Money Matters
athomas2424
member
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Note: This only affects The Nest's community members and will not affect members on The Bump or The Knot.
should i decrease my 401k while paying off mortgage?
right now i am contributing 12% to my 401k out of my paycheck. i am also on a mission to pay our mortgage off in 7 years (instead of 30). i can feasibly do this and live tight for the next 7 years. however, i was thinking that maybe it would be smart to lower my 401k contributions down to 5% for the next few years which would give me more bring home to pay the mortgage down even quicker. or would you just leave it at 12% and keep doing what you are doing? i am 33 years old and currently have about 70k in my 401k and my husband is also 33 and has 360k in his if that helps. what do you think would be the smartest move here?
our mortgage is 3.5% interest for 30 years (225k balance).
Re: should i decrease my 401k while paying off mortgage?
I wouldn't suggest doing this. While it is great to pay off your mortgage so quickly this is not something to do if it will hurt your retirement savings. Think about it this way: You are only paying 3.5% on your mortgage but you will be getting compounding interest on your 401k that will likely exceed this 3.5% per year.
As an example (since I don't know your actual numbers)- Say you reduce your retirement contributions by $3500/year for the next 5 years to add toward your mortgage. At the end of 5 years you have paid an additional $17500 on your mortgage and saved about $2000 on interest if you have a $200,000 home loan and have that additional $17500 in principle for a total of $19,500 in savings and equity.
Now, say you decide to put that $17,500 in the 401k instead and pay your mortgage off in 8 years instead of 7. You will have to pay an additional $2000 in interest that year but you will get compounding interest for, say, the next 30 years. At the end of 30 years that $17500 will be worth about $56,000. If you put the money toward the mortgage you will lose about $36500 in compound interest.
My numbers are not exact because I just threw some numbers into an online calculator, but you get the idea. You will make more in the long run if that money is in the 401k.
At 3.5% I would not pay the mortgage before 401K as the market has been gaining more than 3.5% annually. Plus your mortgage interest is tax deductable.
Your husand's 401K is much larger than yours. Technically this doesnt matter as you are priobably planning to grow old together anyways and it's basically money in a shared pot. But I prefer to keep my and my husband's similar, so I contribute a higher percent to mine than my hsuband does to his since he makes more money. But that is just personal preference.
I would actually increase your 401k contributions to at least 15%. You can still aim to pay off your mortgage ridiculously early (maybe in about 10 years) that, right?
While it's really great that you're paying off the mortgage early, PPs are right that your mortgage interest is lower than your 401k will probably earn. Add to that the fact that time is your most powerful tool in saving for retirement, and you should definitely avoid hyper-focusing on the mortgage to the detriment of your retirement savings.
"You know you're in love when you don't want to fall asleep because reality is finally better than your dreams." - Dr. SeussI definitely understand how the 3.5% is much lower than what the market is making, but being in the first 3 years of my mortgage, the breakdown of a payment is like $335 towards principal and $650 towards interest *every month*, so I do see what she's saying about paying down the house so much quicker, but I'm also trying to decide what I want to do with this. Not to mention once the house is paid off,that is another $1,000+/month to save.