No Mortgage No Problem
Paying off your mortgage as part of your retirement plan.
To promote good health and cordial relations, there are generally two topics to avoid when meeting strangers: politics and religion. Within the financial planning circles, you can also add the topic of this newsletter to the mix. Nothing seems to divide the money gurus more than whether to pay off a mortgage early.
This seems to be coming up more and more now that short-term T-Bills are yielding north of 5%, nearly double the average 15-year mortgage rate of just 2 years ago*. Even before this was the case, many would scoff at the idea of making accelerated mortgage payments because this would take away cash flow that could otherwise be working for you in the market.
Ignoring the oranges to onions comparison, their arguments focus on the unilateral goal of leverage optimization. Before I argue the other side, I will confirm the truth that you would benefit from leveraging borrowed money with a return on investment (ROI) greater than the interest paid to the lender.
*Source: FRED Economic Data; https://fred.stlouisfed.org/series/MORTGAGE30US
But, for this to always be true both the borrowed money and the invested money would need to share an amortization schedule. Furthermore, the invested money would need to be as liquid, or more liquid than the debt owed. Otherwise, this all boils down to a person’s preference for simplicity and cash flow conservation.
Debt does not equal bad nor does it equal good. Debt simply equals risk and risk is uncertain. The idea behind borrowing is to advance your future cash flows (income) into a present value sum today. Your obligation to the debt will not go away outside of the most extreme measures, such as bankruptcy or death. Even then some debts are not released, being immortally bound to your existence. Your cash flows, on the other hand, are usually not as guaranteed.
Some are fortunate to have more stable income sources than others and can therefore responsibly sustain a higher level of debt. One of the many responsibilities of a Chief Financial Officer is to find the optimal level of debt for his or her organization given the consistency of cash flows. A more stable cash flow could permit a company to use a greater degree of leverage, promoting an enhanced ROI to shareholders. I sometimes run into this argument to support the indefinite use for individuals, but corporations don’t retire or risk premature death or disability. At least, not if they’re properly run.
Individuals should not manage their balance sheets like a corporation or government which both enjoy a perpetual existence. Unless you’re Tom Cruise, most people need to plan for their own productive obsolescence. Outside of the fortunate few who manage to lock-in a certain future income, a dubious state of existence, paying off mortgage debt prior to the expiration of your productive years is sound financial planning.
This is not to suggest that people who do not do this are making a bad choice. They are just opting for more risk. After all, the uncertainty of risk could potentially lead to more reward. Some people like a Red Bull in the morning while us normal people like black coffee with eggs and bacon. It’s just a matter of preference and there is no absolute right or wrong. If pressed for my firm opinion, however, there is no substitute for the feeling of debt free financial security. Not many who pay off the mortgage go racing back to the bank for another to leverage in the market. In fact, its against regulation for an advisor to recommend this. That sure makes you wonder, doesn’t it.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Mortgage services are not available through LPL Financial.
Securities offered through LPL Financial LLC. Member FINRA/SIPC. Advisory Services offered by National Wealth Management Group LLC, an SEC Registered Investment Advisory and separate entity from LPL Financial LLC.