Retirement plan to support my "habit"

[Lorenzoid]

Let's say you house note is $1000/month and you are paying 5% interest. That is about $50/month or $600/year in interest. This is the average amount over the life of your mortgage. Considering the rule of 78 which loads your interest payments into the first part of your mortgage, the amount of interest diminishes yearly. With only 4 years left on your note you have passed the half-way point and are now paying more principal than interest. Over the next 4 years you will be paying $48,000 of which about $2,400 is interest. If you are in the 20% tax bracket you only will get about $120/year effective write off. Once you pay it off, you KEEP $1000 / month and are not giving anyone the interest. I realize the numbers seem like "no big deal" but why would pay $600 so you can save $120? Paying off your mortgage early ALWAYS puts more money in your pocket.

I over simplified the numbers and rounded in a couple of places, but the fact remains that the sooner you pay off your mortgage, the sooner you keep all of your money.

Is there an online tool or something I can use to calculate this? I can't argue that paying off a mortgage early always puts more money in my pocket, but isn't a key factor in whether I come out ahead what rate of return I could earn on that money? Given the bull market in the past few years, I'm kind of glad I didn't tie up my money by making additional principal payments on my home loan and instead put it into my investment account.

 

[jlcnuke]

Is there an online tool or something I can use to calculate this? I can't argue that paying off a mortgage early always puts more money in my pocket, but isn't a key factor in whether I come out ahead what rate of return I could earn on that money? Given the bull market in the past few years, I'm kind of glad I didn't tie up my money by making additional principal payments on my home loan and instead put it into my investment account.

If you're "extra" money is being invested (vs being spent), then using it for investments results in a higher net worth in the end than using it to pay off the mortgage faster (using average historic investment returns and current, or recent, average mortgage rates). Of course, there is a risk premium in that paying off the mortgage is a 100% guaranteed rate of return (reducing interest owed being guaranteed) while using investments could result in significantly better or significantly worse returns than historic averages.

 

[Lorenzoid]

If you're "extra" money is being invested (vs being spent), then using it for investments results in a higher net worth in the end than using it to pay off the mortgage faster (using average historic investment returns and current, or recent, average mortgage rates). Of course, there is a risk premium in that paying off the mortgage is a 100% guaranteed rate of return (reducing interest owed being guaranteed) while using investments could result in significantly better or significantly worse returns than historic averages.

Yeah, this is why one really needs to run the calculations. It seems to me that whether it's worth it also depends on how many years are left in the loan period, among other things, since the shorter the term over which you're trying to estimate the market's behavior the less accurately you can do it. Sure, over the long term the stock market returns whatever percent, but what about over the next four years? Nobody knows. Seems to me that the optimal way to pay off a loan early is to pay extra toward principal at regular intervals throughout the period of the loan. Deciding somewhere toward the end of the loan period to start diverting money from investments to pay off the loan early may or may not make sense and may be increasingly difficult to calculate with each additional year. Or so my logic goes.

 

[flyboy08]

15 year mortgage at 3% paying every two weeks instead of once a month reduces the payments significantly....pretty much free money when compared to my ROI in stocks and bonds.

My retirement, like many in the USA, is my real estate holdings

 

[jlcnuke]

I'm still many years away from retirement (unfortunately), but I'm also not young anymore. So, I'm thinking more and more about how I'm going to survive when I retire. I so regret not listening to the folks who said to start early. I admit, I've been unconcerned about this whole retirement planning thing until now. And I'm now starting too late, but at least it's a start.

Problem is...I picked up this relatively new habit and since I do not dive locally I have to travel to dive. Travel costs money, lots of it. Sure, I could keep costs low and go to Cozumel forever, but it's still several thousand per trip between my husband and myself. And when I'm retired, I'll want to dive lots. And see different parts of the world. And even stay at reasonably comfortable places. And sit in extended leg room seats on the plane (if not Premium Economy). And maybe buy new gear once in a while. And have nice dinners. Heck, I'll be old and I deserve it!

So I'm so sad right now because the thought of not being able to maintain this passion of mine during retirement due to financial constraints is KILLING ME! I'm so concerned that I'm actually thinking of doing a master's degree in what I do now, being more aggressive about my career (I admit I've kind of been in a rut about this) and hopefully, that will translate into more opportunities and more money for my retirement plan.

Maybe this passion is a good thing, motivating me to excel with the time I have left. I dunno. How do you guys do it? How did you plan for it?

I just want to add: Me and my first world problems.

First thing I did was reduce my expenses by recognizing I have no need to "keep up with" anyone (the Joneses or otherwise). Once I did that, I decided to start with what I "need" and only add on "wants" if they were something I truly desired. Sticking with a $167k home instead of buying a $400k McMansion just because that's what people with my salary buy allows me to save significantly more money. Sticking with the same care for 7-10+ years instead of making car payments every month of my life, similarly, allows me to save quite a bit of money.

Learning how to invest on my own has saved me TONS of money by no paying others to manage my investments or blindly following their advice (much of which would have resulted in lower returns and higher fees over the years). Automating my investment habits has also done a great job in helping to make investing a habit instead of an "option" or "afterthought". Pay taxes -> pay bills -> pay myself (savings/investing) -> spend money... in that order.

Right now, I plan to have my retirement home (should be paid off in ~9-10 years) for when I'm on land, and have a sailboat that I'll live on for months each year sailing and diving on (Caribbean initially). The savings and investing habits I've developed, coupled with an above average income, should allow me to retire in my late 40's (or early 50's, depending on market returns etc) and start enjoying that life. Sure, I could work until I'm 60 and have much bigger/nicer boat, but that's a tradeoff I'm not willing to make right now. Everything is a tradeoff - spend now vs save, work longer and spend more or retire earlier and spend less. So you just try to find the balance that you think you'll be happy with.

 

[Dan]

Great user name you have there!

You still have a chance to change yours to:
><)))*>

 

[Dogbowl]

.

 

[Lorenzoid]

@jlcnuke , we're also fortunate to live where the cost of living is low. In some places, $400k buys a small condo, not even a fixer-upper house.

 

[JamesBon92007]

You still have a chance to change yours to:
><)))*>

If I'm clever enough I could always do yours in reverse <*(((><

 

[Dogbowl]

@jlcnuke , we're also fortunate to live where the cost of living is low. In some places, $400k buys a small condo, not even a fixer-upper house.

I was thinking the same thing. CAD$167k was the price of a single detached working class family home in the “burbs” in early 1980s in my neck of the woods.

For the price of CAD400k today, we can buy a 500sqft condo in the “burbs”. Not even downtown Toronto.

And yet, our pay scale does not increase like our housing increases. Yes, we have a problem. Everyone’s house is their retirement plan.