Received this question during last nights live stream. Pay down mortgage or invest in Roth IRA?…(read more)
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Not to mention, the cash flow you achieve paying off your mortgage!
So in the last 30 years I’ve paid off 3 mortgages. Literally I was investing in my home, each time I flipped the profit into a larger home. The interest rates were much higher than they are now and I saved a ton of money in interest and PMI to the big guys. My average time to payoff was approximately 8 years each. I started small in 1985 for 35k and grew that into a home I now have worth 500k.
For me it all boils down to peace of mind… if you haven’t had to pay another house note you will never understand the inner peace. Fund your retirement as well as you can but pay off debt first to really thrive. Some will disagree but I can smile and have a drink to freedom!
I do not agree. The long term return and terms of a Roth are so fabulous, that I would never pass up a contribution (well, I would not Outright borrow for a contribution…). Missing a Roth contribution is missed FOREVER. Tax Free until death and potentially beyond. You cannot get it back.
There are many factors, including the interest rate on the mortgage, marginal tax bracket and whether the taxpayer itemizies, But the Roth IRA is usually a better investment because the contributions can be withdrawn in an emergency.
The Roth has other benefits you aren't factoring in like tax free growth and being able to pass wealth to your heirs due to no required minimum distribution. Giving that up to prepay a 3.5 percent mortgage seems foolish.
Hi Josh, watch all your content and mostly agree with you. However, I do not agree with you on this subject for one simple reason. They are only 3 years in to a 30, likely not much in the green. They would have to short sale if something bad happened (prolonged illness, death or job loss) and had to sell the house. In that, they are collateralized against an asset the bank can take back after 60 or 90 days of late payments and they get nothing ir owe the bank. Too me I would "risk off" that situation, monetize the a brokerage account(use for insurance) and the Roth as retirement funding. If these folks were 20 years in and had 80k principle remaining with 200k in savings then I'm taking as much as possible off the principle of the house especially since the 2018 tax law essentially reduced itemization. Keep the great content coming at us – Cheers!
You know I realize all these videos focus on people with average to low income but I would find it fascinating to see what you do overall if your making way above normal. Say 200k a year with a company that offers 401k. What would someone single like that consider doing to save for retirement properly. Those people have huge tax concerns when saving for retirement. I know those are out of the norm but how about a video or 2 about overall strategies. I realize those people normally would find experts to work with them but I mean like no one talks about this subject. I get why I am just wanting to see that perspective. Also when is it too much to put into Roth and or 401k?
I don't completely agree. 3.5% mortgage is cheap money. Your point about needing the money in year 8 for example would be more difficult to get out of your house than it would to get it from your roth too. You paid possibly thousands of dollars to get that mortgage, use that cheap money.
Your graph is also not correct in how much there is in interest. You show a bell curve of equal distribution, where interest in the beginning is higher and looks more like a ski slope going down. In addition the apex of where your interest and principle cross is in year 17 of a 30 year mortgage.
Here's my thought on the matter. I've always been the person who – when putting money in retirement – that is what the money is for – your future. Not to use it in other ways. And that is MY philosophy (whether right or wrong). I say – fund retirement. If you were to invest that $14k/yr for 27 years at 6%, you would approach $900k (yeah, I know, with inflation, etc it probably would be worth $400k today). The compounding effect will be greatly reduced by paying off the mortgage early. The years will pass no matter what – I just think it's more wise to have the investments.
Josh, I like your content, but I disagree with most of this video. The graph at 0:43 is completely nonsensical. The principle/interest graph doesn’t look anything like this. Also, the interest rate does not change throughout the life of the loan as you seem to indicate at 5:55. He will be charged 3.5%/12 on the remaining balance each month. I’ve heard this truthism from other financial advisors on the web and I just don’t understand the logic behind it. To the viewer’s question, I think there are many factors that should be considered such as number of years before retirement and other retirement assets. If you have 15+ years remaining on the mortgage and you’re not retiring before then I think it’s a no brainer to fund the Roth IRA.
But if we’re in for the long term why not put in the Roth?
Pay extra to the mortgage. Anytime one owes money, it is always a risk should a job loss happens.
Nice shirt!
Do both
Wow, just thinking about this. I have always funded my IRAs or 401K. But, man-o-man, cash flow is king. Unbelievable the power when no payments!
Have an investment property and when we sell it, expect enough to retire on just that amount alone. Should I take out of 401K to pay that off? Principal is over 2/3rds of payment. Amount owed is 15% of value.
Thank you for another great video. Very cool.
As long as you plan to keep your Roth for a long period of time, I disagree for the following reasons: 1) Each year you don't contribute to a Roth is a year you can never get back. You lose future compounding in which you can never recover. 2) Roth is tax free. 3) You have much better cash flow with a Roth. There is none with paying your mortgage. 4) Roth is for very long-term investments – usually the last funds you'll ever withdraw from. Pick ANY 20-year period and the stock market has always performed better than 3.5%. This assumes you properly diversify.As long as you are disciplined with your money, the math almost always favors the Roth. Heck – take the Roth contributions and contribute to either VWINX or VWELX (or both). Pick the WORST 10 year period for either of these funds and you will still get at least 5%. I know there's no guarantee of future returns, but the odds are very stacked in favor of these 2 funds.
Yes!! We downloaded our amortization schedule, it showed that the principal actually started accelerating after 10 years.
Our mortgage is 3.25% so we traded paying off the house versus keeping our monies investmented in our 401Ks. We concluded that keeping the money in our 401K was more efficient.