#268: Ask Paula – Should I Invest or Pay Off My Mortgage Early?
Natasha has $3,300 per month to either invest or use toward an early mortgage payoff. Which option should she choose?
An anonymous caller and military member, “Molly,” wants to know if she should move money from a USAA brokerage to Vanguard to pay less in fees. Her goal is to retire in 12 years with $3,000/month in passive income from rental properties, which will supplement her military pension. Should she only contribute to her TSP up to the match, and invest the rest in rentals?
Chaim and his wife live in the Middle East and have $30,000 in a U.S. bank account. However, they don’t plan to relocate. How can they best use this money?
June and her husband are in a sticky situation: they bought their dream house in Michigan last winter, ahead of plans to relocate there. June lives there with their kids, but her husband is unable to find a job despite the numerous contacts he has in the state. He currently works in a job that he dislikes in Southern California, living apart from his family. They’re currently a one-income family, though June has plans to open a firm in Michigan. What should they do?
An anonymous caller from Portland, “Pauly,” has three questions: is a 75/25 US stock/international stock split aggressive? Is an S&P 500 index a close enough equivalent to a total US stock index? Is Betterment worth it for automatic tax harvesting?
My friend and former financial planner Joe Saul-Sehy joins me to answer these questions. Enjoy!
June asks (at 2:16 minutes):
Last winter, my husband and I bought our dream home in Michigan. I live here with our kids, while my husband is still in Southern California working for a startup. I’m in the middle of starting a firm in Michigan, and my license is limited to this state. His stock has vested, but we don’t think the startup will survive this crisis, and he hates his job. Unfortunately, even with having many contacts in Michigan (where he spent decades working), he’s unable to find a job.
My husband is 50 years old, and I’m 45. We have three kids, ages 10 to 14. My husband earns $250,000 per year, and I plan to return to work when my firm gets off the ground. We have $500,000 in retirement accounts, $100,000 in cash, and $900,000 in stock from a private company that we’re locked into with golden handcuffs. We have $25,000 in 529 plans and we max out our 401k and IRA. We use our FSA and have around $5,000 in an HSA. We’re debt-free aside from our mortgage. Our retirement timeline is 20-25 years.
What should we do? Here are the options we’re considering:
- Rent out our house: We paid $250,000 for our house and it would rent for around $1,900 per month (I wouldn’t have purchased it as a rental). We could rent it out and move to wherever he can find a job.
- Emergency fund: my husband quits his job and we live off of our emergency fund until he can find another job. This would also eliminate his paying $2,500 per month in rent.
Chaim asks (at 25:44 minutes):
My wife and I are 39 and 40 and have steady jobs. We live in the middle east and we have no plans to live in the United States in the near future. Besides local taxes, we file a 1040 each year. We have $30,000 in a U.S. bank account and aren’t sure what to do with it. Our pension plans and spending accounts are with local, non-U.S. banks. The money in the U.S. bank account accrued from tax returns we received from either country. We’re considering opening a Roth IRA or getting into real estate. We were pre-approved for a mortgage for a year ago. However, we keep hearing warnings about out-of-state real estate investing. What should we do with this money?
Anonymous “Molly” asks (at 37:49 minutes):
I want to get your opinion on whether or not you’d move money from a USAA brokerage to Vanguard for lower fees. I have money in both. I have $66,000 in a USAA NASDAQ 100 Fund (USNQX) taxable account. I have $44,000 in a USAA Roth IRA consisting of USNQX and USSPX. I opened these accounts in 2014, and since then, USNQX has had a pre-tax return of 16 percent, and an expense ratio of 0.48. USSPX has had pre-tax returns of 9 percent and an expense ratio of 0.27.
With Vanguard, I have VTSAX and VGSLX and their returns since inception are 6.45 percent and 9 percent, respectively, with a much lower expense ratio of .04 and .12 percent.
My long-term goal is to retire from the military in 12 years with $3,000/month in passive income from rental properties.
Should I:
- Keep the USAA brokerage money in place and not use that until I’m older? I’d need to find other money to bridge the gap between military retirement and 59 ½ years old.
- Transfer the money from USAA to Vanguard by rolling over the Roth IRA, and let it continue to accumulate at a slower rate, but with lower Vanguard expenses, also until I’m 59 ½?
- Pull that money out of USAA in chunks at a time to invest in three to four rental properties with 10-year loans so they’re paid-in-full by the time I retire?
I have two properties now and I’m closing on a third this week. After PITI (principal, interest, taxes, insurance), vacancy, capex, maintenance, and property management fees, I’ll have a combined cash flow of $400/month. I still need over $2,500/month to keep my current lifestyle.
I have another question, too: should I invest in my TSP only up to the government match of five percent, but still max my Roth IRA and use the leftover money for properties? After maxing out my Roth, TSP, and IRA, I typically can invest $12,000. Only contributing up to the match, I would have more money for rentals. Would you max out the TSP or only invest until government matching?
Natasha asks (at 1:01:20 minutes):
I’m 43 years old and have maxed out my 401k contributions for the last 15 years. I have $760,000 in retirement accounts and I’m confident that will grow to $2M with a seven percent return in the next fifteen years. According to the four percent rule, I’ll have $80,000 per year to live off of once I’m 59.5 years old, which I’m comfortable with.
We live in NYC and have a special needs son, and we can’t move away to reduce our tax obligations. I’m 15 years away from accessing my retirement accounts, and I invest in a Roth 401k up to my company match. However, I want to walk away from full-time work in the next five years.
I have $3,300 per month that I’ve been investing into a brokerage account, but should I consider redirecting that money to my $380,000 mortgage? Paying it off would reduce our expenses. Or, should I continue to invest this $3,300 in a brokerage account, which will grow to $400,000 over the next five years (assuming a seven percent return)?
Anonymous “Pauly” asks (at 1:12:56 minutes):
I’m 30, with $150,000 portfolio, a six-month emergency fund, and a 60 percent savings rate. I have three questions:
- I mostly invest in target date funds. I want to switch to a more aggressive barbell approach, as that matches my personality. I want my portfolio to be 75 percent total US stock and 25 percent total international. That covers the aggressive side of the barbell, but what about the other side? Should I increase my emergency fund to 12 months or 24 months? Is my 75/25 stock split misinformed and not actually aggressive?
- My employer’s 401k doesn’t offer a total US stock index. Is an S&P 500 index a close enough equivalent, or should I get exposure to small and mid-cap funds as well? I plan to hold these assets for a long time and don’t want to lose out on growth potential.
- Since I max out my yearly tax-advantaged limits, over half of my portfolio is in a taxable brokerage account. It’s with Vanguard, but I might move it to Betterment because they offer automatic tax harvesting. Is that worthwhile, or am I over-optimizing?
Resources Mentioned:
- Personal Capital
- Interview with Rich Carey about real estate investing
- #266: Ask Paula – Your Real Estate Questions, Answered
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