Answers to Two Recent Financial Questions

As you might expect, I often get questions from clients, friends and acquaintances regarding finances. When 2 or 3 people ask, there are probably more as well, so here are two recent questions: 1) What does it mean to max out my retirement savings? 2) Should I pay off my mortgage early?

How much can I contribute to my workplace retirement plan each year to max it out?

There seems to be a common misconception that “maxing out your retirement contributions” means contributing just enough to receive the match from your employer. In fact, you can contribute much more than that, even after receiving the match, and it is in your best interest to do so. Here are the 2020 annual contribution limits as set by the IRS:

• 401(k) - $19,500 in personal contributions or $1625 per month – this amount does not include your employer’s match;
• 403(b) or 457(b) - $19,500; (UK faculty and staff can contribute to both for a total of $39,000)
• If you are 50 or over, add an additional $6500 per year for any of those plans;
• By the way, that one-year investment of $19,500 in your future self will be worth over $75,000 in 20 years assuming close to historical average stock market returns.

Should I pay off my mortgage early?

With interest rates so low several people have asked this question. Here is the quick math on our own situation:

• My wife and I currently owe about $50,000 on our mortgage over the next 6 years at 3.75% interest;
• If we took $50,000 from our Joint investment account and paid off our mortgage, we would save $5913 in interest payments over the next 6 years;
• Now, if we keep the $50,000 in our investment account and it earns an average annual return of 7% over those 6 years it will be worth over $75,000;
• So, we will continue to pay our mortgage on schedule, earn an additional $25,000 in our investment account and be more than $19,000 ahead of where we’d be if we paid off our mortgage early. Easy decision.

Have questions you’d like me to answer? Please email me at steve@moneywatchadvisors.com.

Steve Byars, CFP®