Investing

**dmclone** · 08-17-2011, 11:09 AM

Would it make sense financially to lower my 401k from 15% to 10% and pay extra to my mortgage which is at 4.75%? 30% of the money going into my 401k is going into very safe/low return.

**cyhawkdmb** · 08-17-2011, 11:14 AM

Yes...... Well now that I say that... Is your Mortgage your only debt?

**stateofmind** · 08-17-2011, 11:20 AM

If I were you, I would first refinance. If you have that kind of "disposable" income, you should be able to get into a 15-year note. I have mine at 3.25%. Another fanatic was told last week he could get into a 15 year at 3.25% with NO closing costs.

I would assume that the finance guys would say that you should buy stock right now since it's "cheap". If you are putting a lot into conservative, I would change to buy more aggressive stock, assuming you are young. Another thing is how much your company is matching, which I assume is 6%. If that's the case, as long as you are investing as much as they will match the extra is truly extra.

Most of my stocks have yielded way more than 4.25%, even with the downturn lately. That's where your decisions get more complex.

**DurangoCy** · 08-17-2011, 11:29 AM

First off - 15% well done...
Historically: No
Now: Maybe

Are you over 50? Putting 30% of your income into low yield investments is probably a bad move if you're not at least close to being that old. If you'r still in your 30s 90/10 and 40s 80/20 would be better. I'll probably get crap for it, because these numbers are completely arbitrary based on your risk tolerance and about 100 other factors in your life.

Keep in mind that mortgage debt is tax deductible, and one of the only good types of debt, so your effective tax rate is much lower (probably in the 3% area) so you really need to beat a much lower number than the 4.75% rate you pay. If you have a long ways to go I'd keep shoveling 15% into your IRA (do you have a Roth set up?), up your stock allocation, and sit tight. I think you'll be better in the long run.

If you're close to retirement and want to pay off your house, that's probably another discussion.

**ruxCYtable** · 08-17-2011, 11:30 AM

I used to be pretty staunchly against paying off mortgages early because rates have been so low for so long you could do better long term putting that money elsewhere. However, I've been listening to Dave Ramsey and he makes a lot of sense with his philosophy of doing whatever gets rid of payments faster, without regard necessarily to interest rates vs. investment rates and so forth.

It might depend on your age. At my age I would be hesitant to do this because I would not want to lose out on that extra 5% growing for several more years, whereas it feels like when you plow it into your mortgage it's just gone. You say your 401k is mostly in conservative investments though, so it may not make a difference to you, in which case you may well be better off putting it on the house.

I agree with those who suggest you look at refinancing. I'm paying 3.25% right now. I remember when I got a 6.5% mortgage in 1998 and thinking wow, we'll never see rates this low again. Shoot, I remember when I did my internship at ISU credit union in 1996 rates were between 8-9% and we had so many people coming in to refi we almost couldn't keep up. Times have changed.

**dmclone** · 08-17-2011, 12:11 PM

To answer some other questions:

No other debt.

Emergency fund equal to 9 months of household income

19 years left on the mortgage.

40 y/o

The reason I'm putting 30% of my stock in conservative investments is because I think stocks are overvalued right now. So far this year I'm up 1%. These conservative fixed income investments are up 12%. About 75% of my contributions are going into a roth 401k and the other 25% is going into a standard 401k. My wife does 10% all in a 401k she is in about 90% equities. She is down about 3% for the year.

Looks like I may need to look into another refi.

**Tedcyclone** · 08-17-2011, 12:22 PM

Originally Posted by dmclone

Would it make sense financially to lower my 401k from 15% to 10% and pay extra to my mortgage which is at 4.75%? 30% of the money going into my 401k is going into very safe/low return.

if your 401k return is less then 4.75% than yes. if not, i say no.

**Ficklone02** · 08-17-2011, 12:23 PM

Personally I am all about liquidity. Think about the fact that any of that extra cash you put into your mortgage or IRA is really not coming back to you in the next 20 years....if you're ok with that, then I'd refi the mortgage and keep up the 15%. If not, you might look into high yielding dividend stocks such as Altria Group that pays out 6%, which is a better return on your money than excess mortgage payments. If you think stocks are overvalued you can reinvest the dividends.

The reason I like liquidity so much is, what if a great business opportunity came your way in the next several years, but you had your cash tied up in IRA's and your house? I'm only 31, so you have more experience than me, but that is just my two cents.

**azepp** · 08-17-2011, 12:43 PM

Originally Posted by Tedcyclone

if your 401k return is less then 4.75% than yes. if not, i say no.

It's not quite that simple. The mortgage interest is tax deductible so the effective rate on the mortgage will be less than 4.75%.

**Cyclonz** · 08-17-2011, 12:53 PM

I'd keep the 15% going to the 401K - if inflation kicks in you'll be better off in the market and your house payment stays fixed.

**Incyte** · 08-17-2011, 12:57 PM

Originally Posted by azepp

It's not quite that simple. The mortgage interest is tax deductible so the effective rate on the mortgage will be less than 4.75%.

By reducing your 401(k) to pay off your mortgage you are INCREASING your taxable income and DECREASING your tax deductions.

That right there should tell you it may not be a good idea.

i would just refi if I were you.

**Wesley** · 08-17-2011, 01:00 PM

Since fed rates remain low for two more years per Ben, pay off the mortgage instead.

**FDWxMan** · 08-17-2011, 01:05 PM

Originally Posted by Incyte

By reducing your 401(k) to pay off your mortgage you are INCREASING your taxable income and DECREASING your tax deductions.

That right there should tell you it may not be a good idea.

i would just refi if I were you.

Sounds like 75% of his 401K is actually *Roth 401K*, so it's already being taxed before going in.

**Ficklone02** · 08-17-2011, 01:05 PM

Originally Posted by Wesley

Since fed rates remain low for two more years per Ben, pay off the mortgage instead.

Assuming the OP has a fixed rate mortgage it doesn't matter what the Fed does in this situation.

**Wesley** · 08-17-2011, 01:15 PM

Originally Posted by Ficklone02

Assuming the OP has a fixed rate mortgage it doesn't matter what the Fed does in this situation.

I am saying interest are staying low so that he will earn zilch in next two years. Just pay down the mortgage. If demand stays low worldwide for next 19 years, it means that savings were not worth much. And demand may stay low for a long time if we were the buyers for the world....things have changed.....who needs three big screen TVs at this point?