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Originally Posted by SLO_Z28
Youd be surprised how cheap you can live if motivated, all my bills combined are $1300/mo. Even my dad lives quite well off $1000/mo social security income.
Anyways on to some planning, I can retire at 59 with 90% of my pension for the rest of my life(government pension, costs 10% of my salary), should I buy a house now and amortize the hell out of the loan by paying double the payment on a 15 year loan then put the entirety of my house payment into a 457(b), or just make regular payments on the house and pay the excess into my 457 thus reducing my tax burden. Basically im asking is it better to pay down a debt at 3% and gain equity and defer investing for 7 years(how long it should take to pay off a house), or invest for the entirety of those 15 years at the 457 maximum? If I invest the full amount into the 457 I can lower my federal tax rate to 15% (I have a 48,000 salary that when reduced to 43,000 by the 457 contributions drops me to a 15% tax bracket from the 25% im at now), so I would guess that the tax deferral would be worth it?
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You have to answer that question by analyzing risk vs. return. Paying off your loan early is a guaranteed no risk investment which produces a rate of return equal to the interest rate you are paying. You could also invest that money elsewhere such as the stock market in anticipation of getting a higher return (7% to 10%). If you invest in the stock market instead of paying the loan off early, you are taking on more risk in anticipation of a higher return. So it becomes a personal descision on whether you are willing to take on more risk to get a higher return. The risk is higher in the stock market because it is not a guaranteed return. The market may indeed go up 7% to 10% a year over the next 15 years, but there is a chance it will not go up at all, decline or even go up more than 7% to 10% a year.
You can also look at it and rate risk on a scale of 1 to 10 where 1 is a no risk investment with a low rate of return where 10 is a high risk that has the potential for high return, but also the change of loss. Paying off your loan would rate 1 or 2 whereas investing the money in the stock market maybe a 5? Where is your comfort level on the risk vs. return scale?
It is similar to asking should I invest in government bonds where I have a safe rate of return or invest in corporate bonds where the risk is higher, but the potential return is also higher. How safe do you want to be?