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Retire Your Mortgage Before You Do? Not Necessarily A Slam Dunk

Retire Your Mortgage Before You Do? Not Necessarily a Slam Dunk

There’s a common myth that you should always have your mortgage paid off before you retire. While paying off your mortgage by the time you quit working can be beneficial, it’s definitely not a prerequisite for retirement. We believe that the question of whether or not to pay off your mortgage before you retire is more a question of financial independence and opportunity cost.

Your ability to retire should be based on whether you have enough assets, income sources, and the right investment strategy to meet your lifestyle goals. As such, whether or not you have a mortgage becomes a secondary consideration.

Take a situation where an individual or family doesn’t have a mortgage but also has little else in terms of assets or income sources to support their lifestyle in retirement. No, they won’t have the monthly expense of a mortgage payment to worry about. However, they also may not have the resources to live the way they were hoping for in retirement.

The other factor to consider regarding a mortgage is opportunity cost. In today’s low-interest-rate environment, a 30-year fixed-rate mortgages can still be obtained for less than 4.5 percent as of October 2014 (www.bankrate.com). You need to evaluate the tradeoff here of making extra payments on your mortgage to pay it down sooner versus taking the money that would have gone toward extra mortgage payments and instead investing it in a globally diversified portfolio.

When you consider the interest-rate deduction you receive on your mortgage interest, the “hurdle rate” for the return on a globally diversified portfolio (what you’d need to make to beat the “return” of your mortgage rate and interest deduction) is really closer to 3-3.75 percent. Most long-term investors who have at least a balanced portfolio of stocks and bonds have a high probability of being able to achieve such a hurdle over a long time horizon of at least 10 years.

Let’s look at an example. Assume two married couples each take out a $500,000 mortgage on a new home. The terms of both the mortgages are 30 years, fixed at 4.5%. Both couples’ monthly mortgage payments are $2,533. Couple A decides to pay down their mortgage faster by making an extra mortgage payment a year. By doing so, they will pay off their mortgage nearly four and a half years early. Once the mortgage is paid off, they invest the $2,533 former payment each month in a globally diversified mutual fund invested in 50% stocks and 50% bonds with an assumed average annual rate of return of 6%. At the end of the original 30-year mortgage term, the mutual fund account value has grown to $143,482.

Couple B didn’t make an extra mortgage payment each year. Instead, they invested the same $2,533 in the same globally diversified mutual fund once a year for 30 years. Their mutual fund account has a value of $200,254 at the time Couple B’s mortgage is paid off. Couple B has $56,772 more in funds than Couple A and both are without mortgages at the end of 30 years. By investing the extra $2,533 annually instead of putting it toward early mortgage payoff, Couple B appears to be in a better place for retirement.*

In summary, being mortgage-free is not a bad thing. In fact, it can bring great peace of mind to those who no longer have one. However, the myth that a mortgage needs to be paid off before retirement is one that should be debunked. Factors such as financial independence and opportunity cost should also be evaluated before you decide to pay off your mortgage early.

*This example is not intended to show the returns that any Regent client achieved or could achieve in the future.  It is a hypothetical example intended to show the difference in timing of investing.  Couple A invests $2,533 a month for 50 months after they pay off their mortgage, while Couple B invests $2,533 annually for the term of the their mortgage.

 

Important Disclosure Information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested.  Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable. Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request. This article is not a substitute for personalized advice from RegentAtlantic.  This information is current only as of the date on which it was sent.  The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic.  Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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