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Does It Make Sense to Decrease Your Retirement Savings to Pay Down Your Mortgage?
Townhall.com ^ | October 27, 2010 | Carrie Schwab Pomerantz

Posted on 10/27/2010 1:25:57 PM PDT by Kaslin

Dear Carrie: I'm 60 and will probably retire between age 66 and 70. I currently have $375,000 in IRA/401(k) funds and I'm adding 8 percent of my income annually. My employer matches a portion. I still have a mortgage of over $165,000 at 4.75 percent.

I'm wondering... should I stop my 401(k) contributions and apply that money in extra principal on my mortgage? If I do, I'd pay my house off in about 10 years, making life a lot easier when I retire. But I'd lose the tax advantages as well as the employer match. One idea is to contribute enough to get the match and put the difference toward the mortgage. I'm swimming in possibilities! -- A Reader

Dear Reader: First let me congratulate you on doing some smart thinking in exploring the alternatives for paying off your mortgage. Not having a mortgage in retirement can be a real plus.

But first things first: Under any circumstances, I absolutely agree that you should keep contributing at least enough to your 401(k) to capture the employer match. At your age -- and with possibly 10 years before you retire -- it's crucial to keep saving. In fact, the real crux of the matter is: How close are you to your retirement goal?

Decreasing your retirement savings to pay off your mortgage is a trade-off that takes money from one pocket to put into another. Before you make this decision, I think you should step back and take a more holistic view of your financial situation. Here are some things to consider:

HAVE YOU SAVED ENOUGH FOR RETIREMENT?

Now would be a good time to realistically assess how much money you think you're going to need when you retire. It's a simple formula.

-- First, determine what your annual expenses will be. It's probably safe to assume that you're going to need basically the same amount in retirement as you're living on now.

-- Next, subtract your projected annual Social Security benefit (plus any other source of income you may have, such as rent) from your spending needs.

-- The result is the amount you'll need to withdraw yearly from your retirement savings to cover your expenses.

Now take a hard look at your savings. Will $375,000 -- even assuming a 5 percent annual growth rate for the next six to 10 years -- be enough to give you the type of retirement you want? Industry experts suggest that you withdraw no more than 4 percent of your portfolio in your first year of retirement, adjusted annually for inflation, to comfortably fund a 30-year retirement. Since you plan to retire after age 65, you might increase your first-year withdrawal rate to 5 percent.

So let's say your current nest egg grows to $600,000 by the time you retire. Withdrawing 5 percent would give you an annual income from your portfolio of approximately $30,000. Considering other sources of income, could you live on this? Or do you need to save more? Figuring this out will help you decide how much you can reduce your retirement savings to put toward your mortgage.

WHAT IS YOUR MORTGAGE REALLY COSTING YOU?

This is another important consideration. Mortgage interest is tax-deductible. For instance, if you're in a combined federal/state 30 percent marginal income tax bracket, your loan at 4.75 percent really only costs you a little over 3 percent (assuming full deductibility). Now compare this with what you're averaging on your 401(k) investments. Granted, investing carries risk (as we all know well!) and there's no guarantee that your investments will make a steady return over the next several years, but it could make more sense to keep saving and growing your money now.

On the other hand, paying down your mortgage will reduce your monthly expenses. Once again, it's a trade-off.

WOULD THIS AFFECT YOUR INCOME TAX BRACKET?

You mention losing the 401(k) tax benefit. If you stop or decrease your 401(k) pre-tax contribution, you'll be adding to your taxable income. This could increase your annual income tax bill. Don't forget to factor this in.

WHAT MAKES YOU SLEEP THE BEST?

Crunching the numbers will help you decide what makes the most economic sense. But sometimes it comes down to what gives you the greatest peace of mind. By all means, take steps to pay down your mortgage. Just make sure you don't short-change your retirement savings by diverting too much to your mortgage now.

You might even consider continuing to save at the same rate in your 401(k) and applying any future raises or bonuses to your mortgage. As you say, there are lots of possibilities. I suggest you talk to an adviser to help you make the best choice for both the present and the future.


TOPICS: Business/Economy; Editorial
KEYWORDS: 401k; personalfinance; retirement; savings
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I had to shorten the title as it is to long. The entire title is:

Does It Make Sense to Decrease Your Retirement Savings to Pay Down Your Mortgage? Maybe ... Maybe Not.

1 posted on 10/27/2010 1:25:59 PM PDT by Kaslin
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To: Kaslin
Paying off a mortgage early is absolutely the best investment you can make, unless, of course, you plan to let Obama take over the payments for you.

2 posted on 10/27/2010 1:27:39 PM PDT by Genoa
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To: Kaslin

I thought oBAmA was paying out mortgages.

You mean I was supposed to keep paying after Jan. 2009?


3 posted on 10/27/2010 1:27:44 PM PDT by library user
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To: library user

With all the talk of the govt federalizing our 401k’s, I would have to seriously consider it.


4 posted on 10/27/2010 1:29:44 PM PDT by gwilhelm56 (NAACP ... Your RACE CARD has been declined.. it's Over the LIMIT!)
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To: Kaslin

Of course, the POTUS might answer the question for you, by confiscating your 401K.


5 posted on 10/27/2010 1:29:54 PM PDT by lurk
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To: Kaslin

Oh Lord this is tough. I say pay off the house due to your age. I mean who knows what is going to be happening with regards to the mortgage deduction by the time you retire. They used to allow deductions for interest on credit cards but took those away....I believe the mortgage deduction is on life support. You still will have a pretty hefty amount in your account for things you may need. Good Luck, but really many people pay off the mortgage and go on to have enough money in retirement.


6 posted on 10/27/2010 1:30:10 PM PDT by napscoordinator
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To: Genoa

I agree with you unless their retirement includes taking in borders till the loan is paid off.

Is it AFTER 7 years on the loan they can’t fine you for an early pay off or does that depend on the state?


7 posted on 10/27/2010 1:30:12 PM PDT by A CA Guy ( God Bless America, God bless and keep safe our fighting men and women.)
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To: gwilhelm56

Get the home paid off, stat!

As a rule of thumb I tell people that if you’re still paying a mortgage past the age of 50, you’re doing it wrong.


8 posted on 10/27/2010 1:33:16 PM PDT by dfwgator (Texas Rangers - American League Champions)
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To: Kaslin

Get out of debt and stay out.


9 posted on 10/27/2010 1:33:20 PM PDT by Past Your Eyes (Some people are too stupid to be ashamed.)
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To: library user
You mean I was supposed to keep paying after Jan. 2009?

I've just been forwarding the bills to 1600 Pennsylvania Avenue, but the bank says they aren't getting the payments. I just don't understand!

10 posted on 10/27/2010 1:34:05 PM PDT by Right Wing Assault (The Obama magic is <strike>fading</strike>gone.)
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To: Kaslin

If we are entering an inflationary period then he would be better off not paying down the mortgage. Invest the money in ways that are at least inflation neutral and pay the mortgage with cheap dollars later.


11 posted on 10/27/2010 1:36:45 PM PDT by posterchild (Endowed by my Creator with certain unalienable rights.)
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To: CSM

Possibly of interest to the Dave Ramsey ping list...........


12 posted on 10/27/2010 1:37:07 PM PDT by day10 (Integrity has no need of rules.)
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To: Kaslin

Conventional wisdom as all the others have said is to pay off your home first. That is always the safe choice, pay off your debt, own your home free and clear, but consider if hyper inflation or even severe normal inflation 10-20% a year comes. The debt you owe on your home is fixed in dollars that will progressively become worth less. If you invest your extra money now in inflation-proof or inflation benefited investments you will be better off in the long run. In a normal economy the longer you wait to pay your house off the more it costs you. In a high inflation economy the longer you wait to pay it off the less it costs you.


13 posted on 10/27/2010 1:37:28 PM PDT by azcap (Who is John Galt ? www.conservativeshirts.com)
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To: Kaslin

I started doing the same thing until 2 years ago when my husband was laid off.
I changed my 401k to 3% which is what my employer matched up to and then took the rest and put that and all extra dollars, bonuses, etc, towards house.
I hate to have any kind of debt.


14 posted on 10/27/2010 1:37:49 PM PDT by coconut47
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To: Kaslin

The question should have been, “Does it make sense to liquidate your IRA, pay the penalty, and pay off your mortgage before the government STEALS the IRA?”


15 posted on 10/27/2010 1:39:48 PM PDT by Carry_Okie (The environment is too complex and too important to manage by central planning.)
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To: Genoa

I went the other way when I retired.
Pulled out all my equity and borrowed sub 5% fixed for 30 yrs.
I plan to pay it back with Baraqqi minibucks.


16 posted on 10/27/2010 1:42:17 PM PDT by nascarnation
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To: Carry_Okie
The question should have been, “Does it make sense to liquidate your IRA, pay the penalty, and pay off your mortgage before the government STEALS the IRA?”

Yes, you'll want to get that done first so the bank can steal your house without complications. :)

17 posted on 10/27/2010 1:42:32 PM PDT by Mr. Jeeves ( "The right to offend is far more important than any right not to be offended." - Rowan Atkinson)
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To: Genoa

Why pay off a mortgage now when you can pay it off in 10-20 years with dollars that will be much cheaper than they are today?


18 posted on 10/27/2010 1:43:18 PM PDT by trumandogz
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To: azcap

I lived through the Carter years.
I saw what inflation can do.

I believe Turbo Tax Tim, Helicopter Ben, and Baraq are gonna make inflation happen somehow.

So my financial bets are on inflation.


19 posted on 10/27/2010 1:45:11 PM PDT by nascarnation
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To: Kaslin

All the theoretical possibilities in the world don’t outweigh securing the value of savings by ridding oneself of debt. Invariably, when people start calculating what-ifs based upon out year assumptions like this, they neglect to include interest not paid as a benefit of debt reduction. A sixty year old is on thin ice as far as continued employment in this economy, so purported future employee match on 401k is tenuous, as is the 401k itself, what with ongoing discussions regarding seizure of pretax accounts such as this.

Cut your overhead and bank the difference for as long as you can. Is there some scenario a broker might cook up to make this sound less than ideal? Sure there is, he or she stands to benefit from churning your accounts. They’re not exactly unbiased observers. The security of having little to no debt in a bizarrely uncertain economic situation far outweighs potential returns right now and for the foreseeable future.


20 posted on 10/27/2010 1:46:05 PM PDT by RegulatorCountry
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To: Kaslin

Actually, in the current situation, there is no right answer. If you manage to get up to 600,000 in your retirement account, you’ll be lucky to get enough income out of it to live on, because stocks are extremely risky and bonds pay practically nothing, and are risky, too.

And Obama might steal your IRA.

On the other hand, it seems silly to blow all your retirement funds on paying off the mortgage, when your neighbors are getting by on not making any mortgage payments at all.

And who knows what that will result in? The bank unable to foreclose because no one knows where the mortgage is any more? The bank foreclosing? Obama sending you a little prezzie and paying it off with your neighbors taxes?

There no longer are any rules or certainties.


21 posted on 10/27/2010 1:46:31 PM PDT by Cicero (Marcus Tullius.)
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To: Genoa

Going into retirement with a mortgage is a bad idea. People need to pay off their mortgage before they retire.


22 posted on 10/27/2010 1:47:44 PM PDT by Frantzie (Imam Ob*m* & Democrats support the VICTORY MOSQUE & TV supports Imam)
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To: Mr. Jeeves
Yes, you'll want to get that done first so the bank can steal your house without complications. :)

I'm in the process of checking on the title now. We owe less than $90K on a SF Bay Area semi-rural home with acreage, and yes, it's a conforming loan. MERS lists the FDIC as the "investor."

Heartwarming, isn't it?

23 posted on 10/27/2010 1:48:29 PM PDT by Carry_Okie (The environment is too complex and too important to manage by central planning.)
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To: dfwgator

“As a rule of thumb I tell people that if you’re still paying a mortgage past the age of 50, you’re doing it wrong.”

Agreed.

I think when I was growing up, people in general always had the home paid off by or before 50.


24 posted on 10/27/2010 1:49:37 PM PDT by Frantzie (Imam Ob*m* & Democrats support the VICTORY MOSQUE & TV supports Imam)
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To: Kaslin

The question is more complicated. If you can get or have a very low mortgage rate say around 3.5 to 4%, then hanging onto to you mortgage is essentially a hedge against inflation. I am in fact thinking of remortgaging my home to position myself to benefit from the increase in interest rates that is bound to come.

At the same time, the persistence of these very low interest rates is essentially transferring wealth and income from savers to borrowers. This is an old style Soviet play, whereby the state essentially takes money from those with savings - mostly retirees - to fund grossly ineffective and inefficient government programs.

The Tea Party folks clearly have a handle on what is actually happening.


25 posted on 10/27/2010 1:49:56 PM PDT by bjc (Check the data!!)
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To: Genoa

With inflation coming,
paying off your mortgage in today’s dollars would be foolish.
Wait and pay off your mortgage with worth-less dollars later.

Unless, of course, you don’t think this incredible level of spending and “monetizing” the debt won’t lead to inflation.


26 posted on 10/27/2010 1:49:56 PM PDT by MrB (The difference between a (de)humanist and a Satanist is that the latter knows who he's working for.)
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To: Kaslin
“should I stop my 401(k) contributions and apply that money in extra principal on my mortgage?”

NO. She is vastly underfunded in her retirement savings. She needs to keep working until the house is paid off and keep funding the retirement account.

Option #2 would be to buy a functional time machine and travel backwards in time to the late 70’s; and invest $50,000 in Apple Computer or Microsoft.

27 posted on 10/27/2010 1:51:53 PM PDT by HereInTheHeartland (Vote Like Obama is on the Ballot)
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To: Kaslin

I would only pay off a house if I was going to live in it until I died. Which I am and did by the way.

I would put extra money first in stuff that I will need at some point in my life. The govt. will steal the 401K and the house will be worth half it’s present value in two more years.

I truly believe that anyone who thinks they are going to “retire” 5 years from now to anything other than selling apples on the street corner is deluded. Hoping to be wrong, but fear I am not.


28 posted on 10/27/2010 1:53:15 PM PDT by tickmeister (tickmeister)
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To: Kaslin

Extremely few people will stay in their current house after retirement. The King’s Land Rents, also known as proeprty taxes, will usually cause people to sell and move to a lower tax district.


29 posted on 10/27/2010 1:53:21 PM PDT by CodeToad (Islam needs to be banned in the US and treated as a criminal enterprise.)
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To: Kaslin

A caller asked this question of Dave Ramsey. His answer to that caller was “hang on to your retirement. Doesn’t make sense to be out of debt, but have nothing to live on.”
Tough call, especially for those of us in our 60’s.


30 posted on 10/27/2010 1:53:44 PM PDT by WestwardHo (Whom the god would destroy, they first drive mad.)
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To: Kaslin

“should I stop my 401(k) contributions and apply that money in extra principal on my mortgage? If I do, I’d pay my house off in about 10 years, making life a lot easier when I retire. But I’d lose the tax advantages as well as the employer match. “

A: ABOLUTELY NOT — you would lose two tax deductions and would just pay more taxes, instead of really saving much, why donate to the government, if you don’t have to.

You can always pay the mortgage off AFTER you retire, with the money you saved in your 401K — if you so choose.

Max out your 401K and be happy about the low interest rate on your mortgage.


31 posted on 10/27/2010 1:53:52 PM PDT by SmartInsight (Bad officials are elected by good citizens who do not vote. ~ G. J. Nathan)
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To: tickmeister
I would only pay off a house if I was going to live in it until I died. Which I am and did by the way.

How are things in the great beyond? I've always wondered about that, lol.

32 posted on 10/27/2010 1:55:14 PM PDT by RegulatorCountry
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To: Kaslin

Jimmy the Greek’s answer is the correct answer.

Buy a gym membership for your sons and son in laws, and any nephews and any of their friends you can find. And martial arts training, and firearms training.

Then put the rest of the money on the street and make a 8% a week vig, end up owning a bunch of distressed businesses and properties in your area.

Jimmy was a smart man.

....
For the rest of us... by this time next year, we’ll have 30 yr bond rates at either 1% or 8% ... and now that TIPS as an investment class has failed... the chances that 600k can provide enough interest and tax free fixed investment income to live off of is no longer a reasonable retirement strategy.

Investment acumen here will provide the answer. IT takes a boom to create wealth, and a depression to consolidate it, if you have a strong hand in investment knowledge, do not pay off loans at a low rate such as the example above.. but if you do, you didn’t need an anonymous freeper to tell you that. If you have to ask... best to pay down the mortgage unless you are willing to gamble on the performance of an investment advisor.


33 posted on 10/27/2010 1:55:21 PM PDT by JerseyHighlander (p.s. The word 'bloggers' is not in the freerepublic spellcheck dictionary?!)
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To: WestwardHo

Those of us with a state pension can put less towards retirement and more towards debt. Of course, we make a lot less too.


34 posted on 10/27/2010 1:58:00 PM PDT by AppyPappy (If you aren't part of the solution, there is good money to be made prolonging the problem.)
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To: Kaslin

gotta look at interest too. if you’re paying less in interest on your mortgage than you’re earning on your 401k, keep the money in the 401k.
pay of debts with the highest interest first, then work your way down.


35 posted on 10/27/2010 1:59:46 PM PDT by absolootezer0 (2x divorced, tattooed, pierced, harley hatin, meghan mccain luvin', smoker and pit bull owner..what?)
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To: WestwardHo
"A caller asked this question of Dave Ramsey. His answer to that caller was "hang on to your retirement. Doesn't make sense to be out of debt, but have nothing to live on."

Dave Ramsey is spot on.

36 posted on 10/27/2010 1:59:53 PM PDT by SmartInsight (Bad officials are elected by good citizens who do not vote. ~ G. J. Nathan)
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To: Kaslin
Another (only slightly) related but equally relevant question in this economy is:

Virtually all of my savings is in my 401K (a similar amount), but I am only in my mid 40s. If I lose my job, and struggle to find a new one, what is the "desperation" threshold I must cross before it makes sense to start tapping into the 401K and using it to pay mortgage bills, etc.?
37 posted on 10/27/2010 2:02:25 PM PDT by beezdotcom
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To: Kaslin

Why not pull 160K out of your IRA, take the tax hit, and pay your mortgage off completely, and then save money for retirement, with a totally paid off house?

Then, your home will never be taken away, unless you can’t pay your property taxes, which you will have to pay, either way.

Carrying debt is just not good, especially if you have funds stashed somewhere. Debt is for poor people, not folks with $$!

Examining interest paid, and tax deduction, vs how much IRA is appreciating, looks good on paper, appealing to a persons inflated sense of his own wisdom and street smarts, and that type of thinking might make you money, if you are Goldman Sachs, but it doesn’t really work for normal middle class folks.

In fact, I would state that this type of thinking, being so comfortable with debt, is the ruin of the present generation, and what got us into the mess, temporally speaking.

Also, there is the larger question of the IRA, and what types of investments the gov’t allows you to make in this context. IDK much about it, but I wonder if you can buy gold, or commodities with an IRA? Directly?

Me, I would rather have the house paid off, cash in my wallet, or where ever I choose to spend/save it, than letting the gov’t manipulate me into subsidizing Wall Street thru the tax code.


38 posted on 10/27/2010 2:03:17 PM PDT by TeachableMoment
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To: JerseyHighlander

who would do the collections? Furio Giunta?


39 posted on 10/27/2010 2:03:22 PM PDT by rahbert
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To: Kaslin

PING


40 posted on 10/27/2010 2:03:54 PM PDT by Logic n' Reason (You can roll a turd in powered sugar; that don't make it a jelly donut)
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To: dfwgator
As a rule of thumb I tell people that if you’re still paying a mortgage past the age of 50, you’re doing it wrong.

NOW you tell me!!!!!

I'm 72...still working....have a huge mortgage....and the little tin god says he needs me to contribute to his campaign funds.

What's a body to do??????????????

41 posted on 10/27/2010 2:06:33 PM PDT by Logic n' Reason (You can roll a turd in powered sugar; that don't make it a jelly donut)
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To: Kaslin

Since there is an employer match involved, I’d say the answer is no. At least up to the employer match.

If this guy is putting 8% of his income into an IRA and the employer is matching that, ending his contributions gives him what is effectively an 8% pay cut. He goes from earning 108% of his base pay to his base pay. He would be better off continuing the IRA contributions and using the employer match to pay down his principal when he retires.

If OTOH he is putting more than 8% of his salary into the IRA, it would probably make sense to cut his IRA contributions to 8% and applying the difference to the mortgage. For example, if he is putting 12% of salary into the IRA, reduce the contribution to 8% and apply the take-home of the other 4% to the mortgage.


42 posted on 10/27/2010 2:06:48 PM PDT by No Truce With Kings (I can see November from my house.)
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To: posterchild
That only works if:

1. You still have an income.

2. The stock market is still allowed to make a profit

43 posted on 10/27/2010 2:14:07 PM PDT by tbw2 (Freeper sci-fi - "Sirat: Through the Fires of Hell" - on amazon.com)
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To: dfwgator
If you're still paying a mortgage it's probably pretty much the same as "rent" once you deal with taxes, et al.

As the most recent real estate crash demonstrated there ain't nobody nowhere no how who can escape those crashes.

Think of your house as a place to live.

44 posted on 10/27/2010 2:17:57 PM PDT by muawiyah ("GIT OUT THE WAY" The Republicans are coming)
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To: Kaslin
This is a no brainer. Where in this market can one buy a no risk investment paying 4.75%. The answer is no where. Unless there is some high payoff penalty paying off the mortgage is like buying a no risk investment that yields 4.75% a deal that can be found nowhere. Don't get confused by the tax deduction as it means nothing. Take your after tax return of 3.15%(assuming 30% bracket) which is your mortgage payment and save it don't spend it. Keep putting into 401k to get the employer match.Do it this year as taxes will probaly be higher next year
45 posted on 10/27/2010 2:18:42 PM PDT by cmwy
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To: tbw2
1. You still have an income.

Even if you don't have an income at that point you will have the 401K savings to live on rather than having all of it prepaid on the house debt.

2. The stock market is still allowed to make a profit

There are a lot of bad things that could happen either way. If we look at that doomsday scenario we could just as easily look at his property taxes becoming unbearable causing him to lose his paid off house and have no money in the IRA.
46 posted on 10/27/2010 2:21:38 PM PDT by posterchild (Endowed by my Creator with certain unalienable rights.)
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To: TeachableMoment
Debt is for poor people, not folks with $$!

The wealthiest people I know, and a few are really wealthy, also have the most debt. It's not hard for them to manage it, but the debt is still there.

47 posted on 10/27/2010 2:21:59 PM PDT by Prokopton
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To: Prokopton

Debt isn’t measured in terms of absolute dollars, it’s the debt/assets ratio that matters. Rich people will have debt, it makes sense, since it frees up other assets that can have a better return than the cost of the debt.


48 posted on 10/27/2010 2:29:35 PM PDT by dfwgator (Texas Rangers - American League Champions)
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To: Frantzie
Going into retirement with a mortgage is a bad idea. People need to pay off their mortgage before they retire.

After retiring nine years ago, my ARM has adjusted down to 3.25%. That's practically free money. Why would I take money from my investments, which are beating the market, to pay off my mortgage? Many mortgages are based on the Libor which is at 0.76538 as of last Friday.

49 posted on 10/27/2010 2:29:45 PM PDT by shove_it (have a nice day)
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To: Kaslin
This decision should be deferred until the future fate of taxes becomes more clear. And, there are the menacing sounds coming from the "deficit reduction" cabal which will issue a report sometime before year's end.
50 posted on 10/27/2010 2:35:45 PM PDT by hinckley buzzard
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