AssetBuilder - Registered Investment Advisor :: Simple Investing Smart Future

I'm an employee at your former place of work in Dallas and am continually faced with the prospect of losing my job. Because of that I'm curious whether we should pay off our mortgage quickly as a way to have no debt and therefore the ability to sustain the impact of job loss. I contribute 25% of my 77K salary to my 401K. My wife contributes 19% of her 90K. If I reduce mine to the minimum to get the company match (a pittance) we could use the difference (about 15K) to pay off the mortgage in about 4 years. Of course my job may be eliminated in less time than that. I don't think my wife's continued employment at the same place is at risk. I'm 51 and we have only about 350K in retirement savings but zero debt. We could also reduce my wife's (age 47) contribution and pay off the mortgage in less than two years. At our ages are we better off having the extra 60K in the 401s or having no debt. The tax benefit from the mortgage doesn't seem to be a reason for not paying it off. Thanks for the help, Guy

Guy,

You aren't alone. Due to the publicity for my new book, "Spend 'til the End," I've talked with reporters and columnists from a bunch of newspapers around the country in the last few weeks. They were all concerned with how long their jobs might last. And there seemed to be a universal staff cut of 20 percent. Very tough on the tummy.

The real measure of your personal security isn't having all your debt paid off. The real measure is your "staying power"--- how long you can sustain your current standard of living without earned income.

That means figuring out what your core expenses are and dividing that number into your accessible assets. Suppose, for instance, that your core expenses (including mortgage but excluding taxes which you won't have to pay if you aren't earning) are about $6,000 a month. Then if you had $60,000 in a money market account you'd have 10 months of "cushion." But it you took that same $60,000 and paid off the mortgage, your core expenses would be lower, but you'd still be in a desperate condition without the cushion money.

Since you're 51 and your wife is 47, once your money goes into the 401(k) plan it can't come out without paying a penalty until you turn 59 1/2. That's a big disincentive to doing anything more than capturing the match. Unfortunately, paying off the mortgage also means the equity isn't accessable any more except as a home equity credit line.

I suggest that you save enough to capture the match, then build your accessible savings. At the same time, secure a home equity credit line--- but don't borrow against it. How much you should have will require a long discussion with your wife because you'll need to agree on the trade-off between the lost tax-deduction of the 401(k) contributions and the increased "cushion" you want to build.

If you are thinking of going independent when, and if, you lose your job let me tell you the biggest mistake that most employees make--- underestimating the amount of time and money that it will require to get your cash "pipeline" filled with money due rather than money out. Even very successful freelancers often need enough cash to cover at least 3 months of receivables. Start dealing with this--- and thinking like this--- now and the transition may be a lot easier than you think.

Scott

I've been thinking the same as Guy lately.  I've always fully funded my 401k, but yesterday I set the contribution back to just capture the match.  I want as much cash as possible from my paycheck. The reason is that I have been told my job is ending in about a year unless I relocate and I don't want to, at least not to the place my company has picked out.  

So how much cash is enough in these circumstances?  Is 6 month's living expenses enough?   It might not be if a new job requires a move.  

The other reason is that I don't like the 401k investments options that much.  I can't tell what the fees are.  In my Roth (Vanguard), I can invest how I like, but the yearly contribution is small.  My own cash I could invest the way I want and spend it if I need to.  The tax 'advantages' of the 401k, are lost, but . .

I guess my question for Scott and the people in the forum is, does this all sound reasonable or does it sound like someone overreacting to the gloom and doom in the market ? 

 

It sounds very reasonable to me--- at least for someone your age. The older you are, the greater the reserve account you need because higher paid jobs take longer to replace.

I'd like to see what other forum members consider a good reserve--- and their age.

 Scott

I went ahead and changed my 401 amount to the match minimum and my wife's too. That'll allow us to increase our emergency fund quickly. We have about 30K at present in such a fund. My concern is whether losing the tax advantage of about 25K pre-tax is going to be steep. But I guess if we get back to the max after two years then it'll work out. I'd like to see the emergency fund at 75K. Scott, the rumor mill heated up here just yesterday and George R addressed it in our staff meeting by saying he couldn't confirm or deny anything. But he did say that the 2004 rif terms will not be done again. Buyout offers are more likely once the revenue projections are finalized and budget cut amounts are determined. Seems like he knows a lot without confirming a thing. Hmmm My boss says I'll be safe. I don't trust a thing.