Paying house off vs inflation

[blackcard]

Thanks expat, we are still looking at other stock and bond investment options. That is one of the reasons I visit the boards. I read a lot, on the old MSN Market Talk and The Start Investing threads.

[ameiko]

Ah, the eternal arguement.

Personally, I think to do what is best for you. Yes, you may miss out on 10-15% returns (after all, we are coming off a huge dip but then again we are almost back) but you could also avoid another deep bear market.

No one knows, and this includes those who advocate investing the money to get those 10% returns that may never return. We can look at the past and project but the past isn't the future. America is losing ground against India and China. Then again, we thought Japan was gonna take over the world and look where they are now.

Balance I think is key. Unless you are going to start your own business or invest heavily in real estate, equities are probably your best investment even as one admits that no one knows going foward what the returns will be. If you want to shift some of that cash to pay down the house, I say go for it. They money you free up from the a mortgage free house you can always invest later.

As Phil showed, if we do get those good returns again, you lost out. Would you be content to just do ok rather than shoot for (but possibly miss) the stars? It's your call.

Disclosure: I invest 1/3 of my gross into a mix of retirement vehicles and brokerage accounts. With some extra, I pay down my house as if it's a 10 year note. I am a well paid single person though: not everyone can do this.

[SVT]

Feb 19, 2011 22:05:35 GMT -5 blackcard said:

Thanks for your input Phil.
We just feel the need to be "anchored" with a paid off home, a lot of savings, and fully funded retirement plans,

That's fine. You're taking less/no risk for a more sure thing. Something that you and your husband could at least consider is putting half of the money to prepaying the mortgage and half to investing in equities.

Feb 19, 2011 22:05:35 GMT -5 blackcard said:

before moving our hard earned money into other investments.

Just remember, time is an important element with investing.

[blackcard]

<<consider putting half of the money to prepaying the mortgage and half to investing>>

SVT that is exactly what we have been doing. I mentioned it in my earlier post.

[SVT]

Feb 19, 2011 23:52:53 GMT -5 blackcard said:

<<consider putting half of the money to prepaying the mortgage and half to investing>>

SVT that is exactly what we have been doing. I mentioned it in my earlier post.

Whoops, sorry. I missed it.

[blackcard]

Dats OK Karma 4 U

[runewell]

At age 57, I would probably favor the mortgage payoff. I don't have high hopes for stocks in the coming years because of all the financial difficulties our country and states are having. Eventually they are going to need more money to fund things, and when that comes out of our pockets there is going to be less profit from companies. I'm still fairly invested in the stock market, but I don't think there is anything unreasonable about taking a guaranteed rate of return. Assuming you already have a ton of money in the stock market, paying off your mortgage is like having a bond - a guaranteed return and maybe a diversification component.

[schildi]

Feb 19, 2011 22:06:12 GMT -5 SVT said:

Feb 19, 2011 21:25:01 GMT -5 blackcard said:

You are calculating a future hypothetical 10% return. We are calculating real property, with real savings and a real physical asset. Past performance does not guarentee future returns.I would rather have a bird in the hand.
Thanks Phil but we will pass on your plan, for now.

When I read that, I think 2 things:

- The last 30 year return for the S&P 500 was 10.79%, reinvesting dividends. The next 30 year period could be 10.02%, or 11%, or 9.25%.

SVT, it could also be 5%, or 2%, or -1%. Most "experts" agree that we should lower expectations for the next 20 or 30 year period because of global economical shifts. The question is by how much.
As I said before, why not divide any extra money 50/50 between house pre-payments and after tax stock investments after maxing the retirement accounts. I am assuming the OP's retirement money is mainly invested in the market? Then, some diversification, incl. some mortgage repayment acceleration, would be a good thing imo. It does not all have to be black or white, one does not exclude the other.

[Small Biz Owner]

From a business standpoint, cash flow is more important to me than debt pre-payment. But as debt is eliminated my discretionary cash flow also improves. Seems like something of a two edged sword at times.

[Tiny]

Another way to look at the prepay/don't prepay mortgage delimna is to look out at your horizon - 10 years in the case of the OP.
10 years of $300 monthly prepayments is 36K.

How does the house payment fit into the finances you guesstimate you will have in 10 years:
What does the future look like if you have $36K (or more due to interest (like from a CD) or dividends or increase in stock value) more "cash" and still have to make the "mortgage" payment?
What does the futur look like if you don't have the additional money but no mortgage payment? Don't forget you still need to pay Insurance and Property Taxes so you won't really have $800 (from the Opening post) flowing back into your budget to spend on other stuff.
Another variable is do you see living in the house after it's paid off... if not then it might be better to have the 36K as "cash/investments" so you have something to work with if you can't sell the house (when you need to move or need to use the equity).

[lurkyloo]

Wow, not a lot of consideration for that whole "personal finance is personal" mantra on this board.

Past performance is no guarantee of future returns, that's another classic that doesn't get a lot of consideration...

I agree that you need some exposure to stocks in order to hopefully build wealth and keep pace with inflation. But there were an awful lot of people fairly close to retirement that watched a lot of paper/electronic wealth melt away in a matter of weeks in 2008, and it's still not all back. Moreover, I'm a bit worried about how quickly the market is bouncing back, I think it's overvalued at the moment. Although it may just be a reflection of the dollar's weakness. I think the US has gone through its frenetic growth period and is settling down into a steady but slower rate--excessive growth isn't perpetually sustainable. (Yes, I realize that one can invest in China, etc., and have some exposure to international and emerging markets).

Anyway, my point is that paying principle down on a mortgage is a form of diversification. Also, that I'm in the cover your bases, then whatever helps you sleep better at night camp. In Susanna's case, it does come down to "are my investments/pension going to grow at a faster rate than my mortgage?" I don't think that's a sure bet either way over a 10-year period. I also think that costs are likely to spike a bit in very early retirement, as suddenly you have lots of time and a pent-up list of things you want to do or buy. So higher cash flow will be particularly important then...and you can take that as an argument for whatever you want

[SVT]

Feb 20, 2011 12:48:29 GMT -5 schildi said:

Feb 19, 2011 22:06:12 GMT -5 SVT said:

When I read that, I think 2 things:

- The last 30 year return for the S&P 500 was 10.79%, reinvesting dividends. The next 30 year period could be 10.02%, or 11%, or 9.25%.

SVT, it could also be 5%, or 2%, or -1%.

That is VERY unlikely, though.

[Deleted]

Nice post Lurky loo! <Exhalts>

It would be better if the OP went into some detail about her situation; e.g. NW, investment classes and perhaps most important, is there a reliable pension in the retirement mix?

I do agree that based on past history that over the long haul the stock market will do well. But the devil is in the details isn't it?

When one is younger and has a full time job that handles all the payments and is saving, the stock market gyrations are uncomfortable but not devastating. But relying on investment income only and seeing both your stock tank and dividends cuts is heart attack material unless you have BIG cash reserves.

DH and I are just about back where we stood in June 2008. But our NW includes a few more 401k contributions and stock dividend reinvestments since we didn't need the income. This is good considering we've had to take about $600k write down in real estate values.

So after being a big fan of holding on to those cheap <6% mortgages we are probably going to pay off the mortgage we have on the house we'll be moving to in 18 months when DH retires. It's at 5 3/8ths but when you add in how much more we need to earn with taxable investment income...well it's better to err on the side of being conservative.

[Deleted]

We have been retired for 15 years, and both of us are now 66. We went thru 2 downturns with the market, and believe me, it's not fun!!! Neither is it fun to get the phone call from your financial advisor telling you that your current yearly withdrawal rate from investments is now over 7% of your net worth, and your spending must be cut drastically. We now take between 2-3% of our net worth as income.

Just pray tell, where do you cut spending in retirement if you've committed to paying a mortgage, car payments and other credit card bills???

We completely avoided this last debacle by not being invested in the stock market. We sleep well at night knowing that we have no mortgage or any type of debt. If we can't pay cash for something, we just don't buy it.

Youngsters like SVT have years of income producing ahead of them, we who are either now retired or close to it....not so much.

One size does not fit all...not any more, and maybe it never did.

[gooddecisions]

I think prepaying a 5% mortgage when you are young is a horrible idea. I recall that situation someone posted on the old boads a few years ago. She paid off her mortgage when she was in her 30s and then had a horrible health crises in her 50s. She lost her job as a result which meant she lost her health insurance.

While she did have a lien free house, she had no income to feed herself, pay her remaining bills at her house or pay her hospital bills. Without a job, the bank wouldn't finance a new loan and she burned through her savings in less than a year. Another poster is also learning how limited her options are when the bulk of her net worth is tied up in her house.

If she had invested that money instead of prepaying her mortgage, she would have been able to use that money to continue to pay her bills and eat. You never know what curve ball life will throw at you.

As someone else stated, there is no way you would sign up for a guaranteed 5% CD that made it nearly impossible for you to access quickly in an emergency.

[gooddecisions]

I don't think anybody is recommending keeping a mortgage after retirement. The posters in these scenarios are in their 20s and have a lot of income producing years ahead of them.

[Gardening Grandma]

Feb 20, 2011 16:40:50 GMT -5 gooddecisions said:

I don't think anybody is recommending keeping a mortgage after retirement. The posters in these scenarios are in their 20s and have a lot of income producing years ahead of them.

Exactly. The OP is 55 and looking to retire in 9 years. I think that prepaying her mortgage so it is paid off at retirement is an excellent idea.

[debtheaven]

Here's another vote for getting the mortgage paid off before you retire. It would be a great retirement present for yourself!

I don't think I would feel relaxed in retirement if I still had a mortgage. (I know some people here generate enough from investments for that not to be an issue, but I'm not sure Southern is one of them.)

We never paid ours off early, just over time. But 15Y mortgages are still common here.

ETA: Plus, you could probably retire earlier than 66 with a paid-off mortgage, IF you wanted to, of course. I know that personally I want to retire before 66, but perhaps you don't. It's always good to have the option though.

[debtheaven]

Hi Gardening Grandma!

I think the OP is 57 (57 + 9 = 66). I admire her for wanting to work till 66! I'm only 51 and I don't LOL.

[Deleted]

I am indeed 57. I need to work until I am at least 65 so that Medicare comes into play. I think with sick leave I could retire then with 25 years service (50% pension). But what's another year in the great scheme of things? That would take me to full SS age if it's still around. I'm not sure I can pay the mortgage at 50% of my salary without starting withdrawals from my retirement accounts. I honestly want to leave them alone until they make me.

However, a big factor that I don't know how will play out is my DH. He is ten years older and already retired. He has major heart problems. He's good about everything except smoking. (I don't smoke.) If he is healthy when I can retire at 65, I might do it just to be able to spend time together. We talk about moving back out west (where he is from). Without him, I am tied firmly to the South. But my sister and her family also live out west.

Thyme, get the guest room ready.

[debtheaven]

Southern I thought you have an older DH, but I was not sure. I was concerned I was confusing you with Athena but now I realize you both do.

But, in that case, another year could be significant. I certainly hope it won't be, but again, I'd rather err on the side of caution, and my priority would be the ability to retire as early as I could and time spent together.

To me, all the more reason for paying that mortgage off before you retire.

Best of luck, whatever you decide!

ETA: Is it feasible for you to work a bit less if you plan to continue to work till 65 or 66?

[Peace Of Mind]

I'm with paying off the mortgage too.

Great post Lurkyloo!! You said how I feel about it perfectly.

Blackcard - I think the way you are doing it is perfect since you are still able to save while paying off your mortgage. You are so young that you will have plenty of time to stash a small fortune before you retire along with your current savings. And if a worse case scenario were to occur you won't have to worry about your home and just concentrate on food and utilities, etc.

[Deleted]

No, debtheaven . . . teaching is all or nothing. I'll see how the last few years play out beforehand. If he is healthy when I am 65, he should still be when I am 66. I can't retire earlier (insurance reasons). I am more worried that he won't make it to either point. But I take great care of him.

I'm going to go with paying it off. It will give us great leverage if we try to sell (we will be more worried about what houses sell rather than what we owe). If I am alone at 66, it will give me great incentive to stay in this house forever. At that point, everything will be pretty much be updated. I might have one more roof replacement at age 75, but that should do it.

I think our taxes and insurance will be less than $200 a month. So, yes, that would make housing low in my old age.

[debtheaven]

Here once you are "tenured" (I know in HS or MS it's not called tenure but it's the same difference here) you can go to PT, that's why I asked.

I'm going to go with paying it off.

Whatever happens, I think you are highly unlikely to ever regret that decision.

Again, best of luck to both of you!

[schildi]

Feb 20, 2011 16:38:53 GMT -5 gooddecisions said:

I think prepaying a 5% mortgage when you are young is a horrible idea. I recall that situation someone posted on the old boads a few years ago. She paid off her mortgage when she was in her 30s and then had a horrible health crises in her 50s. She lost her job as a result which meant she lost her health insurance.

While she did have a lien free house, she had no income to feed herself, pay her remaining bills at her house or pay her hospital bills. Without a job, the bank wouldn't finance a new loan and she burned through her savings in less than a year. Another poster is also learning how limited her options are when the bulk of her net worth is tied up in her house.

If she had invested that money instead of prepaying her mortgage, she would have been able to use that money to continue to pay her bills and eat. You never know what curve ball life will throw at you.

As someone else stated, there is no way you would sign up for a guaranteed 5% CD that made it nearly impossible for you to access quickly in an emergency.

I never read that story on the old boards, but if she paid off her house in her 30s, and then had such a horrible crisis in her 50s, what happened in between? Did she just spend all the (previous) mortgage payment for decades without saving?
Yes, that would be a mistake, as would be pre-paying a mortgage without any other savings. But why does it always have to be the extreme? More than one thing can be done in parallel, no?

[blackcard]

That gooddecisions story does not make sense to me either schildi.
If you needed cash, you could sell the house. No different than selling your investments. You either have enough net worth, or you don't.

[blackcard]

A second hole in that story. There is also something known as a reverse mortage.

[gooddecisions]

She couldn't get a reverse mortgage because she was too young. Just about everyone on the board told her to sell the house, but there were reasons (of course) she couldn't or wouldn't.

[bobbysgirl]

Feb 19, 2011 19:12:10 GMT -5 Savoir Faire-Demogague in NJ said:

You gain nothing by pre-paying your mortgage. You are taking liquidity and tying it up in a fixed asset that you cannot get access to it.

If you are not maxing out your retirement savings plan put the money toward that. If you are already maxing out, invest the cash into a stock index fund like an S&P500 Index for example.

I think this was good advice 4 years ago. But things have changed and security is important more so than hustling money. I'd go for a paid off mortgage. Just MHO.

[formerexpat]

If you needed cash, you could sell the house. No different than selling your investments. You either have enough net worth, or you don't.

Just to name a couple of differences, I'd say liquidity and transaction costs.

There is also something known as a reverse mortage.

Man, talk about transaction costs. [/size]