Should We Pay Down the Mortgage or Save for Retirement?
November 24, 2010
Tips & Trends
From Rory S. Coakley on some of the latest real estate news and happenings.
For more than a year, Kim Champney, 40, and Pat Minick, 41, have been kicking in an extra $650 to their $1,048 monthly mortgage payments. “We don’t like carrying a lot of debt,” says Minick, who stays home with their three kids, ages 7, 8 and 10.
At this pace, the couple will pay off the loan in 2018, eight years early. But with their mortgage rate a low 4.4% after a refi, they wonder if the house is the best place to stash their cash.
“Definitely not,” said Grand Rapids financial planner Ryan Sheffer, who adds that the low rate and the tax break on mortgage interest make paying off the loan a lower priority than saving for retirement — which the couple are behind on.
They make $87,000 a year, mostly from Champney’s job as a quality-assurance director; yet they’ve saved just $68,500. She puts 1.5% of her pay in her 401(k); they each stash $3,000 a year in Roth IRAs. “By not investing more while they’re young,” says Sheffer, “Kim and Pat are missing valuable compounding.”
- $68,500 in retirement plans
- $15,000 in 529 college savings plans for the kids
- $6,500 in cash earmarked for emergencies
- Max out Roths. Champney and Minick are in the 15% tax bracket, and tax rates will likely be higher when they retire. So Sheffer says Roth IRAs make sense for them, as money going in is taxed upfront, while withdrawals are tax-free. (Also, Champney gets no 401(k) match.) They can boost savings to $833 a month, $10,000 a year, the max for two people their ages.
- Then feed the 401(k). They will still have $317 a month to work with, of the $650 they’d been using to prepay the mortgage. They should first beef up their emergency fund by $1,000, and after that, redirect the cash to Champney’s 401(k) for additional tax-deferred growth.
- Cut investment costs. Their nest egg is in six funds, most with high fees and poor long-term returns. Philadelphia area planner John Sion suggests consolidating into a target-date fund. As conservative investors, they’ll want one meant for those who’d retire sooner than they will: T. Rowe Price Retirement 2025 (TRRHX) is 77% in stocks.
If you would like to suggest a topic for comment in one of our future emailers, please let me know. You can always reach me at firstname.lastname@example.org or by phone 301-340-8700. I look forward to hearing from you!
Rory S. Coakley
Coakley Realty, Inc.
20 Courthouse Square, Suite 107
Rockville, MD 20850
FIND THE PROPERTY YOU NEED.PROPERTY SEARCH
CONTACT US TODAY
Featured Real Estate Listings
Residential 223 W Montgomery Ave,
Rockville, MD 20850
This home, also known as the Old Episcopal Rectory, was built in 1875 with six additions to follow over the years. This six bedroom, two and one half bath home is privately situated on a premium 17,900 sf lot which also includes a two car garage and a Summer Kitchen.VIEW LISTING
Residential 23400 Woodfield Rd,
Gaithersburg, MD 20882
Mitchell & Best Home on gorgeous 2+ acre lot in Watkins Preserve - a subdision offering 5 additional lots! 5,700 SF (3,934 fin above grade) incl. 4 bdrms, 3.5 baths, 2 car gar, & a full W/O bsmt. 1st fl features office, formal liv& dining rms, gourmet kitchen w/ cntr island, brkfast area & lg family rm w/ FP. Enjoy the gorgeous sunset views from the spacious deck!VIEW LISTING