Kenny Rogers’ iconic song “The Gambler” offers some good advice for life. The lyrics make me think of a common question we receive about paying off a mortgage. When you retire, it is nice not having extra bills, but sometimes the decision isn’t so clear. Looking strictly at the numbers, if you are paying interest at 4% but have a portfolio invested in a way to earn 6% on average after expenses, you would be better off keeping funds invested and not paying off a mortgage. The emotions and the relief of being “debt free” are the bigger driver than rationally looking at the numbers.
Let’s look at a hypothetical situation where you have a $250,000 30 year fixed mortgage at 4%. Your monthly payment would be $1,193.54 (excluding taxes). If you had an investment account with $400,000, not having a mortgage could be tempting. An alternative could be using the investment account to pay the mortgage. If you had a 4% withdrawal rate from your account, you would have $1,333.33 per month to help pay while potentially leaving your portfolio intact over time. In fact, if you were able to earn 6% on average, after ten years your portfolio will have grown to roughly $488,000 while the mortgage balance went down to roughly $200,000. After twenty years, the investment account could potentially be near $600,000 when the remaining mortgage is down to roughly $125,000. To me those would be better points to consider paying off the mortgage if you are becoming antsy. “Every gambler knows the secret to surviving is knowing what to throw away and knowing what to keep,” sang Kenny. I know the lure of the sense of freedom not having a mortgage can bring is much more of a deciding factor than the numbers above, but I think it is best to have different options presented so you can decide what is best for you and your family.