Debt is an emotional issue and paying off your house falls into that emotional space. It is understandable for people to think that is a great idea to pay off your house so that you don’t have a house payment in retirement. The problem with that thinking is that you can’t eat your house.
This may sound funny to you but if you run into a financial situation in your retirement and your house is paid off but you have not saved enough money to navigate a crisis in retirement, you can end up with no options.
As we covered in a previous article, according to the Rule of 72, money invested with a 12% return doubles every 6 years. The S & P 500 total return has averaged 12.72% a year for the last 30 years.
Let’s assume your mortgage is at 5% and that you are in the 28% tax bracket. If you apply additional funds to your mortgage, you would be getting a 3.6% return on you investment of paying down your mortgage. To figure this out you multiply 5 x 28%(.28) = 1.4. You then subtract 1.4 from 5 and the total return on your money is 3.6%
Now if you would take that same money and invest it in your retirement account, the IRS would give you a tax refund of 28% (assuming you were in the 28% tax bracket). So if you put $1000 into your retirement account, at tax time Uncle Sam would give you a $280 tax refund ($1000 x .28 = $280). Add the market return of 12% and you would be getting a 40% return on your money. If you contributed $5500 per year for 15 years and earned 12% you would have accumulated over $231,000. If you contributed that amount over 30 years with the same returns, the total of the account would be $1.617,865.
If you chose to put the $5500 on a $200,000 mortgage to pay it off more quickly, you would be out of debt in 15 years and 9 months. You would owe $0 on your house and have $0 in your savings. If you invested that same money into your IRA you would have $257,265. If you were at retirement age at that time you could pay off the balance of your mortgage ($131, 120) and have $126,145 saved. In addition, remember that Uncle Sam is giving you a Tax refund on any money you have contributed to your IRA.
The choices are simple. Pay your debt with emotion or handle your finances with an educated approach and ensure you will be comfortable in your retirement.
This information and other simple concepts can enable you to be financially free. Call me at (610)657-1708 for more information about this subject or other financial needs. All consultations and plans are complimentary. You can also email me at dheydt@primerica.com.
Upcoming Events: Financial Wellness Seminar. The event is scheduled for Monday July 27th from 6:30pm until 8pm. There will be a question and answer period at the end of the presentation. The discussion will include the proper way to protect your family, plan for your children’s education and your retirement, the best approaches to paying off your mortgage, and the best practices for minimizing your taxes. Refreshments will be served. This event is free to the public. Reservations are required as space is limited. For more information, call Diane Heydt @ (610)657-1708.
