I have $850,000 in retirement savings and a remaining mortgage of $380,000; should I stop contributing to my four retirement accounts and pay down my mortgage?
I am 48 years old. I have about $850,000 invested in a 401(k), IRA, Roth IRA, and a SEP IRA. I also have six rental building; four of them are paid off. The remaining mortgage payment on my house is $380,000. Should I stop contributing to my retirement accounts and start paying off my mortgage?
Great question. There are several variables that, because of a lack of information, I am going to omitt so I may focus on the most important factor between investing and paying off debt. I cannot answer this in full because I do not know your interest rate, nor your rate of return on the investment accounts. But conceptually, if you are earning (or projecting to earn) a higher rate of return on equity, it does not make fiscal sense to pay off debt if the interest rate on debt is lower. For example, if your retirement account has averaged 8% over the past 10 years (Which the S&P has averaged, inculding the recession of '08) and your mortgage is only 4.25%, it does not make sense to pay off additional mortgage, as your time value of money has you losing out on a 3.75% opportunity cost. Inversely, if your investments comprise of only certificates of deposit at the bank, paying 2.75% for a 5 year, it would make more sense to pay off debt, as it is costing you 1.5% annually over the rate of return you would earn. To conculde, as you are only 48 years old, it would make more sense in my opinion to continue to contribute to your retirement accounts, and invest for long term diversification. If you get to the point where you have maxed out contribution limits, you may then look at paying off debt.
I would advise you team up with a financial planner to discuss your situation in greater deatil. I hope this helped!
David Michael Howard
Congratulations on building an impressive asset base at such a young age!
No, I would not recommend stopping your retirement contributions. I recommend to my coaching clients (who are still employed) that they continue to save 15% to 20% of their earnings for retirement, if possible. Dollar-cost-averaging into a well diversified, low-cost index fund portfolio is a great plan for building wealth over the long-term. This also allows you take advantage of market volatility (like we’ve seen recently!).
If you have free cash flow above this amount, yes, certainly look to reduce and ultimately eliminate your mortgage, as well as the mortgages on your rental properties. You haven’t indicated when you’d like to retire, but I recommend the elimination of debt, including your home’s mortgage, prior to retirement. Doing so reduces your monthly cash flow needs in retirement which may produce more tax planning opportunities before RMD’s begin.
Again, congratulations on building a great nest egg!
Based on the limited information you've provided, I'd suggest that you leverage your rental property since the interest you'd pay on a mortgage against one or more of them is likely deductible against the rental income. This would lower your effective rate of borrowing on that property and reduce your net taxable income at the same time.
Use the proceeds of the refinancing to pay off your principal residence mortgage which even though you didn't disclose the interest rate you pay on it, I'm guessing is not going to be fully deductible under the new tax law which limits mortgage deductibility to $10,000.
Refinancing would allow you to continue to contribute to your 401(k) and/or IRA/SEP and continue to max out the tax benefits of these savings vehicles.
A few things to consider in determining whether you should pay down your mortgage quicker or continue to contribute funds to your retirement accounts.
1. The interest rate on your mortgage is likely lower than what you can expect to earn in a diversified portfolio in your retirement accounts over extended market cycles (10+ years). By paying off your mortgage quicker, you're essentially "locking in" a return of the interest rate. If the interest rate is low, you may consider continuing what you're doing.
2. You mention the mortgage on your house. So I'm assuming your primary living residence for tax purposes. If you itemize your deductions (you may be less likely to now given the doubling of the standard deduction) the mortgage interest rate deduction is something to account for. You can use the mortgage interest rate deduction to lower your tax liability IF you itemize for taxes, in which case it would not make sense to pay off the mortgage faster.
Hope that helps.
If I were advising a client in your situation, as described, I would want to ask a few questions and consider your overall financial plan. For example:
- Are you still earning an income from being an employee or self-employment?
- Is the 401k sponsored by an employer, and do they offer any "matching" contributions?
- Is the SEP IRA funded through the rental property business?
- Have you been able to fully define your retirement goal in terms of when you wish to retire, how long you expect to live, what you anticipate to be your annual income needs from your retirement assets, and what your strategy should be for tax efficient access to your retirement funds?
- Do you hold significant cash or investments in "after tax" accounts like a bank, brokerage, ROTH IRA?
- Have you modeled whether your effective tax rate is likely to be higher or lower in retirement?
These types of questions, and their answers, may lead to a better understanding of which path forward holds more relative value.
Good luck, and consider engaging with a qualified financial planner to work through this discussion and creating an actionable financial plan tailored to your needs.