Should we temporarily stop contributing to our 401(k) until we pay off our mortgage?
My wife and I have retirement funds of $1,200,000 in low-fee index funds. Our current annual family income is $171,000, which is my wife's salary. We contribute the maximum amount to her 401(k). Our primary mortgage is approximately $192,000. The mortgage principle and interest is $1,937 per month at 2.65 percent with 112 months remaining on a 15-year mortgage. My wife will continue working for 18 more years until retirement. I should be working again, too. Should we temporarily stop contributing to our 401(k) until we pay off the mortgage?
I would recommend continuing to contribute to the 401k for several reasons.
Not only do the contributions lower your current taxes, but also will grow tax free until you start taking distributions. Over an 18 year time period this can be a very powerful savings tool towards your retirement.
Next, your mortgage payment is very low relative to income and should not be a burden on you.
Additionally, because the interest rate of 2.65% is so low, your investment return should outpace this over the next 15 years. The more money you have working for you, the more money you will have when you retire.
Lastly, since the mortgage is 15 years and the plan is to work 18 years, the mortgage will be paid off before retirement anyway and you can enjoy your retirement debt free.... or at least close to debt free.
No. Absolutely not.
First of all, I think that since your interest burden is about $425 per month (2.65% on $192,000, divided by 12) you aren't saving very much by paying it off early. All you are doing, really, if you accelerate your principal payoff is to turn liquid assets (cash) into an illiquid asset (home equity). You are much better off using that same money to save for retirement. If you do, you will get an immediate tax savings -- depending on the state you live in, somewhere between $6,000 and $6,500 per year (over $500 per month) assuming you continue to contribute the maximum amount of $18,500 to her 401K -- and I trust you will be able to generate more than 2.65% per year in investment returns. So keep up the mortgage payments for the next 9 years at their current rate.
I say this, believing you have enough income on her salary alone to make your $1937 mortgage payment and also her $1541 retirement contribution. Together, they should total less than a third of her take-home pay. If anything should be cut back before you find a job, it should be your lifestyle. But on the whole you look OK.
Keep in mind that you will need liquid assets of roughly 20 times your annual lifestyle needs, after subtracting Social Security and the income from any non-retirement savings you have. That is, if you spend $10,000 per month on everything (not just food and shelter but travel, entertainment, gifts, hobbies, etc.) and you get $3,000 per month from SS, you need about $1.7 million after taxes. You are 18 years away from retirement and have $1.2 million so don't stop now. You should be in good shape if you keep on saving.