Question: Setting aside $15k this year: 403b or pay down mortgage?

An approved mortgage loan application form.

I'm planning to use $15,000 this year for either retirement savings or to pay down my mortgage and am unsure of which option to pick. My employer offers a 403b with no matching for the first two years of employement (which I am in) and fund management fees ranging from .7% to 1.7%. I also have 13 years and about $140k left on a 15 year mortgage with a 3.85% interest rate. What would be the better use of the $15,oo0, or are there third or fourth options I should consider? My only current savings is $5,000 in a IRA, and my debts are just the mortgage and student loans that will be forgiven in 5 years. I'm 33 years old and just landed a job that pays $97k.

Response:

Your question is always one that gets me jazzed:  Mortgage or retirement?

Nearly every single time my answer is a resounding:  Retirement!  Why?  Consider that you're already heavily invested in one piece of 'stock' in a big market--your house.  Trying to pay the mortgage off early at your age would be doubling down on this one basket.  Continue to let the bank share housing market risk with you by paying your mortgage as is, every month, on time.  And your interest rate is practically free money!  Imagine--if you stay put and earn maybe 3%-5% (a historical average) on the home plus take a mortgage deduction on your taxes every year, you come out nicely ahead.  Now, what if the housing market loses money just when and if you need to sell?  I've seen way too many of those scenarios.  Keep the eggs in different baskets and remember, in retirement you can't take your house to the grocery store to pay for food.  Being house-rich and cash poor is a sticky place to be.

Instead, because your retirement options with your employer seem weak, first make sure that you have some cash set aside as an emergency fund (do you?).  What's left of that $15,000 you can diversify your investment options with your own traditional IRA (you make too much for a Roth IRA).  Seek out a low-cost provider with deep educational resources and online access such as the two top award-winners Vanguard and Fidelity.  Within the tax shelter of an IRA (your money will grow tax-free), be mindful of where you're investing.  If you're cost-sensitive, look to index funds which are devoid of management fees.  And just as importantly, keep saving!

 

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