From: schindler@csa1.lbl.gov (AARON SCHINDLER)
Newsgroups: misc.invest,misc.consumers.house
Subject: Re: Mortgage or retirement
Date: 30 Dec 1992 23:31 PST
Organization: Lawrence Berkeley Laboratory - Berkeley, CA, USA
Distribution: usa
NNTP-Posting-Host: 128.3.254.196
News-Software: VAX/VMS VNEWS 1.41    

In article <BGLENDEN.92Dec30180102@colobus.cv.nrao.edu>, bglenden@colobus.cv.nrao.edu (Brian Glendenning) writes...
> 
>My wife and I are planning to buy a house in 1993, and I am not max'ed
>out in my 403(b) pension contributions.
> 
>Can anyone give me any pointers on what the criteria should be used in
>deciding whether I should either:
>	1) Go for a 15 year mortgage; or
>	2) Go for a 30 year mortgage and put the difference into
>	403(b) savings.
> 
>Thanks -
> 
>Brian
>--
>       Brian Glendenning - National Radio Astronomy Observatory
>bglenden@nrao.edu          Charlottesville Va.           (804) 296-0286

The question comes down to:  Should you put money into your 403(b) or pay
down your mortgage faster?  When deciding such questions it is useful to
do a "what if".  What if you are in the top income tax bracket...  say 35%
(we'll include a few points of state tax.  This is only a back-of-the-envelope
calculation anyways.  What if your mortgage is at 9%...  (You can get a 
slightly better rate with a 15 year mortgage, but it will probably not affect
the outcome.)  What if you expect to get 8% return on your 403b... (We'll
say you are investing in long term treasuries.)

PAYING OFF THE MORTGAGE ROUTE

You earn $1.  After taxes you have $0.65.  You send $.65 to your mortgage 
banker.  Next year you have to pay .09*.65 = $0.059 less interest.  But 
since that interest was tax deductible, you are really only saving 
(1-.35)*.059 = $0.038. So the net result is that next year you will have
made a return of .038/.65 = 5.85% return on your money.  (To be sure you
won't have made any money, but as Ben Franklin liked to say, "A penny saved
is a penny earned.")  15 years from now, your $.65 compounding at 5.85% will
be worth $1.66.  

403b ROUTE

You earn $1.  It goes into your 403b pretax.  After 15 years your $1 compounding
at 8% will be worth $3.30.  Then (say you are over 59.5 years old) you withdraw
it from your 403b and pay tax.  Tax =.35*3.3 = $1.16.  Net return
is $3.30 - 1.16 = $2.14.

As we can see, even if my numbers are off or this isn't your exact situation,
you are far more likely to come out ahead by investing in a 403b.  "Borrow
the money for your IRA -- even if you have it."  --Strategy #119 "Wealth Without
Risk" by Charles Givens.  You get the added bonus that the interest on the 
money you are borrowing is tax deductible.

|=======================================================================|
| Aaron Schindler                                Schindler@csa.lbl.gov  |
|                                                                       |
| There are two times in a man's life when he should not speculate:     |
| when he can't afford it, and when he can.        --Mark Twain         |
|=======================================================================|

p.s.  I'd be delighted if you found a flaw in my argument.  

Newsgroups: misc.invest