Retirement Planning - Lessons Learned

[cdaigle430]

Im thinking about using my 401k to pay off my house early next year. I will pay 10% penalty fee and they will deduct state and federal taxes which comes out to this as an example. If I remove 100,000 out of my 401k, that means they will hand me a check for 65,000 dollars. I would have to withdraw 155,000 assuming 10% penalty fee, 20% fed taxes and Maines 5.5% tax rate(total 35.5%) in order to get the 100,000 to pay of the mortgage.

1-I would own the hose after that so if stock crashed-I got something out of it.

2-I should get some taxes back after filing taxes?

3-If I font pay of the loan early i will pay on interest which is 5% now foe me for 15 more years. Thats about 75,000 in interest I would save vs 65,000 in taxes and fees withdrawing from my 401k.

4-I would lose compound interest earnings but then again the stock market isnt going to continue to go up like this...no way no how.

5-I would have 750 a month less to pay for bills meeting meeting and exceeding my budget.

Anyone think of any more pros or cons? My medical is mostly paid for for life and I already have a soc security and two small pensions and one medium sized pension for life. I am also mostly debt free.

 

[dirttoys]

Im thinking about using my 401k to pay off my house early next year. I will pay 10% penalty fee and they will deduct state and federal taxes which comes out to this as an example. If I remove 100,000 out of my 401k, that means they will hand me a check for 65,000 dollars. I would have to withdraw 155,000 assuming 10% penalty fee, 20% fed taxes and Maines 5.5% tax rate(total 35.5%) in order to get the 100,000 to pay of the mortgage.

1-I would own the hose after that so if stock crashed-I got something out of it.

2-I should get some taxes back after filing taxes?

3-If I font pay of the loan early i will pay on interest which is 5% now foe me for 15 more years. Thats about 75,000 in interest I would save vs 65,000 in taxes and fees withdrawing from my 401k.

4-I would lose compound interest earnings but then again the stock market isnt going to continue to go up like this...no way no how.

5-I would have 750 a month less to pay for bills meeting meeting and exceeding my budget.

Anyone think of any more pros or cons? My medical is mostly paid for for life and I already have a soc security and two small pensions and one medium sized pension for life. I am also mostly debt free.

There is nearly no logical reason to take the 10% hit.

If you fear a market correction that you don't have time to recover from, move to money market fund.

If you feel interest is too high on the house refi.

If you need a heart transplant take the money out and pay the 10%, not for anything else.

Best,

ed

 

[kenmac]

Go take on a part time job and pay all you earn on your house mortgage.
No logical sense to take a 40-50% hit on taxes just because you want to pay off early ! JMO !

 

[kenmac]

We keep looking at paying off the mortgage early but with only a few years left it doesn't make sense. Most mortgages are structured so you pay mostly interest first and mostly principal later on. In the last years you're paying almost entirely principal. So in effect you have an extremely low interest loan. Like nearly 0%. If you invest that money instead you'll end up ahead in the end, assuming your investment does better than nearly 0%.

I owe 20 years on this farm. If I never pay it off that's fine. When I'm gone, the money I leave behind (if any) should be enough to take care of the responsibilities. If not, the mortgage company can have it.

I'm not pulling money out of my investments to pay it off

 

[beowulf]

I would never take the penalty or tax hit just to pay off a mortgage. If the interest rate was too high, I would refi. If the rate is competitive, just try to pay more each month. The last mortgage we had - several years ago - was for 15 years. We put down every extra dollar each month on the mortgage and it was paid off in 3 years and 3 months. I know not every one will have extra money to do this totally, but every little bit helps. I really hate paying interest unless it is less than I can somehow earn on our money.

Now for an interesting mortgage story - about a different mortgage - Washington Mutual. Many years ago when our mortgage was down to about $16,000 we decided to just pay it off. I went into the bank and asked about the balance and then wrote a check for that balance. They directed me to a loan officer. I gave him the check and told him I wanted to pay off the balance. He hesitated and then told me the bank could not accept the "last payment" by check - that it had to be in cash. So I told him that, okay, I would write another check for the balance less one dollar and then would give him the check to "pay down" the mortgage, and then I would give him a dollar so the last payment would be in cash as they required. He just stared at me - for a very long time - really, a very long time, and finally he said they could not do that either. We finally agreed that I would give him the check for the full amount but that they did not have to mark the mortgage paid until the check cleared.

 

[CH4Ohio]

Im thinking about using my 401k to pay off my house early next year. I will pay 10% penalty fee and they will deduct state and federal taxes which comes out to this as an example. If I remove 100,000 out of my 401k, that means they will hand me a check for 65,000 dollars. I would have to withdraw 155,000 assuming 10% penalty fee, 20% fed taxes and Maines 5.5% tax rate(total 35.5%) in order to get the 100,000 to pay of the mortgage.

1-I would own the hose after that so if stock crashed-I got something out of it.

2-I should get some taxes back after filing taxes?

3-If I font pay of the loan early i will pay on interest which is 5% now foe me for 15 more years. Thats about 75,000 in interest I would save vs 65,000 in taxes and fees withdrawing from my 401k.

4-I would lose compound interest earnings but then again the stock market isnt going to continue to go up like this...no way no how.

5-I would have 750 a month less to pay for bills meeting meeting and exceeding my budget.

Anyone think of any more pros or cons? My medical is mostly paid for for life and I already have a soc security and two small pensions and one medium sized pension for life. I am also mostly debt free.

You should really talk to a financial advisor. Some companies even offer that through their EAP programs.

People are refinancing their mortgages in the 2 -3% range. There's no reason to have an expensive mortgage unless your credit score won't allow for a refi. It would be crazy to pull invested money out to save on a 2.5% mortgage if you have to take a penalty.

On your point number 2, you won't get any of those "penalty" taxes back. Those are calculated and fixed. Don't kid yourself.

Pay extra on your mortgage every month and pay it off early. That saves you interest and doesn't cost a thing.

Just my opinion . . . And, I should add, you really shouldn't be relying on financial planning advice from an Internet tractor forum!

Good luck.

 

[Jstpssng]

I calculated how much extra to pay to ditch my mortgage 3 years early, then started paying an extra 70$/month. It backfired though, they applied it toward the escrow even though it already had enough to pay my insurance and taxes. When I called them they said “that’s just the way we do it.” I’m back to making my scheduled payment, and will start putting the extra into a Roth acvount

 

[Torvy]

Another loud vote that you do NOT take 401k money to pay mortgage. Even low-No risk investments will outperform your penalty. More likely than not, they will outperform your mortgage interest. In other words, you would be overpaying your mortgage for a false sense of security.

If your mortgage loan APR is high (over 4-5%), you would be better served to refinance. We will pay off our home loan when we retire because we are selling the house and downsizing. (Moving to our rural slice of heaven). It has only a few years left and is worth about twice what we paid 15 years ago...so the proceeds of the sale pay off the house.

Feel free to pay a financial advisor. 100% will tell you to only touch your 401k for real emergencies. If you are risk averse, that is OK, just select lower risk investments... Fixed income securities, government bonds, guaranteed rate funds. You will not grow much money that way, but you also will not lose money. Your plan automatically loses you a big chunk of money with no return on investment.

Fyi, fixed rate mortgages are a hedge Against inflation. Your payments will not get higher, but income will grow (COLA on SS, for example).

 

[Torvy]

I calculated how much extra to pay to ditch my mortgage 3 years early, then started paying an extra 70$/month. It backfired though, they applied it toward the escrow even though it already had enough to pay my insurance and taxes. When I called them they said “that’s just the way we do it.” I’m back to making my scheduled payment, and will start putting the extra into a Roth acvount

You could press them on that. More likely, they screwed up and bluffed you. Good choice! It seems counterintuitive, but heading into inflation it may make more sense for some people to get a low interest rate 2nd mortgage and invest (carefully). As inflation grows the home value grows but payments stay low.

 

[beowulf]

I calculated how much extra to pay to ditch my mortgage 3 years early, then started paying an extra 70$/month. It backfired though, they applied it toward the escrow even though it already had enough to pay my insurance and taxes. When I called them they said “that’s just the way we do it.” I’m back to making my scheduled payment, and will start putting the extra into a Roth acvount

Unless there are provisions about pre-paying, you should be able to pay down the principal any way you want to pay it. What they did makes no sense. I know that in my situation I had to clearly indicate that the extra payments were to apply exclusively to principal.