FIRE goal in 5 years: pay off mortgage or invest all available cash

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Topic Author
TravellingTechOnFire
Posts: 387
Joined: Mon Nov 21, 2022 9:54 am

FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by TravellingTechOnFire »

First, a bit of background. Dual income, grown kids. Age 51, spouse 49.

Yearly gross ~$250k
Yearly net after taxes ~$230k(we have a unique situation)

Income is somewhat variable but this is a ballpark.

Jan 2020; Net worth $30,000
Today: $280,000 including home. Yes, we changed from consumer suckas to diligent savers/investors.
Cash: $45,000
Ibonds: $30,000
Brokerage: $14,000
Retirement: $120,000

We are maxing 401k's and tIRA's, will both be 50 or older next year and will be hitting the $75k total here moving forward.

I'd like to be *capable* of lean FIRE in 5 years. We currently have a $330,000 mortgage on 30 year fixed @ 4.375%. Monthly principle and interest is $1657 or right at $20k/year. Making minimum payments, balance will be right at $300k in 5 years.

I'm trying to decide how wise it would be to pay down the mortgage aggressively over the next five years. This would require an additional $4500/month or so towards the house and would significantly reduce the amount we save into after tax brokerage. To match the rate I'd be making on paying the mortgage down, I'd have to earn at least 5.3% or so in my brokerage account. So I either take the 100% guaranteed 4.375% after tax rate of return, or accept the risk of investing in the market to try and come out ahead.

Other considerations: lowering my required retirement income by $20,000/year(due to paid off mortgage) would also decrease ACA cost by $2400-$3,000/year.

Best I can tell, this could go either way. I'm leaning towards paying the house down. I can afford to do so without selling any investments and without sacrificing any tax advantaged savings. It would be simply a matter of paying the mortgage off in 5 years or investing all that money in after tax brokerage.

Other important info. This will put me at 56-57. 100% full retirement in 5 years is not a *desperate* goal at this point.....I have the flexibility for example, to work as little as 13 weeks/year and earn 2x annual living expenses if I want to earn money for a while longer without working full time. So if I don't have much in brokerage, this can be a bridge to age 59.5.
MattB
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Joined: Fri May 28, 2021 12:27 am

Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by MattB »

I'd preserve the optionality by buying 52 week t-bills for as long as the rates remain over 4.5%. This keeps you more or less cost-neutral, with respect to paying down your mortgage, while maintaining liquidity. 5 years is too short a time period, in my opinion, to hope for any particular return out of the stock market.

Out of curiosity, how do you go from "consumer suckas" "to diligent savers/investors" at the flip of a switch? Your post is direct and well put. You certainly don't seem to lack the mental horsepower to understand saving and investing. What information were you missing before that you have now? What motivated the change? Etc.
Last edited by MattB on Sun Dec 04, 2022 8:36 pm, edited 1 time in total.
KlangFool
Posts: 31530
Joined: Sat Oct 11, 2008 12:35 pm

Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by KlangFool »

OP,

1) Do not pay off or pay down your mortgage until you are financially independent.

"I'm trying to decide how wise it would be to pay down the mortgage aggressively over the next five years. "
"We currently have a $330,000 mortgage on 30 year fixed @ 4.375%."

2) It is not wise. You want to tie up more of your net worth into the house. How does this makes any sense? Diversification is a good thing.

3) You have an expensive house as compared to your total net worth. Why would you want to put even more of your money into the house?

"Other considerations: lowering my required retirement income by $20,000/year(due to paid off mortgage) would also decrease ACA cost by $2400-$3,000/year."

4) You could do that after you are financially independence. Not before.
.
"To match the rate I'd be making on paying the mortgage down, I'd have to earn at least 5.3% or so in my brokerage account. "

5) Who say that is the only option? I invest on my 60/40 portfolio as opposed to paying down my mortgage.

KlangFool
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KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by KlangFool »

TravellingTechOnFire wrote: Sun Dec 04, 2022 4:58 pm
Other considerations: lowering my required retirement income by $20,000/year(due to paid off mortgage) would also decrease ACA cost by $2400-$3,000/year.
TravellingTechOnFire,

This is totally illogical.

If you have 20K of cash and you use that to pay the 20K mortgage, why would that generate 20K income? Spending cash generate zero taxable income.

And, if you plan to retire in a few years, you should accumulate a fair amount of cash.

Expense is not the same as taxable income. They are not exactly relate to each other.

I keep 2 to 3 years of expense in cash to prepare for early retirement. I have almost total freedom to generate whatever amount of taxable income every year.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Topic Author
TravellingTechOnFire
Posts: 387
Joined: Mon Nov 21, 2022 9:54 am

Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by TravellingTechOnFire »

Hi Matt, thanks for your reply. I agree about the five year time frame. Not sure it would be a safe enough bet to build up a mortgage payoff fund in equities.

As far as the flip of a switch change? Well, that's pretty much what happened. I changed careers late in life. After graduating at age 45, we went on our merry, blissfuly ignorant way for a bout a year. We've never been *horrible* with money i.e. we've never had two brand new cars with massive car payments, don't have a designer clothes fetish, we aren't super shoppers, and don't vacation extravagantly. However, I wasn't carefully managing our money. A year out of school, making a low six figure household income, I thought, "dang, how the heck do we not have any money?" I mean, we weren't short on money. Always had $3-$5k in checking, bills on autopay, etc. But no savings building up, just the measly 5% 401k contributions. I knew we made too much money to not have any money, so I started paying attention. Went through two months of bank statements and accounted for every penny of our spending. Realized that it was just all slipping through our fingers here, there, and everywhere.

I started with Dave Ramsey. It was *exactly* what I needed at the time and, although I've moved past his bare bones advice, I still think it was the best wake up call I could have gotten. I started carefully budgeting, eliminated unnecessary expenses and memberships, shopped around for the best deals on cell service, cancelled cable, etc etc. Before I knew it, I had an extra $1,000 month to throw at debt. I paid off her car, then mine. Soon, I had us down to owing only on our small mortgage of around $100,000.

We are in the medical field(not doctors, just tech level), and started traveling. By this point, we already had embraced a much more frugal lifestyle with greatly reduced living expenses. The extra income from traveling has allowed us to massively increase our savings. We embrace luxurious frugality now and as stated in the first post, my goal is to be capable of FIRE in 5-6 years if all goes reasonably well. Sorry, I tried to be brief but we definitely have gone through a drastic change in the past three years...hard to sum it up in 100 words or less lol.

Treasuries are a consideration but the after tax yield does put me below 4.375.....as you said I have to weigh the benefits of liquidity. However I'm also not so sure rates will remain that high.....I can see a realistic chance of rates dropping next year. But yeah, that's one of three options I've considered.
Topic Author
TravellingTechOnFire
Posts: 387
Joined: Mon Nov 21, 2022 9:54 am

Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by TravellingTechOnFire »

KlangFool wrote: Sun Dec 04, 2022 5:40 pm
TravellingTechOnFire wrote: Sun Dec 04, 2022 4:58 pm
Other considerations: lowering my required retirement income by $20,000/year(due to paid off mortgage) would also decrease ACA cost by $2400-$3,000/year.
TravellingTechOnFire,

This is totally illogical.

If you have 20K of cash and you use that to pay the 20K mortgage, why would that generate 20K income? Spending cash generate zero taxable income.

And, if you plan to retire in a few years, you should accumulate a fair amount of cash.

Expense is not the same as taxable income. They are not exactly relate to each other.

I keep 2 to 3 years of expense in cash to prepare for early retirement. I have almost total freedom to generate whatever amount of taxable income every year.

KlangFool
I suppose I was thinking about it in this way:

Yearly living expenses with mortgage: $50,000
Without mortgage: $30,000

I assumed this would force my yearly income to be higher which would in turn reduce my ACA subsidies.
KlangFool
Posts: 31530
Joined: Sat Oct 11, 2008 12:35 pm

Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by KlangFool »

TravellingTechOnFire wrote: Sun Dec 04, 2022 6:11 pm
KlangFool wrote: Sun Dec 04, 2022 5:40 pm
TravellingTechOnFire wrote: Sun Dec 04, 2022 4:58 pm
Other considerations: lowering my required retirement income by $20,000/year(due to paid off mortgage) would also decrease ACA cost by $2400-$3,000/year.
TravellingTechOnFire,

This is totally illogical.

If you have 20K of cash and you use that to pay the 20K mortgage, why would that generate 20K income? Spending cash generate zero taxable income.

And, if you plan to retire in a few years, you should accumulate a fair amount of cash.

Expense is not the same as taxable income. They are not exactly relate to each other.

I keep 2 to 3 years of expense in cash to prepare for early retirement. I have almost total freedom to generate whatever amount of taxable income every year.

KlangFool
I suppose I was thinking about it in this way:

Yearly living expenses with mortgage: $50,000
Without mortgage: $30,000

I assumed this would force my yearly income to be higher which would in turn reduce my ACA subsidies.
TravellingTechOnFire,

You are thinking it wrong.

A) Tied up 300K in the house.

Or,

B) Keep 20K per year in cash to cover the expense without generating income.

(A) or (B) is cheaper and easier to achieve?

Your basic assumption is wrong. ACA is based on MAGI. Expense is not income.

For example, let's assume that my annual expense is 60K per year.

If I spend 30K in cash and 30K in Roth IRA contribution, how much is my income as per ACA?

The answer is zero.

You should check out this thread.

viewtopic.php?t=87471
"How to pay ZERO taxes in retirement with 6-figure expenses"

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
LeeMKE
Posts: 2233
Joined: Mon Oct 14, 2013 9:40 pm

Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by LeeMKE »

Congratulations and welcome!

I have a different opinion about paying down the mortgage.

Yes, five years is too short a period for any investment in a taxable account to beat the sure thing of paying down your mortgage.

Bear in mind that paying down a 30 year mortgage has a higher yield than your mortgage interest rate. Every dollar paid early compounds the amount of principal paid the following month. Run your own mortgage out with current payments and proposed pre-payments to see exactly how much more "profit" you get with prepayment. My guess is your yield will be as much as double the interest rate on your mortgage.

You are older than many we see here, and have fewer unknowns (like a young family, or an uncertain career). So, I'm not as concerned about having a fully funded emergency fund as a higher priority than mortgage pre-payment.

If you plan to keep your home, then paying off the mortgage is a certainty. The sooner you quit paying almost all interested each month, and start whittling away at the principal, the more equity you add to your net worth. Stop paying for the banker's swimming pool.

IMHO your cash should be deployed in this order:
Tax deferred retirement plans- IRA, 401K, Solo 401K if you are on 1099 instead of W-2, others offered in select cases from your employers.
Roth IRA, if eligible
Mortgage pre-payment
Emergency fund - which in your case should be targeted to cover living expenses between FIRE and age 59.5.
Taxable savings as your pour over account once these other priorities are funded.

Keep going!
The mightiest Oak is just a nut who stayed the course.
KlangFool
Posts: 31530
Joined: Sat Oct 11, 2008 12:35 pm

Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by KlangFool »

LeeMKE wrote: Sun Dec 04, 2022 6:33 pm Congratulations and welcome!

I have a different opinion about paying down the mortgage.

Yes, five years is too short a period for any investment in a taxable account to beat the sure thing of paying down your mortgage.

Bear in mind that paying down a 30 year mortgage has a higher yield than your mortgage interest rate. Every dollar paid early compounds the amount of principal paid the following month. Run your own mortgage out with current payments and proposed pre-payments to see exactly how much more "profit" you get with prepayment. My guess is your yield will be as much as double the interest rate on your mortgage.

You are older than many we see here, and have fewer unknowns (like a young family, or an uncertain career). So, I'm not as concerned about having a fully funded emergency fund as a higher priority than mortgage pre-payment.

If you plan to keep your home, then paying off the mortgage is a certainty. The sooner you quit paying almost all interested each month, and start whittling away at the principal, the more equity you add to your net worth. Stop paying for the banker's swimming pool.

IMHO your cash should be deployed in this order:
Tax deferred retirement plans- IRA, 401K, Solo 401K if you are on 1099 instead of W-2, others offered in select cases from your employers.
Roth IRA, if eligible
Mortgage pre-payment
Emergency fund - which in your case should be targeted to cover living expenses between FIRE and age 59.5.
Taxable savings as your pour over account once these other priorities are funded.

Keep going!
LeeMKE,

OP has a 200K portfolio with a 400K house and 300K mortgage. OP plan to early retire in 5 years. Would you still recommend OP to pay off the 300K mortgage?

OP's portfolio is very small as compared to the 400K house.

KlangFool
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Mestk5593
Posts: 66
Joined: Wed Nov 30, 2022 7:49 pm

Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by Mestk5593 »

Why I am thinking FI in 5 years is unachievable?

OP needs about 1.5m to generate their 50k annual living expenses. They already have about 200k in various accounts.

At 5% return, they need to save 225k per year to get to 1.5m in 5 years.

Can OP save 225k/year?
LeeMKE
Posts: 2233
Joined: Mon Oct 14, 2013 9:40 pm

Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by LeeMKE »

Why I am thinking FI in 5 years is unachievable?
Yup. Five years is a stretch. But if the mortgage payment is $20k of the $50K annual expense, they need $750k, rather than $1.5M or $1.25M

So, I think it is possible for the OP.
OP has a 200K portfolio with a 400K house and 300K mortgage. OP plan to early retire in 5 years. Would you still recommend OP to pay off the 300K mortgage?

OP's portfolio is very small as compared to the 400K house.
Yup, agree with the facts presented by OP, and if we were advising OP on whether to buy that house, I'd be all in on NO.

I don't presume to change the desires of OP, so while you or I might not want to have this much tied up in a house when our retirement is not yet funded, we aren't the OP. If, as the OP implies, they plan to stay in the house, it must be paid off at some point. They will get to FIRE faster by pre-paying, than putting the same amount in a taxable account ($750k + $330k vs. $1.25M)

N.B. OP is targeting FIRE, but as a goal, not necessarily fully retiring in 5 years. I did something similar, targeting being ready if forced to retire by age 55, but once I had the portfolio close to my target, could ease off work toward a bit more grace in my numbers.
The mightiest Oak is just a nut who stayed the course.
Topic Author
TravellingTechOnFire
Posts: 387
Joined: Mon Nov 21, 2022 9:54 am

Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by TravellingTechOnFire »

Hi, didn't mean to ghost out in the middle of our posts...the maintenance break got me. Thanks to everyone for your input so far.

Yes, FIRE in 5 years is a tall order. We can save about $125k/year. Maybe more but thats what I feel comfortable counting on as our income can vary.

Also correct, its a big mortgage considering my savings balance. We moved to a higher COL area and it wouldn't have been easy to spend much less. We were in a nightmare little garbage generational poverty town and moving to a nicer area was of the absolute highest priority.. It was a sacrifice that had to be made.

Also, our mortgage payment is <8% of our monthly pay, so there is that. I HATE owing $330,000 though, to be sure!

Our income will vary and should range from ~$230,000 to $260,000. We have a very low tax liability and will only pay an estimated $10k/year in federal taxes. This year will be around 0 due to EV tax credit. We make ~ $100k/year as a tax free stipend. Retirement contributions get our taxable income down into the 12% bracket.

The house is admittedly expensive given our low invested assets, but we are saving vigorously and working very hard to keep expenses low. Recall from the first post that we went from $30k net worth to almost $300k in under 3 years.

Also correct is that we need $1.2m to retire with the current mortgage for lean fire. This is what has led me to investigate whether I should pay the house off early. Another important data point is that I have only about $7k in Roth assets and currently plan to stick to tIRA. Why? Well, most of our retirement money will be contributions and not growth, so I won't have millions in tax free money that will have been compounding for decades. We also aren't going to have $10m+ in retirement..in other words, our retirement income and tax burden is likely to be very low. Therefore I have leaned towards tIRA to reduce current taxable income, allowing for maximum amount of investable dollars and additional funds to be used for mortgage reduction or brokerage investing. Perhaps my reasoning is flawed. Regardless, unless I switch to Roth IRA's, I won't have a very big pool of tax free assets to pull from.

Another reason I am considering reducing my risk i.e. payoff the mortgage, is that my wife's job is *very* demanding; so much so that it affects her quality of life. I don't know how many years she can keep working. I am more durable and can work myself half to death then go to the gym. She is not like this at all. The ability to at least scale back if needed as soon as possible is an important consideration in my planning.

I am leaning towards mortgage payoff. I do plan to keep a 6 month cash emergency fund while working towards FIRE. I don't think I will build it beyond this point as I can do many things, but not everything. I can, even by myself, work a single 13 week contract and net $30-40k. Double that if we both work just 13 weeks/year for a while i.e. sort of a Barista FIRE if you will. I see this now as a likely scenario once we achieve lean FIRE.....working two 13 week contracts/year, we can probably cover our living expenses and continue to max retirement contributions while taking 6 months/year off and end up with more of a fat FIRE in short order.
Topic Author
TravellingTechOnFire
Posts: 387
Joined: Mon Nov 21, 2022 9:54 am

Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by TravellingTechOnFire »

LeeMKE wrote: Sun Dec 04, 2022 6:33 pm Congratulations and welcome!

Thanks!!!

I have a different opinion about paying down the mortgage.

Yes, five years is too short a period for any investment in a taxable account to beat the sure thing of paying down your mortgage.

Bear in mind that paying down a 30 year mortgage has a higher yield than your mortgage interest rate. Every dollar paid early compounds the amount of principal paid the following month. Run your own mortgage out with current payments and proposed pre-payments to see exactly how much more "profit" you get with prepayment. My guess is your yield will be as much as double the interest rate on your mortgage.

I can't wrap my head around this. I always assumed prepaying simply yields the mortgage rate as a return.

You are older than many we see here, and have fewer unknowns (like a young family, or an uncertain career). So, I'm not as concerned about having a fully funded emergency fund as a higher priority than mortgage pre-payment.

If you plan to keep your home, then paying off the mortgage is a certainty. The sooner you quit paying almost all interested each month, and start whittling away at the principal, the more equity you add to your net worth. Stop paying for the banker's swimming pool.

IMHO your cash should be deployed in this order:
Tax deferred retirement plans- IRA, 401K, Solo 401K if you are on 1099 instead of W-2, others offered in select cases from your employers.
Roth IRA, if eligible
Mortgage pre-payment
Emergency fund - which in your case should be targeted to cover living expenses between FIRE and age 59.5.
Taxable savings as your pour over account once these other priorities are funded.

Keep going!
I replied within your quote in red, thanks.
KlangFool
Posts: 31530
Joined: Sat Oct 11, 2008 12:35 pm

Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by KlangFool »

OP,

1) You are not reducing your risk by paying off the mortgage. The house is not liquid asset. In fact, you are increasing your risk since your portfolio is small as compared to your house.

2) At 12% tax bracket, your long term capital gain tax rate is 0%.

3) If you plan to retire early, it is nice to have all three pools of money: Taxable, Roth, and Tax-deferred.

"is that my wife's job is *very* demanding; so much so that it affects her quality of life. I don't know how many years she can keep working."

4) And, paying off the mortgage reduces your flexibility. What if you need to move elsewhere in the coming recession and you cannot sell your current house without a major loss?

In summary, do not pay down or pay off your mortgage until you are financially independent. If not, it is a lot more risky for you financially. Especially in your case. You have too much house. You need to diversify away from your house.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Topic Author
TravellingTechOnFire
Posts: 387
Joined: Mon Nov 21, 2022 9:54 am

Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by TravellingTechOnFire »

KlangFool wrote: Sun Dec 04, 2022 6:16 pm
TravellingTechOnFire wrote: Sun Dec 04, 2022 6:11 pm
KlangFool wrote: Sun Dec 04, 2022 5:40 pm
TravellingTechOnFire wrote: Sun Dec 04, 2022 4:58 pm
Other considerations: lowering my required retirement income by $20,000/year(due to paid off mortgage) would also decrease ACA cost by $2400-$3,000/year.
TravellingTechOnFire,

This is totally illogical.

If you have 20K of cash and you use that to pay the 20K mortgage, why would that generate 20K income? Spending cash generate zero taxable income.

And, if you plan to retire in a few years, you should accumulate a fair amount of cash.

Expense is not the same as taxable income. They are not exactly relate to each other.

I keep 2 to 3 years of expense in cash to prepare for early retirement. I have almost total freedom to generate whatever amount of taxable income every year.

KlangFool
I suppose I was thinking about it in this way:

Yearly living expenses with mortgage: $50,000
Without mortgage: $30,000

I assumed this would force my yearly income to be higher which would in turn reduce my ACA subsidies.
TravellingTechOnFire,

You are thinking it wrong.

A) Tied up 300K in the house.

Or,

B) Keep 20K per year in cash to cover the expense without generating income.

(A) or (B) is cheaper and easier to achieve?

Your basic assumption is wrong. ACA is based on MAGI. Expense is not income.

For example, let's assume that my annual expense is 60K per year.

If I spend 30K in cash and 30K in Roth IRA contribution, how much is my income as per ACA?

The answer is zero.

You should check out this thread.

viewtopic.php?t=87471
"How to pay ZERO taxes in retirement with 6-figure expenses"

KlangFool
I appreciate your input; I will read through that thread. I feel reasonably non-moronic when it comes to how to save for retirement, but definitely not well versed on how to spend in retirement. I learned a lot in another thread on that topic recently but still new to the idea.
Topic Author
TravellingTechOnFire
Posts: 387
Joined: Mon Nov 21, 2022 9:54 am

Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by TravellingTechOnFire »

Another data point. In January, our retirement contributions begin again. We contribute 50% of our W2 wages(the max allowed by our company) to our 401k's. I'll also be contributing $1250/month each into our IRA's. So we will spend the first half of the year heavily DCA'ing into the market. This will not leave huge amounts of money left over for brokerage investing or paying down the mortgage. In other words, I have some time to consider my options! :D While contributing to retirement, we will have maybe $3k/month to be used for other purposes. I know I shouldn't be timing the market, but I'm glad I'll be "front loading" my yearly contributions while the market is down!
rr2
Posts: 1071
Joined: Wed Nov 19, 2008 9:04 pm

Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by rr2 »

OP -- you are making your life too complicated. And then compounding it.

Keep things simple. Contribute evenly throughout the year. For the 401k it will be 2500/month for each of you. For the IRA it will be $625/month for each of you. You mentioned you have another $45K/year = $3750/month. Just keep things simple and put it into a HYSA or CD automatically. Yes, it will lose money compared to the mortgage but you will have liquidity. Or you could put it into a low risk funds in a brokerage account at Vanguard.

You just got started saving only for the last couple of years. Try and build the stash as much as you can.

Re-evaluate in 3 years time. By this time, you would have at least 5 years of a saving habit. Then optimize.
VikingThor
Posts: 44
Joined: Thu Jan 30, 2020 10:11 pm

Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by VikingThor »

You have ~$200k liquid and want to retire in 5 years.

This is only achievable if you build a large portfolio of investments to fund your retirement.

Based on your numbers, this sounds impossible if you pay off the mortgage. Its a guaranteed small return, much less than historical stock returns.

You need big savings and good returns to retire in 5 years. Stock market might not deliver good returns, but unless you can live on a paid off house and poverty level income you need to grow your portfolio significantly.

Even $1m will only yield 40k with 4% rule. If I were you, I would invest aggressively for 5 years and pay only the required monthly mortgage payment.
CorgiGoneCycling
Posts: 58
Joined: Sun Jul 24, 2022 2:22 pm

Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by CorgiGoneCycling »

VikingThor wrote: Sun Dec 04, 2022 10:00 pm You have ~$200k liquid and want to retire in 5 years.

This is only achievable if you build a large portfolio of investments to fund your retirement.

Based on your numbers, this sounds impossible if you pay off the mortgage. Its a guaranteed small return, much less than historical stock returns.

You need big savings and good returns to retire in 5 years. Stock market might not deliver good returns, but unless you can live on a paid off house and poverty level income you need to grow your portfolio significantly.

Even $1m will only yield 40k with 4% rule. If I were you, I would invest aggressively for 5 years and pay only the required monthly mortgage payment.
While it certainly sounds like OP needs to take this risk to come anywhere close to their goal, counting on stock returns over 5 years is a dangerous game.
lakpr
Posts: 11614
Joined: Fri Mar 18, 2011 9:59 am

Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by lakpr »

@TravelingTechOnFire,

You said above that you are in a 12% bracket, but also that you require a 5.3% return rate on investments just to break even with the mortgage rate. 4.375% ÷ 5.3% = 0.825, or it looks like you are in a state that has income tax and your state tax rate is about 5.5%.

I think rather than paying down your mortgage, I suggest you buy some agency bonds that are yielding 5.3%, and in most states the agency bonds are state tax free. Do not hesitate whether the bonds are callable. If they do get called, just use that money to pay off part of the mortgage. Until they get called, enjoy the state tax free return.

But Federal Farm Credit Bureau bonds instead of Ginnie Mae bonds, they tend to be a bit more sticky (meaning not called as often).

This will guarantee that you will stay liquid and ahead of your mortgage.

https://personal.vanguard.com/us/FixedIncomeHome

Go to the Agencies tab and simply click Search. I found bonds with yield to maturity 5.5% for Freddie Mac loans, and 5% for Federal Farm Credit Bank loans.

I believe you have to buy in multiples of $1000 though.
VikingThor
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Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by VikingThor »

Other thing I would point out to OP- I don't know specifics of your numbers but it sounds like a relatively lean fire.

You could most likely engineer no taxes on the taxable brokerage gains and no impact on ACA even by investing in taxable (achieving heavy ACA subsidies)

Ie if you cover a portion of yearly spend from non taxable bucket (cash savings, taxable brokerage at cost basis) you can cover a good chunk of spending with zero taxable income.

As a married couple you can have $83k in capital gains this year with no tax (assuming no other income). So I think 0% tax on capital gains would be pretty easy for you to achieve with a little planning.

I'm pretty sure you could also engineer a very low ACA income number.

So its really just the 4.3% mortgage you would need to beat. Of course there is no guarantee, but based on historical averages you should double this rate. And if the stock market does not perform for 5 years, you would be in no position to retire even if you paid off the house.

Investing heavily is your best chance and if not five years the more time in market the better chance of a good return and worst case you work a little longer until the market does better.
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rocket354
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Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by rocket354 »

TravellingTechOnFire wrote: Sun Dec 04, 2022 8:58 pm Hi, didn't mean to ghost out in the middle of our posts...the maintenance break got me. Thanks to everyone for your input so far.

Yes, FIRE in 5 years is a tall order. We can save about $125k/year. Maybe more but thats what I feel comfortable counting on as our income can vary.

Also correct, its a big mortgage considering my savings balance. We moved to a higher COL area and it wouldn't have been easy to spend much less. We were in a nightmare little garbage generational poverty town and moving to a nicer area was of the absolute highest priority.. It was a sacrifice that had to be made.

Also, our mortgage payment is <8% of our monthly pay, so there is that. I HATE owing $330,000 though, to be sure!

Our income will vary and should range from ~$230,000 to $260,000. We have a very low tax liability and will only pay an estimated $10k/year in federal taxes. This year will be around 0 due to EV tax credit. We make ~ $100k/year as a tax free stipend. Retirement contributions get our taxable income down into the 12% bracket.

The house is admittedly expensive given our low invested assets, but we are saving vigorously and working very hard to keep expenses low. Recall from the first post that we went from $30k net worth to almost $300k in under 3 years.

Also correct is that we need $1.2m to retire with the current mortgage for lean fire. This is what has led me to investigate whether I should pay the house off early. Another important data point is that I have only about $7k in Roth assets and currently plan to stick to tIRA. Why? Well, most of our retirement money will be contributions and not growth, so I won't have millions in tax free money that will have been compounding for decades. We also aren't going to have $10m+ in retirement..in other words, our retirement income and tax burden is likely to be very low. Therefore I have leaned towards tIRA to reduce current taxable income, allowing for maximum amount of investable dollars and additional funds to be used for mortgage reduction or brokerage investing. Perhaps my reasoning is flawed. Regardless, unless I switch to Roth IRA's, I won't have a very big pool of tax free assets to pull from.

Another reason I am considering reducing my risk i.e. payoff the mortgage, is that my wife's job is *very* demanding; so much so that it affects her quality of life. I don't know how many years she can keep working. I am more durable and can work myself half to death then go to the gym. She is not like this at all. The ability to at least scale back if needed as soon as possible is an important consideration in my planning.

I am leaning towards mortgage payoff. I do plan to keep a 6 month cash emergency fund while working towards FIRE. I don't think I will build it beyond this point as I can do many things, but not everything. I can, even by myself, work a single 13 week contract and net $30-40k. Double that if we both work just 13 weeks/year for a while i.e. sort of a Barista FIRE if you will. I see this now as a likely scenario once we achieve lean FIRE.....working two 13 week contracts/year, we can probably cover our living expenses and continue to max retirement contributions while taking 6 months/year off and end up with more of a fat FIRE in short order.
You say you net $230k/year after taxes, and can only save $125k/year off of that. Then you are spending >$100k/year and it will be very tough to retire in five years given your current portfolio and projected savings.

You should definitely not pay off your mortgage if you want to retire ASAP. The only way you can retire in five years, even "leanFIRE," is if you save as much as possible in investments that then do very well. Your mortgage will pay you 4.375%, after-tax. You need to do a lot better than that. If the stock market has returns like from 2009-2021 then you probably still won't quite get there, but you'd be close.

You have a $200k portfolio now. Saving $125k/year for five years at 5% return would give you about $945k. You'd need 14% per year to have $1.2MM.

You are unlikely to be in position to retire in five years, especially if you can't get your expenses down. On the plus side, you are likely to be in great financial shape overall if you do manage to save like you are planning. You should also take Klangfool's advice and not worry about paying off your mortgage until you are are FI, since liquidity is important, and if markets don't do well you won't be retiring anyways and if the markets do well then you'll have a lot more money by having invested rather than paying down your mortgage.
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Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by secondopinion »

CorgiGoneCycling wrote: Sun Dec 04, 2022 10:05 pm
VikingThor wrote: Sun Dec 04, 2022 10:00 pm You have ~$200k liquid and want to retire in 5 years.

This is only achievable if you build a large portfolio of investments to fund your retirement.

Based on your numbers, this sounds impossible if you pay off the mortgage. Its a guaranteed small return, much less than historical stock returns.

You need big savings and good returns to retire in 5 years. Stock market might not deliver good returns, but unless you can live on a paid off house and poverty level income you need to grow your portfolio significantly.

Even $1m will only yield 40k with 4% rule. If I were you, I would invest aggressively for 5 years and pay only the required monthly mortgage payment.
While it certainly sounds like OP needs to take this risk to come anywhere close to their goal, counting on stock returns over 5 years is a dangerous game.
Agreed. I would plan for 10 years and assess everything yearly; plans change and the OP can be in a better or worse spot outside of the portfolio (let alone the portfolio). But wait on the mortgage until the liquid assets catch up a bit.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
MattB
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Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by MattB »

Good on you for making the change you have in your financial life. That change is very commendable.

I thought about this thread for a bit and have to agree with some of the other commentators. Make a 10 year plan that you can sustain and get on with it. You might want to be financially independent in five years, but that is unlikely to happen at your current spending rate. You might end up divorced for pushing things much further than you have. That is hard to know. And probably not worth it anyhow.

You might consider this post, from Mr. Money Mustache, to better understand why I say financial independence in five years is unlikely to happen at your current spending rate: https://www.mrmoneymustache.com/2012/01 ... etirement/ You're spending about 50% of your income; so, it will probably take you more than 10 years to be financially independent, possibly more than 15.

The bottom line is that financial independence is the end of a long game, not a short one. You and your spouse are now making a good income, now saving a lot of money, and now have a nice roof over your head. I suggest you develop a truly workable plan with your spouse, keep saving as you are able, and enjoy life in the process. You're headed the right direction, and will get to financial independence when you do.

On the specific question of prepaying your mortgage or investing your cash—You're probably best off investing your available cash in a combination of equities and safe assets. Your timeline is not 5 years; it's 10 or 15 years; so, equities are appropriate. Think about what you want to do and perhaps write a full portfolio review post here, so you can get some feedback on where you are and where you're going.

Again. Good work. You're definitely headed in the right direction.
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Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by Wiggums »

I wouldn’t pay off your mortgage in your case.

You started investing late so the money needs time to grow. I think you are realistically looking at working more than 5 years. Watch your portfolio and see what happens. You wife should continue to work until you reach you FI number.

You are spending $125k today. Without a mortgage, your expenses will spend less. The priority should be to grow your investments and retire when the numbers support your retirement budget. I’m not a fan of seeing how cheaply one can live as a means to retire early. Build a bigger cushion is in your best interest is all i’m saying.

You were doing a great job. Keep it going…
"I started with nothing and I still have most of it left."
aristotelian
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Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by aristotelian »

TravellingTechOnFire wrote: Sun Dec 04, 2022 4:58 pm
We are maxing 401k's and tIRA's, will both be 50 or older next year and will be hitting the $75k total here moving forward.
I hope by this you mean that you are doing backdoor Roth IRA? Traditional IRA's are not tax deductible in your bracket. Any gains are going to be taxable at your marginal rate in retirement which will be higher than your capital gains/qualified dividends rate, so you would be better off investing in taxable.

I would say mortgage vs investing does not have to be all or nothing. Similar to allocating between stocks and bonds, I'd do a portion (say 20-40%) to make some progress in the mortgage and have some guaranteed return while investing the majority (60-80%).

With such a short timeframe to desired retirement, sequence of returns is going to make a huge difference in your outcomes. From what I understand, you have about $100k of non-mortgage expense, so FI number is around $2.6M with a paid off house. Social Security could bring that down a little.

If I understand correctly, your net worth is not actually $280k. That is your gross investments, including home equity, offset by $330k debt. So your current net worth is -$50k. Based on Monte Carlo sim, your range of outcomes investing $125k annually for 5 years in 100% stocks is about $600k at the low end vs $1.05M at the high end in real dollars. So even with near ideal market outcomes you're not even halfway to your desired goal.
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Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by lakpr »

aristotelian wrote: Mon Dec 05, 2022 8:50 am
TravellingTechOnFire wrote: Sun Dec 04, 2022 4:58 pm
We are maxing 401k's and tIRA's, will both be 50 or older next year and will be hitting the $75k total here moving forward.
I hope by this you mean that you are doing backdoor Roth IRA? Traditional IRA's are not tax deductible in your bracket. Any gains are going to be taxable at your marginal rate in retirement which will be higher than your capital gains/qualified dividends rate, so you would be better off investing in taxable.
OP did clarify above that of the $230k annual income, $100k is tax-free (tax free stipend). So the actual W-2 wages are only $130k, less maxing out the 401(k) contributions would drop them down to 12% bracket and make the tIRA contributions tax deductible in full.
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Watty
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Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by Watty »

If you decide to pay down your mortgage then you may not want to just send the lender extra money each month. That will just shorten the length of your loan.

Instead you can save up money until you have maybe 10 or 20%(or whatever makes sense) of the balance and then call the lender to see if they will "recast your mortgage"(Google this). Lenders are not required to do recasts but they usually will for a couple of hundred dollar fee or even for free. The way this works is that if you pay your loan down by 20%(or whatever) and recast, then your required monthly payment will be reduced but the same percentage. The interest rate and length of the loan stay the same. This can be important in case something happens like you are laid off or disabled or if interest rates get higher and keeping the mortgage makes more sense.

If I was in your position then I would save up the money until I had 10 or 20 percent of the loan balance then decide what to do. If that is next summer or fall interest rates and inflation may be different then and deciding what to do may be an easier choice.

Having a paid off mortgage by the time you retire will not only reduce your income needs but it will also reduce your sequence of returns risk so I think that makes sense for most people who own a home. One possible exception might be if you have a large pension that is not adjusted for inflation since that could be used to pay the mortgage but even then having a paid off home would still likely be better.

Every situation is different but not having a mortgage payment did help me get a large ACA subsidy like you mentioned so that idea has merits but you would still need to take a hard look at your numbers. I even set up a no-cost home equity line of credit that I could use to juggle my income to make sure that I did not go over the ACA subsidy cliff that existed back then.
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Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by LittleMaggieMae »

My advice for the OP - with a mortgage balance that's barely 1.5 thimes their income - I would let the mortgage do what it's intended to do - allow the OP to sock away large amount of investments/savings and NOT pay it down.

If the OP needs a 'warm Fuzzy' - just round up the monthly payment or come up with some plan to make an extra payment (or two) each year.

I would suggest that if you want to do any sort of FIre in 5 or 6 years - that it would be more productive and useful to work on identifying your "expenses" and having a good handle on what those numbers are and with projections out to the future. You need a good idea of what your expenses will be when you FIre - so you have some idea of how much income you will need.

And just because it irks me that people seem to forget that houses are a never ending expense even if you don't have a mortgage:

Keep in mind a paid off house IS an expense - and may still be the biggest fixed (or required monthly bills that need paying) in retirement. Paid off House expenses: property tax, insurance(s), utilities, HOA fees if required or maybe landscaping/snow removal. And then there's the "vague" house maintenance expense (and saving to spend). If you have a fireplace you need to get the chimney swept, your HVAC checked every year, if you have a water softener, whole house humidifier, filters in your fridge, a sump pump (with battery backup), filters in your furnace, maybe some sort of maintenance for those light fixtures/fans up there in the cathedral ceiling or front foyer. And you haven't even "saved to spend" money for a new roof or a water heater or to replace appliances or repair/paint your deck (or fence) or repair/seal your driveway. That's just some of the expenses. They aren't all "yearly expenses".

Having a paid off house is great - until you have to borrow money to keep it in livable, good repair.
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TravellingTechOnFire
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Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by TravellingTechOnFire »

Wow, what an amazing torrent of replies...thank you all. I'm at work and will take time to thoroughly read and respond this evening.
greenskeeper
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Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by greenskeeper »

pay it off and never look back… what a feeling.
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TravellingTechOnFire
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Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by TravellingTechOnFire »

rr2 wrote: Sun Dec 04, 2022 9:42 pm OP -- you are making your life too complicated. And then compounding it.

Keep things simple. Contribute evenly throughout the year. For the 401k it will be 2500/month for each of you. For the IRA it will be $625/month for each of you. You mentioned you have another $45K/year = $3750/month. Just keep things simple and put it into a HYSA or CD automatically. Yes, it will lose money compared to the mortgage but you will have liquidity. Or you could put it into a low risk funds in a brokerage account at Vanguard.

You just got started saving only for the last couple of years. Try and build the stash as much as you can.

Re-evaluate in 3 years time. By this time, you would have at least 5 years of a saving habit. Then optimize.
We are contract W-2 workers and, although I am very confident we will always have work available, its not as steady as a normal 9-5 long term hourly or salary job. Our contracts are typically 13 weeks in duration.

Our time off is unpaid as well. So perhaps I plan on two weeks off between assignments, but maybe we can't start as planned and end up with 4 weeks off. I feel more comfortable front loading our contributions.
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TravellingTechOnFire
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Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by TravellingTechOnFire »

lakpr wrote: Sun Dec 04, 2022 10:47 pm @TravelingTechOnFire,

You said above that you are in a 12% bracket, but also that you require a 5.3% return rate on investments just to break even with the mortgage rate. 4.375% ÷ 5.3% = 0.825, or it looks like you are in a state that has income tax and your state tax rate is about 5.5%.

I think rather than paying down your mortgage, I suggest you buy some agency bonds that are yielding 5.3%, and in most states the agency bonds are state tax free. Do not hesitate whether the bonds are callable. If they do get called, just use that money to pay off part of the mortgage. Until they get called, enjoy the state tax free return.

But Federal Farm Credit Bureau bonds instead of Ginnie Mae bonds, they tend to be a bit more sticky (meaning not called as often).

This will guarantee that you will stay liquid and ahead of your mortgage.

https://personal.vanguard.com/us/FixedIncomeHome

Go to the Agencies tab and simply click Search. I found bonds with yield to maturity 5.5% for Freddie Mac loans, and 5% for Federal Farm Credit Bank loans.

I believe you have to buy in multiples of $1000 though.
I may have been calculating my tax rate incorrectly. 12% federal tax rate and 3% state tax rate. I don't remember at this point but perhaps I was thinking about social security taxes which are only on earned income.

If I will only be paying 12%(or less) and 3% state, then it would seem that 5.15% would match the yield of my 4.375 mortgage.

Also, there have been quite a few mentions regarding the $20,000 of increased income I would require in order to pay the mortgage, and the affect this would have on ACA subsidies. I see that there may/should be many options to cover this added expense without increasing MAGI by $20k, if at all. So thank you to everyone who touched on this point as it has corrected my thinking on the matter.
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TravellingTechOnFire
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Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by TravellingTechOnFire »

rocket354 wrote: Sun Dec 04, 2022 11:50 pm
TravellingTechOnFire wrote: Sun Dec 04, 2022 8:58 pm Hi, didn't mean to ghost out in the middle of our posts...the maintenance break got me. Thanks to everyone for your input so far.

Yes, FIRE in 5 years is a tall order. We can save about $125k/year. Maybe more but thats what I feel comfortable counting on as our income can vary.

Also correct, its a big mortgage considering my savings balance. We moved to a higher COL area and it wouldn't have been easy to spend much less. We were in a nightmare little garbage generational poverty town and moving to a nicer area was of the absolute highest priority.. It was a sacrifice that had to be made.

Also, our mortgage payment is <8% of our monthly pay, so there is that. I HATE owing $330,000 though, to be sure!

Our income will vary and should range from ~$230,000 to $260,000. We have a very low tax liability and will only pay an estimated $10k/year in federal taxes. This year will be around 0 due to EV tax credit. We make ~ $100k/year as a tax free stipend. Retirement contributions get our taxable income down into the 12% bracket.

The house is admittedly expensive given our low invested assets, but we are saving vigorously and working very hard to keep expenses low. Recall from the first post that we went from $30k net worth to almost $300k in under 3 years.

Also correct is that we need $1.2m to retire with the current mortgage for lean fire. This is what has led me to investigate whether I should pay the house off early. Another important data point is that I have only about $7k in Roth assets and currently plan to stick to tIRA. Why? Well, most of our retirement money will be contributions and not growth, so I won't have millions in tax free money that will have been compounding for decades. We also aren't going to have $10m+ in retirement..in other words, our retirement income and tax burden is likely to be very low. Therefore I have leaned towards tIRA to reduce current taxable income, allowing for maximum amount of investable dollars and additional funds to be used for mortgage reduction or brokerage investing. Perhaps my reasoning is flawed. Regardless, unless I switch to Roth IRA's, I won't have a very big pool of tax free assets to pull from.

Another reason I am considering reducing my risk i.e. payoff the mortgage, is that my wife's job is *very* demanding; so much so that it affects her quality of life. I don't know how many years she can keep working. I am more durable and can work myself half to death then go to the gym. She is not like this at all. The ability to at least scale back if needed as soon as possible is an important consideration in my planning.

I am leaning towards mortgage payoff. I do plan to keep a 6 month cash emergency fund while working towards FIRE. I don't think I will build it beyond this point as I can do many things, but not everything. I can, even by myself, work a single 13 week contract and net $30-40k. Double that if we both work just 13 weeks/year for a while i.e. sort of a Barista FIRE if you will. I see this now as a likely scenario once we achieve lean FIRE.....working two 13 week contracts/year, we can probably cover our living expenses and continue to max retirement contributions while taking 6 months/year off and end up with more of a fat FIRE in short order.
You say you net $230k/year after taxes, and can only save $125k/year off of that. Then you are spending >$100k/year and it will be very tough to retire in five years given your current portfolio and projected savings.

You should definitely not pay off your mortgage if you want to retire ASAP. The only way you can retire in five years, even "leanFIRE," is if you save as much as possible in investments that then do very well. Your mortgage will pay you 4.375%, after-tax. You need to do a lot better than that. If the stock market has returns like from 2009-2021 then you probably still won't quite get there, but you'd be close.

You have a $200k portfolio now. Saving $125k/year for five years at 5% return would give you about $945k. You'd need 14% per year to have $1.2MM.

You are unlikely to be in position to retire in five years, especially if you can't get your expenses down. On the plus side, you are likely to be in great financial shape overall if you do manage to save like you are planning. You should also take Klangfool's advice and not worry about paying off your mortgage until you are are FI, since liquidity is important, and if markets don't do well you won't be retiring anyways and if the markets do well then you'll have a lot more money by having invested rather than paying down your mortgage.
Hi Rocket, thanks for your input!. In regards to savings rate, I mentioned $125k/year in savings simply to err on the side of caution with what I am very confident we will be able to consistently achieve in the upcoming years. If we only net $200k, we should be able to save $125. I say this because we are not salaried and do not have a fixed rate of pay. It can vary significantly based on how much time we take off, which is all unpaid, and the rates we get for each 13 week contract we take. I am thoroughly in control of our spending and track every dollar. Annual expenses are around $75k including the $20k/year mortgage.
cbs2002
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Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by cbs2002 »

I'm glad you have found a living situation that works for you and your spouse, that's great.

I would def not pay off the mortgage. Liquidity gets more important as you age, not less. If I retired with a paid off $400K house at 56 and three hundred grand...I'd be terrified. Super risky and probably not possible. Going to part time at 56 with $1-1.5MM invested, and a $300K mortgage is far less risky. Though I don't think you can get there from here unless you are heavily invested in stocks and the market is unexpectedly friendly. Also your presumption of cutting your expenses down so much seems unrealistic. Go out 10 or 20 years with good saving behavior and you start to have more options.

Suggest - create a 20 year plan that includes Social Security payments. Focus on liquidity and growing investments. Stop using terms like "leanFIRE" and just talk numbers and exactly how those numbers will cover your personal situation.

It sounds like you are doing a lot of the right things, you are just coming to it late. I think you have to get comfortable with working longer, even if that's part time, as a result.
VikingThor
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Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by VikingThor »

TravellingTechOnFire wrote: Mon Dec 05, 2022 5:05 pm
lakpr wrote: Sun Dec 04, 2022 10:47 pm @TravelingTechOnFire,

You said above that you are in a 12% bracket, but also that you require a 5.3% return rate on investments just to break even with the mortgage rate. 4.375% ÷ 5.3% = 0.825, or it looks like you are in a state that has income tax and your state tax rate is about 5.5%.

I think rather than paying down your mortgage, I suggest you buy some agency bonds that are yielding 5.3%, and in most states the agency bonds are state tax free. Do not hesitate whether the bonds are callable. If they do get called, just use that money to pay off part of the mortgage. Until they get called, enjoy the state tax free return.

But Federal Farm Credit Bureau bonds instead of Ginnie Mae bonds, they tend to be a bit more sticky (meaning not called as often).

This will guarantee that you will stay liquid and ahead of your mortgage.

https://personal.vanguard.com/us/FixedIncomeHome

Go to the Agencies tab and simply click Search. I found bonds with yield to maturity 5.5% for Freddie Mac loans, and 5% for Federal Farm Credit Bank loans.

I believe you have to buy in multiples of $1000 though.
I may have been calculating my tax rate incorrectly. 12% federal tax rate and 3% state tax rate. I don't remember at this point but perhaps I was thinking about social security taxes which are only on earned income.

If I will only be paying 12%(or less) and 3% state, then it would seem that 5.15% would match the yield of my 4.375 mortgage.

Also, there have been quite a few mentions regarding the $20,000 of increased income I would require in order to pay the mortgage, and the affect this would have on ACA subsidies. I see that there may/should be many options to cover this added expense without increasing MAGI by $20k, if at all. So thank you to everyone who touched on this point as it has corrected my thinking on the matter.
You are way overestimating the tax burden of the investment.

If you are in 12% tax bracket now and planning retirement spend of roughly 100k dollars/year or less in todays dollars, you should easily be able to plan for 0% federal tax on your capital gains. Probably could get the state tax at or close to zero also.

Married couples with less than 83k income have a zero percent capital gains rate.

Keep in mind the tax basis of the investment you made in a taxable brokerge is not double taxed in the future. So in retirement if you need $100k to spend in a year and you sell a taxable brokerage stock for $100k, of which 50k is cost basis and 50k capital gains, you have 100k to spend with no federal tax.

The 50k cost basis not income no matter what. The50k capital gain no federal tax unless you have 33k plus in income from other sources.

I am planning to have pretty high retirement spend without paying any capital gains\federal tax on my taxable brokerage investments.

You just need a plan and different buckets (401k, Roth, taxable brokerage) and plan strategically each year where to pull money from to spend, that will optimize taxes.

Similar logic you are likely overestimating impact on ACA. ( you can spend a lot without high income using bucket strategy \ tax optimization)
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Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by grabiner »

LeeMKE wrote: Sun Dec 04, 2022 6:33 pm Bear in mind that paying down a 30 year mortgage has a higher yield than your mortgage interest rate. Every dollar paid early compounds the amount of principal paid the following month. Run your own mortgage out with current payments and proposed pre-payments to see exactly how much more "profit" you get with prepayment. My guess is your yield will be as much as double the interest rate on your mortgage.
Reported returns already assume compounding, so the mortgage rate is the right rate to use for comparison.

Using the OP's numbers, suppose that there are 25 years left on the mortgage, and they make a prepayment of $3428 now. This will grow at 4.375% compounded annually, which means that it will reduce the payments in the last year by $10,000. If they instead bought a zero-coupon bond which is worth $3428 now and would be worth $10,000 in 25 years, that bond would also report a yield of 4.375%.

And if the OP is actually in a 12% tax bracket, then it isn't as clear to pay down this mortgage from a taxable account as it would normally be, because the tax cost of that taxable account is near zero. They can hold Vanguard Long-Term Bond ETF in an IRA for a low-risk, long-term return of 4.88%, and hold stocks in their taxable account for a zero tax cost. In retirement, they can sell the bonds to make the mortgage payments; this could be done by selling taxable stock, and moving an equal amount from bonds to stock in the IRA, to avoid depleting the IRA prematurely.

"Near zero" is not quite "zero", though:
TravellingTechOnFire wrote: Sun Dec 04, 2022 4:58 pm Other considerations: lowering my required retirement income by $20,000/year(due to paid off mortgage) would also decrease ACA cost by $2400-$3,000/year.
Realizing $20,000 from the sale of stock in the taxable account does not create $20,000 of income, as only the amount of the capital gain is taxable income. If the basis of the stock is half the sales price, then the $20,000 withdrawn might increase the ACA by $1200, a marginal tax rate of 6% until they start Medicare.
Wiki David Grabiner
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TravellingTechOnFire
Posts: 387
Joined: Mon Nov 21, 2022 9:54 am

Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by TravellingTechOnFire »

Thank you everyone, this thread and your responses have taught me some things.

I think you have talked me off the ledge. I'll be directing all funds into my AA, and I'll consider if I want to build up a "mortgage payoff fund" someday.

Going over my portfolio, I think my next step will be to present a portfolio summary laying out my current situation in detail.

Thanks again, the crisis has been averted :D
faanger101
Posts: 341
Joined: Sat Jul 30, 2022 6:20 pm

Re: FIRE goal in 5 years: pay off mortgage or invest all available cash

Post by faanger101 »

TravellingTechOnFire wrote: Sun Dec 04, 2022 4:58 pm First, a bit of background. Dual income, grown kids. Age 51, spouse 49.

Yearly gross ~$250k
Yearly net after taxes ~$230k(we have a unique situation)

Income is somewhat variable but this is a ballpark.

Jan 2020; Net worth $30,000
Today: $280,000 including home. Yes, we changed from consumer suckas to diligent savers/investors.
Cash: $45,000
Ibonds: $30,000
Brokerage: $14,000
Retirement: $120,000

We are maxing 401k's and tIRA's, will both be 50 or older next year and will be hitting the $75k total here moving forward.

I'd like to be *capable* of lean FIRE in 5 years. We currently have a $330,000 mortgage on 30 year fixed @ 4.375%. Monthly principle and interest is $1657 or right at $20k/year. Making minimum payments, balance will be right at $300k in 5 years.

I'm trying to decide how wise it would be to pay down the mortgage aggressively over the next five years. This would require an additional $4500/month or so towards the house and would significantly reduce the amount we save into after tax brokerage. To match the rate I'd be making on paying the mortgage down, I'd have to earn at least 5.3% or so in my brokerage account. So I either take the 100% guaranteed 4.375% after tax rate of return, or accept the risk of investing in the market to try and come out ahead.

Other considerations: lowering my required retirement income by $20,000/year(due to paid off mortgage) would also decrease ACA cost by $2400-$3,000/year.

Best I can tell, this could go either way. I'm leaning towards paying the house down. I can afford to do so without selling any investments and without sacrificing any tax advantaged savings. It would be simply a matter of paying the mortgage off in 5 years or investing all that money in after tax brokerage.

Other important info. This will put me at 56-57. 100% full retirement in 5 years is not a *desperate* goal at this point.....I have the flexibility for example, to work as little as 13 weeks/year and earn 2x annual living expenses if I want to earn money for a while longer without working full time. So if I don't have much in brokerage, this can be a bridge to age 59.5.
1. Build your portfolio for FI
2. Pay out the mortgage
3. Establish an extra 2-3 years of cash buffer
4. Retire

I’d be shocked if you can achieve it in 5 yrs with such income and current NW but if you enjoy your life for 30k annually - may be it’s possible :sharebeer
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