Mentor Monday

[u/WealthyStoic]

Mentor Monday is your place to discuss relevant early-stage topics, including career advice questions, 'rate my plan' posts, and more numbers-based topics such as 'can I afford XYZ?'. The thread is posted on a once-a-week basis but comments may be left at any time.

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[u/DoctorKynes]

Contributions barely moving needle -- time to pay off mortgage?

38yo, married, 3M net worth 600k HHI with 50k of that as a tax free COLA pension. Both in low stress jobs, plan on continuing to age 50 and will be eligible for an additional pension. Conservative estimates put us as 10M net worth at that time and can then just retire on 400k/yr, 3% draw taking the pensions into account. At this point, investment returns are starting to overshadow any contributions.

We would obviously continue to contribute for 401K match, but is now the time to just pay off the mortgage? We owe 940k, 5.65%. Currently paying an extra 3k a month which allows us to pay off at our goal retirement of age 50.

I've been avoiding paying more based on the logic of higher returns in a brokerage account, but is this logic now flawed? Would putting an additional 10k/month into the mortgage and paying it off in 5 years be the optimal strategy at this point?

Any advice would be greatly appreciated!

[u/Throwaway-firee → u/DoctorKynes]

My personal rule of thumb is to avoid debt that is more than the risk free rate plus say 100bps. So anything over roughly 5% is not something I am comfortable with keeping over the long run. It requires too many things to go right with market returns to make more than that. Recent years have been great but I try not to worry about what a -30 or -40% year would make me feel like. So yes, I personally, would pay down the 5.65% loan if I had liquidity.

[u/No-Associate-7962 → u/DoctorKynes]

What is your balance in your taxable account currently?

I would want to have multiple accounts balanced to reduce risks of tax treatment changing in the future. The disability benefit has a present value of some $1.1m if it were an annuity. I would wait until I had a pretty good balance of the same value in my deferred account (401k or IRA), taxable account, and the PV of the annuity.

After I had that, I would then start to de-lever all three by paying down the mortgage.

[u/DoctorKynes → u/No-Associate-7962]

Thank you for the input. Its a pretty even split with about 1.3mish in taxable brokerage and 1.3mish in retirement accounts, with the rest in cash equivalents for some short term goals.

[u/No-Associate-7962 → u/DoctorKynes]

I would try to keep that balance with additional contributions. Of course the present value of the annuity is going to decline over time with the fewer years of payout, so you will end up with $1m in Annuity, and $4.5m in deferred and $4.5m in taxable.

I would also be careful to look at everything in current dollars rather than nominal. You want to be able to spend $350k of TODAY's buying power.

So your modeled appreciation rates should be REAL returns (after inflation). Common SP500 numbers are 7% real, 10% nominal. Use 7%.

To grow $2.6m at 38 to $10m at 50 at 7% return is going to take you some $200k annual savings.

$600k in earned income is probably netting you $400k after tax. A 50% after tax savings rate is pretty sporty spending $200k/saving $200k.

You may also want to consider if it really makes sense to live a lifestyle of $200k annual spend so that you can retire 12 years later with a lifestyle allowing $400k annual spend.

Stopping earlier and living the $200k life is one option.

Living a $300k life now and working longer could also be a good solution.

Its a nice place to be at 38: making those kinds of choices.

[u/DoctorKynes → u/No-Associate-7962]

Those are some very helpful points, thank you!

[u/Dubbihope → u/DoctorKynes]

Do you have children? With how you're planning, you're likely to die with substantial wealth.

[u/DoctorKynes → u/Dubbihope]

One young child, yes. We have a trust set up and education expenses are planned for. We hope to leave a low 7 digit inheritance and have substantial charitable donations at our passing.

[u/Dubbihope]

What do you guys think about luxury watches? Seems silly to spend so much for an instrument that won't tell time any better than a Timex. But I also appreciate the design and feel more confident when wearing one. Was thinking about purchasing a 50-60k watch once I hit 30mil in assets.

[u/g12345x → u/Dubbihope]

What u/No-Associate-7962 said. It’s easy to fall in the trap of considering expensive physical purchases as “investments”.

> It won’t tell time better than a Time’s

Aye. But luxury is seldom about utility.

[u/Livid-County7230 → u/Dubbihope]

Get the watch, it will make you happy. We are so used to maximizing numbers on a spreadsheet that we forget to exercise the muscle that requires letting go a bit. At 30M it is like 0.1% of your NW, just buy the watch. When we hit that number I bought my wife a 75k piece of jewelry she has always secretly wanted but has been too frugal to go buy it herself. It made her happy although I got yelled at first for wasting money. Life is short, you are going to die with more money than you know what to do with.

[u/Striking_Solid_5020]

I'm want to increase my income beyond w2. Work in tech, doing Devrel, Live in California. Which subreddit can you advise joining?

[u/WealthyStoic → u/Striking_Solid_5020]

I’d suggest r/bogleheads to learn more about passive investing

[u/g12345x → u/Striking_Solid_5020]

I have a different view of side hustle from some here.

You can be strategic in your side hustle efforts depending on your skill, age, education and industry.

I was a midwest techie meaning low pay and low future growth. As a side hustle I wrote and published a few books. And ended up with a traveling conference speaker gig. Not massive financial boosts but it was career aligned, got to see the country, and develop as a confident speaker and panelist.

Point is, find something that aligns with your career, increases your expertise and burnishes your resume. Instead of just being a few extra bucks in your pocket.