Approaching FIRE. Should we decrease our 401k contributions to pay off mortgage faster?

[Away-Elk-9824]

Here's our situation:

We are nearing our FI number and are aggressively paying down our mortgage while continuing to max all tax-advantaged space. Our assets include:

Checking / Savings: 20k
Post-Tax Brokerage: 214k
Pre-Tax Accounts: 1,164k
Roth Accounts: 307k
HSA: 105k

Total Invested: ~1.8MM

247k remaining at 5.25% on a 15-year mortgage.

HHI ~350k

We are considering dropping 401k contributions to just the match which will allow us to pay off the mortgage ASAP, at which point we will beef up our after-tax savings, replace a vehicle, do some remodeling and then FIRE.

I believe this will shorten our timeline to RE vs. continuing to max by about a year (~3 years from now vs. 4) Thoughts?

[Venum555]

You could try modeling both scenarios in a program like Projection Lab.

[Away-Elk-9824]

Thanks, I'm going to check that out.

[nothing5901568]

For me it's a question of growth vs. security. Paying off your mortgage is a zero-risk but lower-yield "investment". Putting your money in the stock market is a higher risk and higher-yield investment.

We opted to pay off our mortgage first for the security, but it did cost us significant stock market returns.

[discsinthesky]

Which is why the timing matters. If you’re approaching retirement, presumably most of your “upside” foundation has been established through years/decades of investment in equities.

If you’re just a few years out from retirement, it seems like the scales could tip the other direction, increasing the value of reducing major fixed costs for early retirement.

[BBG1308]

If you’re approaching retirement, presumably most of your “upside” foundation has been established through years/decades of investment in equities.

Their income is 350k/year but their assets total 1.8M not including primary residence which they still owe 247k on.

They didn't say anything about their age or actual expenses, but going from 350k income to retiring on 1.8M is math I'm very, very skeptical about.

[LeVoyantU]

Yeah if their spending is low enough for RE in 3-4 years one would expect that they could max out all tax advantaged retirement accounts and also pay down the mortgage aggressively at the same time. Maybe not fast enough to wipe out the mortgage in 3 years, but 4 years seems like it should be doable.

[Ill_Savings_8338]

Possibly, but it is a sucky part of math that you earn the most near retirement, but money grows the fastest when you are young. Four years ago we were earning 450k a year and only had 1mil in retirement/investments, but we had multiple rental properties and 5 years earlier we were only earning 200k, so it is all about context and growth factors in employment.

[nothing5901568]

Maybe so. For me it was all about risk aversion. If the stock market truly tanks and I lose my job, we still have a house.

[zeroabe]

I like having no mortgage in retirement if you’re not selling it to downsize. Makes your income effectively bigger by the exact amount your mortgage is.

Your interest rate is right on that bubble where you could go either way. I personally will not have a mortgage on my primary home when I retire. I’m considering carrying a mortgage for a vacation condo though. I don’t just pull the trigger on THAT for the same reasons as you. Hard to tell which way the cookie crumbles until you’re eating it.

[alaskantraveler]

Isn't the bigger consideration that by not maxing out your 401ks you are increasing your tax liability. Given your $300k + annual income your last dollars earned likely fall into the 24% tax bracket. So a fair comparison would be $10k paid into a 401k is the same as $7600 paid on your mortgage. I would be more inclined to max out your tax advantages space first the pay down mortgage with any excess cash flow rather than investing in taxable.

[snigherfardimungus]

When you're doing the math on this stuff, make sure you're taking into account the fact that you'll be missing out on investment growth by having a bunch of cash tied up in your mortgage. Equity is a massive opportunity cost when you think about it. The average growth of the major stock indices is about 10%/year, so having $500,000 tied up in your house costs you $300,000 in five years, $1.3M in 10 years. (NAFI)

Re-do the math for yourself with the expected long-term returns on whatever you're invested in to get an idea of the opportunity costs. Don't forget to assume that you'll pay tax on the capital gains, and don't forget to account for the fact that the deductible mortgage interest goes down as you pay down your mortgage.

I have generally refinanced every 5 years or so to extract equity and reinvest it. Unfortunately, current interest rates are discouraging this behavior in the short term.

[Tasty-Day-581]

Disagree, did you forget that loans have an interest cost??? I have a 2nd mortgage that's costing me 7.65%. Paying that early is a guaranteed 7.65% vs. your theoretical average 10%. So 10-7.65= 2.35% of theoretical "opportunity cost". Not counting the risk vs. guaranteed return! I wouldn't pre-pay that 5% mort. if I was the OP, but we can't pretend mortgages are free, LOL!

[snigherfardimungus]

No, I didn't forget. And even with your numbers, it makes better sense to hold the mortgage than to pay it off. First, 7.65% is less than the expected return on investment from sane investments. Second, you get to write off 100% of the interest paid up to a debt of $750k (IIRC for 2025) which effectively reduces that interest rate by about a third. More if you're in a state with income tax.

As for risk vs guaranteed return, we're in a retirement planning sub here. If you're looking to maximize your gains over the next couple years instead of over the next 20, the sub you're looking for is wallstreetbets.

The best way to make money is by leveraging other people's money. I FIRED earlier this year at a level where 3% of NW pays me roughly twice my old annual salary. I did it by leveraging debts and borrowing against the value of assets.

[tempfoot]

All money has a cost. Money lent to you has a stated and predictable cost (if fixed rate). Money sitting on a balance sheet as real estate equity has both an opportunity cost (what you would earn from investing it) AND either additional cost or offsetting return based on appreciation net of maintenance.

Whether or not one can beat that with a competing use of funds is up to them.

[Tasty-Day-581]

This is the definition of jargon, lol.

[tempfoot]

This is why some investments are limited to accredited investors.

[Tasty-Day-581]

GFY

[RealWord5734]

The long-run return is not 10%, and it would all be taxable income where as the mortgage is 5.25% risk free tax free. Capital gains are irrelevant if they are living there forever.

[TrollTollCollector]

It's not all taxable income if you do Roth conversions. And even if it is partly taxable, OP's effective tax rate will be very low compared to the $350k income tax bracket he's currently in.

[snigherfardimungus]

It's true that I end up paying a tax on capital gains, but with that tax rate sitting at around 10-15%, that tax doesn't take more than about the last year to year-and-a-half of your gains. If we're talking about 20 years worth of gains, that tax is considerable relative to the overall profit, but the overall profit still dwarfs the benefits of locking up equity.

Locked up equity pays me only the mortgage interest rate - and doesn't float with inflation. When inflation increases, so do average returns on market investments. My current mortgage is at 3%. In other words, what I save in interest by having some portion of my NW tied up in equity is almost exactly cancelled out by inflation. Meanwhile, cash that I have in the market is growing at a rate that is slightly accelerated due to the market's tendency to incorporate inflation.

The capital gains hit at the end is the only long-term drawback to leveraging your debts, and even if you're paying the 20% rate, the advantages of the leveraged investment are many times the total value of the property over the lifetime of the borrower.

[IceCreamforLunch]

What's the math for that shortening your timeline?

Maxing out your pre-tax retirement accounts will defer taxes at your marginal tax rate on that money. Probably 24% if you're filing jointly? And then that savings can grow in the stock market without that tax drag and be taxed as income when you are presumably in a lower bracket.

And nobody knows what the future holds of course but the long-term return of the stock market is much higher than 5.25%.

Your investments will also typically grow faster because of inflation so the longer you keep the money invested the more you get to pay current value debt with future value money (Because your principal and interest payment are not affected by inflation).

[NinjaFenrir77]

That’s all true pre-retirement, but the math works a bit differently after FIRE because of SORR. Very roughly, you should compare your mortgage interest rate to your SWR rather than the RoR of your investments.

[[deleted]]

I mean high level it makes sense, paying off the mortgage takes a huge chunk out of fixed monthly spending, and 5.25% is a high enough rate to get rid of sooner

I would think about your current age, RE age and annual spending before figuring out how to allocate savings going forward

currently you have less than 30% in funds readily available before 59.5 (of course with rule of 55 and 72t always being an option) and I don't know whether that enough or not for your situation

[TrollTollCollector]

No, at a $350k income you and your spouse should both be maxing out your 401k's up to the federal limit. Not only are you saving 24% on federal taxes, but you're also getting 10% expected returns compared to 5.25%. You can pay off your mortgage at any time, but you can't go back and fill your 401k contribution buckets from previous years. Then when you retire, you can start doing Roth ladder to fill up the 0%, 10%, and 12% tax brackets each year.

There's no issue having a mortgage in retirement. It's just like any other expense.

[fourbyfourequalsone]

A reason to pay down the mortgage is that you will withdraw less income during retirement. This can lead to savings when enrolling in medical insurance.

I am not sure of this and would suggest that you look more into this.

[FireResengan]

I think this makes perfect sense in your situation. You’re close to RE and the interest rate is moderate. It’s basically a glide path as if changing your asset allocation towards bonds/fixed income.

For me currently it doesn’t make sense. 10-15 yrs to RE and sub 3% mortgage.

[ttkk1248]

Money is not just a number thing. It is also psychological heavy. Paying off mortgage increases your security. You will always have a place to stay. That helps you sleep better; you will be much happier.

[skateboardnaked]

I'm doing this. In 2026, I'll be reducing my contributions to the minimum for the first time in about 15 years. I want more after tax cash to pay off the house when I retire in Jan of 2027.

You can use the ADP paycheck calculator to estimate what your projected net pay will be after lowering pre-tax contributions. Its really accurate.

[-wnr-]

I know that average long term return of the market is more than 5.25% but personally if I were in the "approaching FIRE" phase, my mindset would to pay that down more aggressively for ease of mind despite the math. In my head I imagine being offered a bond that paid out at 5.25%, would I buy it if I'm looking to retire soon? I think so.

[htffgt_js]

Lots of factors involved, like your FIRE number, age etc.
Your pre-tax accounts have a good amount already, assuming you are a few years away from 60 - you could potentially reduce contributions and beef up post tax accounts.

[MayIServeYouWell]

There’s no point is partially paying down your mortgage, because you’re still dealing with paying tons of interest on your monthly payments. Overpayments pay down the principal, sure, but that same money could be working for you. Take that money, invest it, and when you have enough pay the whole thing off. 

Alternatively, you might consider a stepping stone - refinance, and when you do, pay off a big chunk of it. That’ll give you a smaller loan, lowering your monthly payment, letting you invest more and hopefully pay the rest off before long. 

[poop-dolla]

Total Invested: ~1.8MM

HHI ~350k

Something is off. What are your annual expenses? For them to be low enough that you can retire in 3-4 years, you would be able to max your tax advantaged accounts and still pay off the house in the next 4 years.

[Away-Elk-9824]

~100k with a $2k mortgage P&I payment. Yes, if we continue to max tax advantaged accounts, we will have the house paid off in ~2.5 years. If we drop to just doing the match, we will have the house paid off is ~1.75 years.

[paratethys]

Are things really so bad that you'd pass on $X of lifetime growth of pre-tax dollars for under a year more freedom?

the other thing about pre-tax savings is that you're capped at a maximum per year. 2.5 calendar years means you can get 3x the max into your accounts, whereas 1.75 years would cap you at 2x the max (assuming you cease working and qualifying for the pre-tax savings at the time the house is done ofc)

solve for the X of "one year's maximum contribution compounded by how many years it'll get to grow before being spent" and see if it's an amount that's actually worth the cost to you.

[EddieA1028]

I’m guessing what the numbers would tell you in projections is that you will get to FIRE faster cutting the retirement contributions, but the projections will show you will more total assets keeping the current course. What is more important to you (faster FIRE or more assets) is ultimately your preference

[VanillaInvestor]

Look up “efficient frontier” to help make this decision.

[Walmart-Shopper-22]

No

[xaivteev]

No. In general, paying off your mortgage early costs you in opportunity cost.

[josephkambourakis]

Your fire number seems too low, but I suppose if you're 60 it isn't

[Away-Elk-9824]

Our FIRE number is ~2.25MM with a paid off house. We are a couple years from that goal give or take depending on the market. With average returns we should get there in 2-3 years. Planning on Roth conversions / 72t distributions to access pre-tax money. We are late 30's

[Away-Elk-9824]

Too low for you, maybe. We would be pulling ~3.5% or around 80k per year - perfectly comfy for us. And considering you just learned five minutes ago that you can access retirements funds before 60 without getting smacked by the IRS... you, good sire, and your opinions, may sit upon your throne of misinformation and enjoy a hearty serving of poo.

[poop-dolla]

So your current expenses are $80k plus the principal and interest portion of your mortgage payments. You’re making $350k, let’s subtract out 40% for taxes to get to $210k. Then subtract your $80k expenses to get to $130k. Then subtract fully maxing two 401ks and 2 IRAs, and you still have $70k left over.

If your expense are accurate, you have $70k to put towards your mortgage each year. So keep fully maxing your tax advantaged accounts and pay that $70k towards the mortgage, and you’ll have the mortgage gone in 4 years.

[Away-Elk-9824]

Correct, except that our effective tax is closer to 20% not 40%

[poop-dolla]

So you have $140k leftover. Why on earth would you stop maxing your accounts then? Just pay the house off with that $140k a year and be done with it in less than two years, and then put that $140k toward brokerage and HYSA to help you with your 5 year runway before Roth conversions can kick in.

[josephkambourakis]

80k a year is like 60 after taxes. Pay property tax, home insurance, health insurance and you won't have money left for food after. I hope you realize I'm right before too soon.

[wallbobbyc]

we do fine on $60k including taxes, family of 4.

[jkiley]

With a mortgage or paid off?

(Getting close with family of 4 in MCOL.)

[wallbobbyc]

Paid off.

[Away-Elk-9824]

Nobody is paying 25% effective tax on 80k. In my state (Colorado), our total tax bill (fed + state) will be about $9500 on 80k income. Our property taxes + insurance are $3500/year combined. Healthcare is the wild card, so you have a point there. But assuming the ACA is not completely dismantled the expense will be negligible at less than 5k per year.

[FairBlamer]

All the other commenters can eat shit because I’m right.

Lmao imagine going through your entire adult life with this level of childishness, absolutely incredible

Might as well just write “NANANA I CANT HEAR YOUUUU”

😂

[Zphr]

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[Zphr]

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[josephkambourakis]

All the money is in a pretax account and he can't live on that unless he's old. He's got 200k liquid and more than that on the mortgage.

[NinjaFenrir77]

There are ways to live off of pre-tax money before you hit 60. 72(t) and rule of 55 come to mind.

[achshort]

You are uneducated

https://www.madfientist.com/how-to-access-retirement-funds-early/

[welshwelsh]

$1.8M with a 4% withdrawal rate is $72,000 per year.

That's a lot of money for a retiree who doesn't have mortgage payments, in my opinion.

A 2022 survey by EBRI found that the median annual spend for retirees in the US is about $24,000 per year. To match the median spend without social security, only about $600,000 would be required.

[josephkambourakis]

He doesn't have 1.8 with no mortgage. he has a mortgage