I owe $147,000 on my home. I have a little over $280,000 in a 401(k). Should I try and pay off my mortgage or keep adding to the 401(k)?

I am 56 years old.

Asked by Karen

3 Answers

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Answered by Carlos Contreras, ChFC® in Aventura, FL
Because of the penalties and added taxes created by a withdrawal if you are under 59 1/2 years old, it really is not to your advantage to remove money from the 401(k) to pay down the mortgage. This is clearly one reason why placing too much of your liquid net worth into a 401(k) can be problematic. What I would do is creating a 5 to 10-year funding plan outside of your 401(k) to pay down the mortgage.

Best of luck! | 12.21.15 @ 23:02
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$commenter.renderDisplayableName() — {comment} | 12.09.16 @ 08:13
Answered by Ken Perine, Certified Financial Planner in Livermore, CA
What a great question! I think many people struggle with which strategy makes the most sense for them. Everyone's situation is unique and not knowing more about your goals and overall situation makes it tough to make specific recommendations, but I can share some thoughts with you.

First would be the "math" answer. If, for example, you were able to get a long-term average return on the investments in your 401(k) of 7%, and your mortgage is costing you 5%, you would be money ahead continuing to fund your 401(k) instead of paying off your mortgage. Having said that, there are a lot of reasons why that might not make the most sense for you.

What kind of returns are you getting in your 401(k)? There are still some plans out there that have a lot of fees that act as a drag on the performance you might experience. You might want to look into that.

As Carlos points out, there could be significant tax penalties if you lost your job and needed to access the money in your 401(k) to make your house payments before you retire. Do you have a good emergency fund in place that would cover you while you tried to find work again? That's always a great idea!

What are your plans for the equity you're building in your home? Will you need to get at that at some point in retirement, or have you already saved enough to pay for your life in retirement? Is the equity part of an "emergency" fund in case you experience a lot of medical expenses in retirement? Maybe you'd sell the house to pay for that? Or would it be something that you want to leave to your heirs? Home equity can be a significant resource for folks so it's good to know how it fits into your overall plan.

Finally, do you think you're pretty good at "sticking to the plan"? Over long periods of time, the markets have historically rewarded patient investors with very nice returns, but there can definitely be periods of time when markets go down and take your 401(k) account balance with them. If you're not committed to sticking with it on the investment side, then taking the "sure thing" and paying off the debt might make the most sense for you.

Lots of ways you could go with this and definitely no one "right" answer. I hope this helps you figure out what makes the most sense for you. | 12.22.15 @ 21:18
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$commenter.renderDisplayableName() — {comment} | 12.09.16 @ 08:13
Answered by James L Roberts, Independant Consultant in Lake Worth, FL
I agree with Ken Perine in that this is a great question, and believe that many struggle with the decision-making process and developing strategies that align with their retirement objectives and goals. I also agree that everyone’s situation is unique, and that not knowing the details regarding your specific situation, objectives and goals, it is difficult to provide specific recommendations. King Solomon stated “that plans fail for lack of counsel, and succeed with many advisors.” My first recommendation is to take your situation to as many trusted advisors as possible and make your decision, don’t let others make your decision for you. Both Carlos and Ken have provided you with valuable information that you should seriously take into consideration in making your decision and I am not going to repeat their wise advice. I will however offer a different perspective. I should also state here that I am not a fan of 401k’s, and do not recommend them to any of my consulting clients.

Given your current age (56), and the amount of savings in your 401k, if you currently have sufficient cash flow to meet all your expenses I would not recommend using your 401k to pay off your home. I would recommend looking into the possibility of generating passive cash flow (which I teach my clients to look for and why) and extra income that can be directed toward extra principal payments on your mortgage to pay it off sooner.

Why do I recommend establishing a minimum of seven or eight sources of passive income? It is because people maintain their standard of living, quality of life, (lifestyle) with cash flow. Most people establish one active source of cash flow based on employment. If this source of cash flow is interrupted for any reason, it forces individuals and families to use savings and debt to maintain their current lifestyle. Let’s face it, no one likes cutting back, especially if we don’t have to. Anyone having established multiple sources of cash flow (income), each contributing, if not fully capable of supporting and maintaining a desired lifestyle, is secure in knowing that their lifestyle is not at risk should any one source be interrupted. This also follows two other pieces of wisdom, “divide your investments among seven or eight, for you do not know what hardships tomorrow may bring,” and “the good man provides an inheritance to his children’s children.” If I can be of further help please feel free to contact me.
| 12.23.15 @ 00:25
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$commenter.renderDisplayableName() — {comment} | 12.09.16 @ 08:13
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Answered by

Carlos  Contreras
Carlos Contreras, ChFC® in Aventura, FL

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