a case for building up the retirement accounts first as well. Note. On the tax side because standard deductions for married couples are so high now you may not lose as much of the interest deduction as you might think.
Hope this helps.
 
If you think you might be the type of people that once they pay off debt, they use that freedom to buy more stuff (re-creating the debt) then I would put the money into retirement (I'd suggest outside of TSP); Although I doubt you are or you probably wouldn't have created this thread in the first place. I personally wouuld pay off the debt from highest interest to lowest interest.

I personally was debt free and have never paid a penny of credit card interest, but just took out an auto loan because at 1.99% its cheap money. Not that I needed the money; I'm transferring most of it to a brokerage account.
 
Like I mentioned earlier, there is literally no debt on the credit cards. That $5K we owe will be paid off in OCT. Between now and DEC we are making the extra payments to that, and paying ourselves (sock drawer money for emergencies). So we will have roughly $15k nestled away for the minor issues, an the CCs will be paid off. Then in January the extra car payments will be started, and we should be able to finish that off by NOV of 2014. At the same time, I'll be tossing an extra $1k a month to the principle of the house loan. Then we take the month of December "off" for extra payments. Jan of 2015, I'll be tossing an additional $1500 a month (total of $2500 extra each month on principle of house loan). That goes until scheduled payoff of around DEC 2017.

Investment-wise:
I'll be investing in TSP still. Currently at 10%, but by 2017 it will be at 30%-ish
My wife is investing as well in her defined contribution plan. She's investing roughly $500 a month. she has the option to invest $8 an hour of her pay, I think he is doing half right now.

We do not have any IRAS or Roth accounts. But that is something I am considering for 2014.
I don't know if I like the TSP ROTH, but I do like the concept of what Birch mentioned that I can do the Roth and get the money tax-free upon withdraws.

The house loan is 3.75%.

The hardest concept to wrap my brain around is not maxing TSP now when I could. But then again the idea of killing off all debt sounds really nice as well. I'm not too worried about gathering more debt, as I think we'll be okay in that area. I can start drawing my military pensions in 2020 or 2021... Grab a tech job somewhere close to home (lots of opportunities here for that) and then continue investing by possibly rolling that my TSP into that TSP (I am unsure how that works though). I have another 15 years there investing, while just basically paying normal expenses with just my military pension.

But I was curious as if it was a bad idea to pay the house off right away or not. I haven't dived into tax advantages all that much yet, so that's what I was worried about. Between my pension, the wife's pension and both of our "401k" plans.... And addition Roths and IRAs... We should be doing okay. Debt free sounds like the way to go. I know we are in a bull market, but I still think by paying off debt quickly I should be able to reach "critical mass" easier then when I have a mortgage payment.

Now I just got to see if I can get both 401k accounts to that critical mass, money-printing point.


Please keep the comments rolling! Thanks
 
Max out the TSP, you only have a limited window where you can contribute to TSP, once your done, that's it. You can pay off the house anytime, but you can't pay into the TSP once your retired. House debt is good debt (as good as debt gets) plus it may still be deducible.
 
Eric, with the mortgage deduction your interest cost might be closer to 3.0%. When you have equity built up in the house an equity line of credit would pay down other bills and the interest is also dedutable. You can use excess equity cash to buy individual stocks that pay a higher yield and you get the benefit of possible capital appreciation. Just something else to think about. And when you get to my level you can margin your life up to the max and ride the winds of prosperity. Most debt is a privilege and has to be earned. Now is a good time to start working on an income stream that will grow year round.
 
Looks like you are the right path and have your financial house in order. Although you don't indicate how old you are or how many years you have until you plan to retire, you should try to plow as much into TSP as possible, especially if you are under the FERS retirement system as it plays a key part in your retirement nest egg down the road. By investing now, you will have more time for your investment to grow and if you are not under Roth, your contributions come out of your paycheck tax free. You don't pay taxes until you withdrawal down the road hopefully in a lower tax bracket. If you have a choice between Roth and Regular TSP, I would go with the Roth as you can withdraw it tax free after you retire, however, you pay taxes on the contributions now. If you think your salary is going to rise going forward, Roth is the preferred plan. My wife is under CSRS and is retiring on 3 Sept and we are trying to contribute a full year's worth of regular IRA and catch up contributions amounting to $23K before her last paycheck because she never plans to work again, nor will she have to. The darn furlough made it difficult but the annual leave cash payout in her last paycheck will make it easier for us to manage. I'm under FERS (missed CSRS by 15 days) and I'm maxing out as well. Next summer is my KMA day and it looks like all the savings via TSP and IRAs over the past 29 years will pay off. Good luck in whatever you chose to do...
 
Another thing I was looking at: paying off a 30 year mortgage in 5 years saves me nearly $60k in interest.

Ive got a lot to think about in this aspect. Birch... I know you know what you are talking about, I've already got about $40k in equity. Just don't know a lot about all of the other stuff. But, that's why I am here !
 
Scout was 100% correct...

But, you were already on that target - so the question is whether to invest in a guaranteed 3.5% fixed interest product or a variable product that normally gains about 10%...

However, because of the tax advantages of the mortgage, that guaranteed 3.5% 'bond' is really worth about 2.5% or so. The 'C Fund', however, will normally provide between -6% and +26% centering on 10%. I think the answer presents itself. Your investment in the 'C Fund' compounds on itself, the mortgage does not. The 'C Fund' is tax advantaged, paying down a mortgage is a tax negative till you no longer get the write-off (which is were I am). And, you seem to be starting a bit late in your TSP so you want to plow as much as you can early on so those assets can compound. Finally, a nice market dump would be just grand for you - just plow contributions into the C/S/I at cheaper prices.

It is rarely a great idea to buy down a mortgage early. They get cheaper as inflation increases pay. The only reason I can think of buying one down at the expense of growing and dynamic investments is to beat the affects of deflation. Deflation is a misery for holders of debt. But, if you are a long way from buying it out you will still have the same payment if/when deflation rears its ugly head...
 
Let me simplify the math if I may....

You're passing up a possible 10, 20 or even 30% gains in TSP in order to eliminate 3.75% interest fees a year as well as pass up the tax write off of your mortgage(resulting in higher taxes)
Also, lets not forget that your tsp contribution lowers your taxable income so more money in your pocket and less money to Uncle Sam.

Please consider the glowing:
1. Get rid of the credit card and car debt.
2. Keep the good debt (mortgage).
3. Increase TSP contribution
4. Start Roth IRA (not TSP Roth)
5. If you get bored watching your money multiply, you could try passing up Birch just for fun. That should get some bull tinky flying.
 
I agree that maxing out the TSP is a good idea. That's what I did and the 30 year mortgage did get paid off in 14 by scraping together a few hundred bucks when possible to throw at the principal. I think the interest was 5.25, which was refinanced a couple of times. It got to the point where it was not worth refinancing for a lower rate. Tax wise, once the interest deduction got to the point of being less than the standard deduction, we got serious about paying it off.

A caveat about my situation v yours is that I retired from the military and once I found a job, made a rule that the military annuity was only for mortgage payments and other housing expenses. Both my kids are grown and gone. It is about the same as having two incomes. My spouse does not work. In case you are thinking that military annuity is a fortune, I retired as an E-7. No 40k O-5 annuity here. Just enough to make a house payment.

Sounds like you have a good plan. I vote for maxing the TSP while the market is going up and paying off what you can in the mean time.

Other thoughts after reading Boghie's reply are

-real estate is going up right now in most areas but your house's value may not continue to increase, a house is a place to live, not an investment tool

-if you are planning on living in the house for a while, what used to go to the mortgage payment needs to go to updating the infrastructure

Now Judy has replied. The market does not always give you 10, 20 or 30%. YMMV

MHO. Remember about opinions.

PO
 
jpcavin said:
Let me simplify the math if I may....

You're passing up a possible 10, 20 or even 30% gains in TSP in order to eliminate 3.75% interest fees a year as well as pass up the tax write off of your mortgage(resulting in higher taxes)
Also, lets not forget that your tsp contribution lowers your taxable income so more money in your pocket and less money to Uncle Sam.

Please consider the glowing:
1. Get rid of the credit card and car debt.
2. Keep the good debt (mortgage).
3. Increase TSP contribution
4. Start Roth IRA (not TSP Roth)
5. If you get bored watching your money multiply, you could try passing up Birch just for fun. That should get some bull tinky flying.
Click to expand...


The last few responses are the exact reason why I asked this here. I don't have it all figured out, yet it seemed like a bit of a mistake paying the mortgage off quickly. It is just so tempting to see that part of the output of money staying in the bank. I'm going to rerun the numbers. Hell... I suppose I could just pay the mortgage off with military retirement paycheck. Thanks for the responses. I appreciate it all!
 
Should read "Please consider the following" not "Please consider the glowing" I was replying from my phone. :embarrest:
 
PessOptimist said:
Now Judy has replied. The market does not always give you 10, 20 or 30%. YMMV

MHO. Remember about opinions.

PO
Click to expand...

What is YMMV??? I agree with you PO, but you gotta be positioned to take advantage of the markets when it wants to be generous and giving. :D
 
JP,
You are the most right IMO.

J,
CC debt is the worst. Unsecured debt like CC and auto notes MUST be paid off first.
One life lesson I've lived by. If you can't afford it, don't buy it unless you NEED it. Something tells me the CC debt and auto notes weren't needs. But hey, live and learn right?

Secured debt is ok. Looks like a refi on the house worked out well. My wife and I own 3 houses. 2 of these are rentals. Refi on 2 this last winter and spring and bought the last rental a year ago. Cash leveraging is the name of the game. You have a great rate on that house. It's time to max out retirement. I do the same thing by looking at the interest liability on the houses and think, "wow, look at all that interest". But really you are only paying about 20 - 40% of that interest in the long run because of the tax write off.

That is great that you came here looking for advice. I'm sort of new here but a long time invested and saver. I'm prior military and retire after 24 years. Maxed out my TSP and Roth IRA . I'm 44 but retired almost 2 years ago and will never have to work another day of my life. My wife works but every cent she brings in is just extra. We are sitting on $456k in retirement and $160k in investments. That is freedom my friend.

JP has it right. Follow that checklist and you'll be just fine.

Take care,
GB
 
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