Q: Thank you for the information on your radio show. This week you spoke with a gentleman asking about paying off the mortgage on a second home – you spoke of a 1/3 rule. We have been grappling with a similar question. As a result of our own savings as well as a recent inheritance, our financial assets are almost $900k taxable, $550k retirement based. We are both 57 years old and I am self employed having lost my job of 24 years almost 4 years ago. Current income is about $125k per year. Two children educated and married, one a senior in college looking at graduate school. Other than mortgage on primary residence, we and our children are debt free. Current mortgage balance is about $75k at 4.00%.
My presumption is that I will need between $2m and $2.5m in financial assets (other than house and social security) to retire. We also own an inherited condominium in south Florida we intend to hold.
My question relates to my mortgage – my view is that I have three possible strategies:
1) Pay it off immediately with cash (less than 1/3 of non-tax preferred savings) and realize a guaranteed 4% return given the question of a stock market bubble.
2) Pay it off using an existing home equity line at prime – .20 (currently 3.05%) and wait for rates to go up to pay off (reducing interest expense but still taking stock market risk).
3) Hold onto current mortgage given reasonable rate locked in for about 5 more years before adjusting.
We are currently invested about 60/40 mostly through various funds with about 25% currently in cash awaiting market correction.
Any thoughts? Also, what is your firm’s fee structure? Currently we are on the Schwab platform.
A: This is a great question and as Wes alluded to on the radio, there is no absolute perfect answer as you reference in your question below.
We typically will suggest clients to stay leveraged on their house if A) they are comfortable with this risk, B) they can fund the mortgage with their existing cash flow and C) will have the ability to have the mortgage paid off by the time they get to retirement. The happiest retirees we work with have no mortgage. There is an argument to be made that borrowing at a net (after tax deduction for interest) cost of less than what you can earn on other investments would be worth maintaining in retirement, but we believe that sometimes the best financial decision is not the most emotionally correct decision.
Our fee structure can be found on our website at https://www.yourwealth.com/approach-3/fee-schedule.html
Our clients maintain accounts at third part custodians such as Schwab and Fidelity and hire us to make the investment decisions on their behalf on those accounts.