pay off mortgage or retirement invest

19 years ago

Ok... so here's another reason why one shouldn't pay off their mortgage. I don't think I've seen this explained yet in this forum.

Tell me if I have my head straight on this:

My main reason for wanting to quickly pay down a mortgage is for one reason: To have no debt... being debt free is something I value. This alone is worth something that often isn't figured into financial planning. (Sort of like buying a great new car is financially unwise, yet has another sort of value. Granted, new cars are probably FAR more financially damaging than paying off a mortgage!)

Ok. Getting to the point...so here is my thinking and it's very simple.

Instead of paying off the mortgage, take that same money... the extra principal that you were putting into the mortgage...and put it into your 401k/403b.

By investing tax free, you are getting to keep money that would otherwise be taxed away. By doing this, it seems to me that even with a very, very conservative investment you would come out much better off instead of using the money to pay down a mortgage.

I understand that this money will be taxed in retirement...but I expect my income in old age to be rather modest and taxed at a lower rate.

So is using the money for retirement rather than mortgage payoff a true "no brainer"?... or are there other factors to consider?

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Comments (13)

randy427
19 years ago
IF you do indeed invest it, and, no, I don't mean the lottery, I see no reason to pay down the mortgage. Even if you've maxed out the IRA/401, etc, a balanced investment plan beats making extra payments.
The only exceptions I see is if you have a high interest 2nd mortgage or are being charged PMI due to a high percentage principle balance.

I'm no expert, but I saw a Holiday Inn last week.
Mo
19 years ago
Everyone's situation is different, and there's too many variables to say it's a no brainer. Just to name a few, your age, when you bought the house and how long you plan to stay in it, interest rates, when you want to retire, kids, college, marital status...

I don't like any kind of debt, even mortgage debt. I met with a financial planner who also doesn't like debt, and told me the key to retirement is to be debt free.

If one plans to stay in their house and have a mortgage for years after retirement, why take retirement savings to pay the mortgage and increase one's income at the same time?
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Using those figures, Quicken sez the loan originally would have ended 4/1/18 with a payment of $1235 (seems a month too soon, but whatever). Paying $100 extra on payments 1-24, then $200 extra on paments 25-36 (you say that $200 was "for the last year", so I'm thinking that is June 06 to May 07, Quicken sez the balance now should be 149,425 (pretty close to your 150,000). So the numbers aren't lining up exactly - depends partly on the gap between the closing and the first payment... but close enough. If you went back to the $1549 starting with the June payment, Quicken sez you'd end September 2017 with a last payment of $976, 7 1/2 months ahead of the original loan schedule. (=11,600 less in payments in exchange for that 6,000 prepaid to date. If you keep prepaying $200 as is your plan, Quicken sez your last payment will be in March 2016 for $1439, just over two years ahead of schedule. (= 39,000 in payments saved in exchange for the 25,000 you are prepaying over the life of the now roughly 13 year loan). Folks will argue you should keep the mortgage and invest that $200. There are ways to have it drafted and making it hard to get to. Most certainly you should consider investing instead if you have not maxed out your tax deferred retirement options. Unlike a "rainy day" fund, tht money would be pretty hard to get to. (And I say this as someone who did choose to prepay a 4.75% mortgage! Every situation is different.)
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Greetings rufus doofus, There are two rats that eat your cheese. There's an agency, the partner in many of your financial affairs, that asks you a question each year, and makes a statement. The question from the income tax people: "How much did you make, last year"? The statement: "We want part of it". You can keep only that part of your income that remains after you've paid that income tax to your financial partner, the income tax people. I wasn't sure from your message whether the interest on your mortgage is deductible, or not. If not, another reason not to pay off most or all of the amount owing. The other rat that eats your cheese? When you put money into a CD, you have that guarantee that you referred to - that the guys using your money will pay back every dollar that they got from you, in addition to the rent on the money. There's another guarantee that they never mention - they won't pay one dollar more than you gave them, either. BUT - the value of each one of those dollars shrank, every year since the early 30s. When you put your money into a bank account, a money market fund, a bond or a CD ... you're not keeping the full after-tax amount of interest that the borrowing agency's paying you. You must put part of the earnings with the amount invested, in order to maintain purchasing power of those dollars. Your actual earnings are what's left. And, don't forget ... the rats eat first. Good wishes for making increasingly wise use of your income and assets. ole joyful
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Mush, If I were to inherit $100,000. I'd invest almost all of it - maybe have a little fun with some of it, in a way that would be a good memorial to the one from whom I inherited. As I have no debt, currently. I won't go into debt for consumer stuff, daily issues of living: I wait till I can pay cash for stuff that I use up now. I prefer also to pay cash for a car, and get older cars, usually at $3,000. - 4,000. or less. The last one, costing $2,700., operated for me for over 8 years - cost me substantial amounts for repairs toward the end, more in total than I'd paid to buy it. But I drove it for over 110,000 miles. When I ask an auto salesperson whether s/he can give me 100,000 miles for about $6,000., they just look at me, sniff, and say, "No way!". Ian in B.C. Given your offer from your employers, one could scarcely turn it down. 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Weston, Power Corp. or subsidiaries, e.g. Investors' Group, GreatWest Life, or other major companies, I'm not worried that they may go out of business. Tobacco and booze, if having them doesn't bother you for moral reasons. I suggest that you check David Stanley's articles in "Canadian MoneySaver" on the Canadian equivalent of picking the "Dogs of the Dow", which he has written about for the past ten years, and back-tested for a number of years before that, usually reporting in the July/August issue what he (supposedly) bought at the end of May, as that was the time at which the TSE 35 was set up, several years ago. Then it was the largest 60 on the TSE, now the largest 40. He ranks those 40 stocks of the largest Canadian companies in order of the rate of dividend that they pay, from the highest down. Then he picks the 10 that pay the highest rate of dividend and buys an equal dollar amount of each. Despite some loss years, he's made a nice rate of return in about 7 or 8 of those 10 years, usually 10% or more total, comprised of dividends of about 3% and current capital gain ... or better. One year he was up 40%. There's a sub-set where one buys the 5 paying the highest dividend rate, and another that omits the one paying the highest dividend (as a company possibly in trouble, and possibly about to cut the dividend rate), and takes a double load of the one paying the second highest rate of dividend. In a number of years, this choice has turned out the best performance. I don't mind borrowing some to invest in such companies: if I use stocks worth $10,000. as collateral, the bank will lend me no more than $5,000. If I borrow the full $5,000. and the value of the collateral drops, say 20%, to $8,000., I get a call from the bank telling me that they want $2,000. more collateral ... or $1,000. cash to reduce the loan amount ... *today* (or at the latest, tomorrow). 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bonelady
19 years ago
I agree, Mona. I am planing to complete my mortgage about 2 years before I retire. I wil then use the $2,000 a month to fatten up my ready cash reserves.
dave_donhoff
19 years ago
Definitely agreed that HOW to invest is certainly not a "no brainer."

However, THAT it is financially wiser to invest more, earlier, is indeed a no brainer.

LEAVE as much of the mortgage balance ALONE as you can. Pay off the tax-deferrable debt AFTER you have accumulated enough of a lump sum to do so, all in one final payment.

Frittering away your early investment dollars by niggling away your tax-preferred mortgage leverage is tantamount to driving with each foot firmly stamping on the gas & brake pedals simultaneously... not the best & brightest way to get to your destination while preserving the value of your vehicle.

By all means eliminate your non-advantaged consumer debt as immediately as possible, and stay out of it as best you can.

Comfortably carrying your tax-preferred mortgage balance WHILE sending all discretionary money straight into tax-deferred or tax-free retirement investments is NOT normally intuitive... but is absolutely the more certain way to arrive at a safer, more secure retirement.

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner
liz_h
19 years ago
Don't forget that earnings during your retirement years can also trigger taxation of your Social Security benefits. Thanks to our wonderful Congress not indexing the allowed income to inflation, the actual value of the $$'s we can earn before triggering that extra tax is decreasing every year.

I can't tell you what those amounts are, but it should be easy enough to find out. I do know that I resent having any of my social security taxed - in effect, the years that we earn more than allowed, our last earnings are taxed double.
Mo
19 years ago
If you decide to see a financial planner, avoid the ones who spam internet message boards with their services.
behaviorkelton
Original Author
19 years ago
I'm assuming you are not talking about Mr. Donhoff. I enjoy his input.
kaismom
19 years ago
Behaviorskelton,

I don't think it matters how you do it. If you can meet your retirement goals at retirement, then you have achieved your objective.

If your objective is to have as much money as you can at retirement or at anytime, then you may need to maximize every potential there is. If your goal is to have enough at retirement without spending too much time at it, then follow that path.

If paying off your house gives you a peace of mind, then it is pricelss! Go for it.
zone_8grandma
19 years ago
Don't forget that earnings during your retirement years can also trigger taxation of your Social Security benefits

That's something to keep in mind. I'm retired (but not working at all). Here's what the letter from SS said to me, "In the year you reach full retirement age, $1 in benefits will be deducted for each $3 you earn above the annual limit ($33,240 in 2006) until the month you reach full retirement age. After that your benefits will not be reduced no matter how much you earn. (emphasis was in the letter)

In the years before you reach full retirement age, $1 in benefits will be deducted for each $2 you earn above the limit ($12,470 in 2006).

I'm drawing SS even thgough I'm not yet full retirement age (in my case that would be 65), so I could earn a whopping $12,470 before my benefit would be deducted. Note that "full retirement age" depends on when you were born....
C Marlin
19 years ago
Is SS reduced only by earned income?
And after full retirement age there is no limit on income, earned or otherwise?
I'm not there yet, but want to plan ahead.
zone_8grandma
19 years ago
Is SS reduced only by earned income? That's correct

And after full retirement age there is no limit on income, earned or otherwise? That's how I interpreted the letter sent to me from the SSA

I'm not there yet, but want to plan ahead.
Smart, be sure to find out what YOUR "full retirement age" will be. For example, if you were born in 1960 or later, your full retirement age is 67. Not many people I know want to work full time that long.

Here is a link that might be useful: Plan Your Retirement
ladynimue
19 years ago
Only pay off a mortgage early if all your other investments are met - max IRA, max 401K (or whatever retirement accounts you're allowed).

And never pay it off early unless you are w/i 15 years of retirement (for maximum benefit).
jakkom
19 years ago
>>If you decide to see a financial planner, avoid the ones who spam internet message boards with their services.Mona could not be speaking of Dave Donhoff, whose input I also enjoy and respect immensely. Dave is NOT a financial planner, nor does he pass himself off as one. He is, however, very knowledgeable in his field, which is mortgages and equity - how people handle their debt, in other words.

The only true financial planners are Certified Financial Planners (CFP), who specialize in estate and financial planning, either through annual fees (percentage of investible portfolio) or hourly. They are registered and licensed. No stock broker or any kind of financial advisor who is not a CFP, has any true fiduciary responsibility when handling your money. Note I said handling, not advising. You can take advice from anyone, even me or Dave. But you don't want anybody EXCEPT someone with fiduciary (e.g., legal) responsibility, to be handling your money.

Many people get confused and think financial planners are those guys who give "free" seminars and then try to railroad you into buying insurance you don't need or wild'n'wacky hedge funds. But people who are the "real deal" in the CFP world don't operate that way. It isn't worth their while - most of them have minimums of at least $250K for a client's portfolio. Those are liquid funds for investing, not your house equity or stock options. And many go even higher, to $1M+ needed in liquidity before you can become a client.

pay off mortgage or retirement invest

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