Retirement Information - Things that may help you

[Doug Jensen]

What you can earn in the marketplace on the difference is hypothetical unless it is actually earned. The extra $161K in interest is not hypothetical at all. I don't believe people are doing 30 yr mortgage as an avenue of growth or savings. They do it to get a lower monthly budget.

That's one way of describing it. I'd say they do it so they can buy more house than they can actually afford. Kind of like people financing cars now for 5-8 years or more. If you have to spread out the cost over that that much time . . . YOU can't afford it. I have to chuckle when I see one of those home shopping channels where they are selling crap for three low playments of $29.99. What? If you can't afford to pay the whole hundred bucks in one shot, you have no reason to be buying that shitty ring, foot massager, or special cooking appliance nobody really needs . . . and will be in the garbage before you finish your payments. Financial illiteracy runs amok.

 

[ahalpert]

What you can earn in the marketplace on the difference is hypothetical unless it is actually earned. The extra $161K in interest is not hypothetical at all. I don't believe people are doing 30 yr mortgage as an avenue of growth or savings. They do it to get a lower monthly budget.

Is that why you put all your investments in a savings account instead of equities? Because it's a guaranteed return?

 

[ahalpert]

That's one way of describing it. I'd say they do it so they can buy more house than they can actually afford. Kind of like people financing cars now for 5-8 years or more. If you have to spread out the cost over that that much time . . . YOU can't afford it. I have to chuckle when I see one of those home shopping channels where they are selling crap for three low playments of $29.99. What? If you can't afford to pay the whole hundred bucks in one shot, you have no reason to be buying that ****ty ring, foot massager, or special cooking appliance nobody really needs . . . and will be in the garbage before you finish your payments. Financial illiteracy runs amok.

I took a 30-year mortgage because it's a lower commitment which means it will still be manageable in the event of financial calamity. I graduated college in 2009, the depths of the great recession, and the knowledge that the economy or even just my particular industry could collapse without warning looms large over my decision-making.

Currently you shave about 1% off your APR for every 10 years you shorten the mortgage term. When I bought in, it was a smaller difference in absolute terms.

"Afford" is a funny word. We could have afforded to buy a much more expensive house. But not necessarily in the event of a downturn or while maintaining the same savings rate.

If things go south, you're glad you bought a cheaper house. If things keep up or improve, there's nothing stopping you from paying off your mortgage early or investing the money however you see fit. If my mortgage were higher than 4%, I'd be more concerned with paying it down. It's a low mortgage rate by historical standards and considerably lower than the expected ROI of other investments.

 

[Tom Roper]

That's one way of describing it. I'd say they do it so they can buy more house than they can actually afford.

And that's the other reason.

 

[ahalpert]

This is why my people run the economy. It's just numbers

 

[Tom Roper]

Is that why you put all your investments in a savings account instead of equities? Because it's a guaranteed return?

Is that a question for me? Not sure of your point here. You can FDIC protect up to $250,000. High Yield Savings Accounts advertise promotional rates up to 5.25% but the regular rates are variable and can change at any time. As of today, the national average interest rate on savings is 0.59%. The Average 30 year fixed mortgage rate is 6.08%. When the federal discount rate is high, money is tight and banks offer higher rates to attract depositors, but they don't pay 6% to make loans at 4%.

 

[ahalpert]

Is that a question for me? Not sure of your point here. You can FDIC protect up to $250,000. High Yield Savings Accounts advertise promotional rates up to 5.25% but the regular rates are variable and can change at any time. As of today, the national average interest rate on savings is 0.59%. The Average 30 year fixed mortgage rate is 6.08%. When the federal discount rate is high, money is tight and banks offer higher rates to attract depositors, but they don't pay 6% to make loans at 4%.

My point is you're touting paying down your mortgage as a guaranteed return in one thread (which is true) and in another thread you're discussing stock picking NVIDIA (very risky). You are balancing risk/reward and making investments based on estimated returns not guaranteed returns.

I'm not worried about today's mortgage rates because my rate is locked. Same would be true if it were a 20-year or 10-year mortgage.

I haven't read anyone who expects an average return of under 5% from the S&P going forward. Of course, it could happen. It's gambling. It took the Nikkei 225 Index 35 years to beat the high it hit in 1989. Same could happen here. But I'm more bullish than that. And on that basis, the arithmetic is rock solid.

 

[Tom Roper]

My point is you're touting paying down your mortgage as a guaranteed return in one thread (which is true) and in another thread you're discussing stock picking NVIDIA (very risky). You are balancing risk/reward and making investments based on estimated returns not guaranteed returns.

You were balancing them. Interest is a drain on your savings and your equity.

 

[ahalpert]

You were balancing them. Interest is a drain on your savings and your equity.

What if your mortgage rate were 2%? 1%? What if there were 10 righteous people in Sodom and Gomorrah? Would you still pay it off first instead of parking that cash elsewhere?

 

[Tom Roper]

- The corner station is running a special sale on gasoline, 50 cent savings on each gallon you buy with the coupon, but you haven't fixed the small hole in your fuel tank.

- Mattress Firm runs a sale, for every $1,000 you spend, get $100 back in savings. Spend $1,000 on a mattress. Mattress Firm says you saved $100. Are they right?

Are these examples of savings? A fundamental confusion facing Americans is they don't understand that savings are what goes in your piggy bank, and they are being exploited by the lies that pass off discounts as savings. Discounts?

Member banks of the Federal Reserve Banking system make loans of their deposits, but when they don't maintain adequate reserves, they have to borrow from the Federal Reserve Bank and pay interest on what they borrow. The interest rate charged is set by the board of governors of the Federal Reserve System. Do you know what it is called?

It's not called the savings rate, it's called THE DISCOUNT RATE. It is the cost of borrowing money that you don't have.

So to answer your question if the mortgage rate were 2%, and you borrowed to buy something you want, you are just leveraging one discount as an offset to another. It is an enabler, but it doesn't change this; interest is not savings, interest is a cost of borrowing, interest is a drain. I already suggested to plug the leak. I'm not doing this to criticize.

Or you can be your own member bank within you own reserve system. Credit can be an enabler, and big banks can succeed or fail.​​

 

[Paul F]

What if your mortgage rate were 2%? 1%? Would you still pay it off first instead of parking that cash elsewhere?

It doesn't matter what the rates are. The principles are the same. A low mortgage rate doesn't create cash. People buy as much house as they can afford regardless of interest rates. They take on a certain amount of dept (payments) as they feel comfortable with. Mortgage rates don't change that.

 

[ahalpert]

- The corner station is running a special sale on gasoline, 50 cent savings on each gallon you buy with the coupon, but you haven't fixed the small hole in your fuel tank.

- Mattress Firm runs a sale, for every $1,000 you spend, get $100 back in savings. Spend $1,000 on a mattress. Mattress Firm says you saved $100. Are they right?

Are these examples of savings? A fundamental confusion facing Americans is they don't understand that savings are what goes in your piggy bank, and they are being exploited by the lies that pass off discounts as savings. Discounts?

Member banks of the Federal Reserve Banking system make loans of their deposits, but when they don't maintain adequate reserves, they have to borrow from the Federal Reserve Bank and pay interest on what they borrow. The interest rate charged is set by the board of governors of the Federal Reserve System. Do you know what it is called?

It's not called the savings rate, it's called THE DISCOUNT RATE. It is the cost of borrowing money that you don't have.

So to answer your question if the mortgage rate were 2%, and you borrowed to buy something you want, you are just leveraging one discount as an offset to another. It is an enabler, but it doesn't change this; interest is not savings, interest is a cost of borrowing, interest is a drain. I already suggested to plug the leak. I'm not doing this to criticize.

Or you can be your own member bank within you own reserve system. Credit can be an enabler, and big banks can succeed or fail.​​

A dollar saved is a dollar earned. Doesn't matter if it's saved mortgage interest or market returns. Money is money.

Let's say that 20 years ago, you had 20 years and $300k left on your 4% mortgage and you inherited $300k. Where to put the money?

S&P average return over past 20 years is about 10%. Let's knock it down to 8% to simplify the hit from taxes. (That's inaccurate but biased in favor of paying down the mortgage instead.)

Just ran a compound interest calculation. 20 years at 8% starting with $300k MINUS 20 years at 8% starting with $0 and putting in $1818 every month (this represents the money you're taking out to pay the mortgage and the market returns it misses out on by being withdrawn to pay the mortgage.) You end up with $400k in stocks after taxes and a fully paid house.

Contrast that with paying off the mortgage 20 years ago. You have $0 and a fully paid house.

There's nothing hypothetical about this situation. I have 28 years and $332ish left on my 4% mortgage. Investing savings in a 401k defers income taxes vs making extra mortgage payments. And i may never pay taxes on the returns. The only question is what the future returns of the market will be.

 

[ahalpert]

In actuality, my calculations are simpler and favor investing savings in a 401k far more.

I'm deferring taxes and if I end up with Paul's situation may never pay taxes on this money. So let's ignore taxes on the 401k contribution.

But making an extra mortgage payment will incur income taxes. At a marginal tax rate of 24%, every $1,000 put into the mortgage nets you only $760 of principal paid down.

I checked the numbers. The break-even rate for market returns is 3%. if the market returns 3%, it's a wash whether i put an extra month's mortgage payment into the mortgage and save 4% on $760x or if I put it into my solo 401k and earn 3% on $1,000x.

If you have to pay 20% tax on the 401k withdrawal at the end of the day then the breakeven rate is 3.75%.

 

[ahalpert]

. People buy as much house as they can afford regardless of interest rates. They take on a certain amount of dept (payments) as they feel comfortable with. Mortgage rates don't change that.

It's not the question. The question is what to do with extra savings in your pocket. Do you put it into the mortgage or something else. And so the mortgage rate is absolutely pertinent. But the impression that I'm getting is that people use paying off the mortgage as a motivator to get them to save money that they would otherwise not invest.

 

[Bassman2003]

Yes, I mis-spoke; it is unearned income. But the point I'm making is we paid no tax on our IRA withdrawal nor our SS benefits. That's $78k tax free. It's nuts.

Paul, thanks for sharing but I am not quite sure of the IRA distribution. I seem to think distributions from an IRA are taxed as income since you were allowed to deduct the contributions when they were added. Did a tax person verify this for you?

Also, regarding the SS benefits:

Here is a calculator I found on the web. It states you would have $9,400 subject to taxation if the $20,000 IRA distribution was considered taxable. https://www.covisum.com/resources/ta...ity-calculator

It is kind of nuts but not if you think SS is something that was already paid for. If I just put in $56,000 filing jointly without any extra taxable income the SS subject to tax is zero.

 

[Paul F]

Your doubts are exactly why I am posting this information. Instead of financial advisors giving advice that is from someone that is not retired, I'm giving out real-world tax information from a real tax return. What's written in the law and what financial advisors tell you are not necessarily what actually happens in retirement. If you read the 'Roth a really stupid idea' thread, you will see in that thread that there are many misunderstandings of what the law is, what financial advisors tell you, and what actually happens.

Regarding the IRA withdrawal; yes, per law, it will be taxed. But in reality, for my case, it is not. We had a $78K of income and paid no state or federal tax. How is that possible? Well, I'm not going to repeat the Roth thread. In that thread, I essentially posted my 1040 form from a couple years back to show why no taxes were paid. Before I posted it, people supposed all kinds of reasons on how I got there; tax credits, etc. I did nothing of the kind. My return simply consists of social security and IRA income and standard deduction. No loop holes. No tax credits. Nothing. I can fill my 1040 form out in 5 minutes.

 

[Paul F]

It's not the question. The question is what to do with extra savings in your pocket. Do you put it into the mortgage or something else. And so the mortgage rate is absolutely pertinent. But the impression that I'm getting is that people use paying off the mortgage as a motivator to get them to save money that they would otherwise not invest.

Abe, you are reading past what Tom and I are saying.

 

[ahalpert]

Abe, you are reading past what Tom and I are saying.

I think you're saying that you wouldn't take out a 30- or a 20-year mortgage instead of a 10-year mortgage in order to invest the difference in the monthly payment?

I was under the impression that a 30-year mortgage is standard these days...

In any case, if you end up making more money than anticipated, you will have an extra savings/investment opportunity regardless of what mortgage you chose. Simple question -- what to do with it.

 

[Tom Roper]

Paul, thanks for sharing but I am not quite sure of the IRA distribution. I seem to think distributions from an IRA are taxed as income since you were allowed to deduct the contributions when they were added. Did a tax person verify this for you?

Also, regarding the SS benefits:

Here is a calculator I found on the web. It states you would have $9,400 subject to taxation if the $20,000 IRA distribution was considered taxable. https://www.covisum.com/resources/ta...ity-calculator

It is kind of nuts but not if you think SS is something that was already paid for. If I just put in $56,000 filing jointly without any extra taxable income the SS subject to tax is zero.

Re: SS Benefits - Your benefits may be taxable if the total of (1) one-half of your benefits, plus (2) all of your other income, including tax-exempt interest, is greater than the base amount for your filing status.

If Paul was born in 1955, the base amount for his filing status, married filing jointly is $32K. Half of his SS income is $28K, plus $22K in other income = $50K - $32K = $18K (Box 6B)


$18K SS Taxable Amt (Box 6B)
$20K IRA income (Box 4B)
$2K Interest income (Box 2B)
----------------------------------
$40K Adjusted Gross Income (Box 11)
($29.2K) Standard Deduction (Box 12)
---------------------------------
$10.8K Taxable Income (Box 15)
---------------------------------
Payments $0 (Box 33)
Tax owed $1,083 (Box 37)

That's how I see it, for Tax Form 1040-SR (for seniors)
YMMV

 

[Paul F]

Your close. The taxable SS was $11.3k. Standard deduction for married filing jointly is $27,700. Add $3000 more for seniors for a total deduction of $30,700.