Personal Finance

Your Financial Planner: Don’t pay off your mortgage if you plan to enjoy retirement

By DAN DANFORD

Financial Planning Association of Greater Kansas City

Crunch the numbers before deciding whether to start making extra mortgage payments to pay off the loan early. You might be better off letting the loan ride.
Crunch the numbers before deciding whether to start making extra mortgage payments to pay off the loan early. You might be better off letting the loan ride. AP

The best fishing guide is one who takes you to a place you’d never find on your own, and where the big fish are biting. At day’s end, there is no doubt about value and no quibbling about the fee. You got what you wanted – great photos and maybe a sunburn – and you go home happy.

Unfortunately, financial decisions are more complicated.

First of all, objectives aren’t usually that distinct. Every person is different and financial goals range from buying a car to buying an island. The enormous diversity of goals for retirement creates a large part of the challenge of finding the right solutions.

While some are able to successfully navigate elements like their work-related 401(k), it’s important to note that 36 percent of Americans aren’t saving for retirement, according to the Financial Security Index study by Bankrate. This is something investment advisors are working to change. Part of this change means helping investors think about their financial health in new ways, using straightforward examples and information.

For example, what about your mortgage? Is this something you’ve thought about tackling – such as paying it off early and getting out from under what is most likely your biggest debt? Conventional wisdom says pay it off as early as possible. Perhaps you’ve seen stats that alarm you--such as the one from the Federal Reserve’s Survey of Consumer Finances--which says in 1989, 26.4 percent of households were retired with a mortgage. By 2007, that number jumped to 46.5 percent. However, is retiring while still in the grips of a mortgage really that bad?

No, and here’s why. Deliberate debt can be a tool toward building wealth. In the same way that financial leverage is used successfully by businesses, and taught in the nation’s top business schools, many investors can let their mortgage work for their futures.

A mainstream economic principle called opportunity cost helps explain. In simplest terms, extra payments made toward a mortgage might instead be used for other purposes. This includes enhancing your salary through additional training, starting a small business, acquiring rental property, building a savings plan for college, or investing for your retirement. Any of those decisions could be more profitable than paying off a low-rate mortgage. And, if they are carefully studied and done right, they can be low-risk decisions.

Let’s take a homeowner who wants to put an extra $500 a month toward the mortgage. If that $500 were invested in a retirement account for the life of the home loan (30 years is the average today), assuming 8% annual growth, this homeowner could have $734,000 in their retirement fund at the end of the 30 years.

You might reason that putting $500 towards the monthly mortgage means it’s paid off in half the time, and this means you could then start saving for retirement. Yes, you could, but to get to that same $734,000 mark, assuming the same 8% annual growth rate, you’d have to sock away $2,100 a month over the next 15 years. You would no longer have a monthly mortgage payment, but still, not many Americans today have those kinds of resources.

Today, take a moment to really consider what might be holding you back from putting more into your retirement. A 2013 Employee Benefit Research Institute survey found that 30 percent of respondents said job uncertainty and making ends meet keep them from investing toward their retirement. Just over 40 percent said their day-to-day costs keep them from considering a retirement strategy. Others may be facing emotions, habits, and attitudes toward money that genuinely prevent them from taking those next steps toward building their retirement.

In many ways, that template is normal and expected behavior. But many times, at the foundation of the struggle is a well-worn path toward conventional wisdom – and conventional wisdom is a lot like fishing off your own dock: easy and fun, but rarely rewarding.

My suggestion? Hire a qualified guide and seek out the sweet spots. No guarantees, but my guess is that you’ll be happier and more successful.

About Dan Danford and Family Investment Center:

Dan Danford serves as Founder/CEO of Family Investment Center, a full-service, commission-free investment advisory firm founded in 1998. Based in St. Joseph, Mo., Family Investment Center also serves clients in the Kansas City area and across the country, managing money for families and nonprofit clients.

The information provided in this article is provided for general information and educational purposes only, and is not intended to be and should not be relied upon as legal, accounting, tax, investment, or other professional advice or services. Because every individual’s situation is unique, you should consult a professional who can thoroughly review and analyze all aspects of your particular situation before making any decision or taking action.

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