Wednesday, September 28, 2011

Why It Makes Sense Not to Pay Off Your Mortgage---Even If You are about to Retire

Shelly K. Schwartz at CNBC writes:

The countdown to retirement is on for millions of baby boomers and, thanks to a lifetime of diligent saving, some have amassed enough wealth to pay off their mortgages and live debt free.

Conventional wisdom says it's best to pay off your mortgage before retirement, but given the low-interest rate environment, and the need to preserve cash in an unstable economy, that strategy is no longer absolute.

“Paying off your house is one goal, but having a zero-mortgage liability is not the answer for everyone,” says Jennie Fierstein, a certified financial planner (CFP) in Westborough, Mass. “If you don’t have a stream of resources to replenish it, you might do yourself a disservice by taking money out of the bank to pay off your mortgage.”
There's a lot of wisdom in these words, especially given the price inflation environment we are headed into.

If you have a long-term mortgage with a fixed rate at current levels, at some point the payments will become insignificant relative to your income (even retirement income that is adjusted for inflation).

If you have, say, $100,000 that you have been considering using to pay off your mortgage, it may be much more prudent to put 25% in oils stocks, 25% in silver coins and 50% in nickels. I'm not kidding about the nickels. The current nickel metal content is 75% copper and 25% nickel. The melt value of a nickel is more than 5 cents. If price inflation heats up the way, I expect the melt value to really climb. Nickels will disappear from circulation and climb in value, just like silver coins have done. (A current silver coin is worth $2.28)

But what's great about the nickel as an investment is that if I am wrong and there is no great inflation, your investment stays in tact and you can just spend the nickels (or use it to payoff your mortgage).

Here's more from Schwartz on why paying off your mortgage in full is likely a bad idea:
CFP Fierstein agrees, noting most retirees are advised to withdraw no more than 4 percent from their nest egg each year to ensure they won’t outlive their income.

Thus, if you take $200,000 out of a $500,000 portfolio to pay off your house, your income based on that 4 percent drawdown rate would drop to $12,000 from $20,000 per year. (The $20,000, of course, would have had to help pay for your mortgage.)...

[Further] don’t forget to factor in the effect of the mortgage-interest tax deduction.
If you’re in the 30 percent tax bracket and you’re able to claim the full deduction, a 5 percent loan is really only costing you roughly 3.5 percent.
Bottom line: The country is a financial wreck. Debt at the state, local and federal levels is suffocating government. Most likely the government will respond to this by getting the Federal Reserve to print money and depreciate the dollar. During such a period you want to own assets that will protect you against price inflation and you also want to owe money long term at fixed rates that you can pay off in the cheaper dollars that Fed will be creating.

In other words, think twice about conventional wisdom that says you should payoff your mortgage. If you have a long term fixed rate mortgage at the current record low rates, and put your assets in the right place, paying off your mortgage is likely the last thing you want to do.


  1. So gold wouldn't play a role in that $100,000 investment?

  2. My girlfriend laughs at my Nickels collection. She jokes about it with friends at work, even nicknaming me 'Nickels'. I don't mind... It is a sound investment.

  3. I've been thinking about the inflation/mortgage relationship a lot recently. My fear is, given that the government dances to the bankster's music, what would stop legislators from passing a law that allows mortgages to retroactively readjust for inflation? They've done similar things in the past.

  4. "...a man's home is his castle...". We own ours outright, no bankster rated mortgage for us. Prudence, saving, investing(metals)has been our staple. This castle is ours and save for the grim reaper, we will let no one will take what we have.

  5. My wife and I (ages 59 and 62) sold our mortgaged house in March and are completing construction of a smaller one for very close to what we netted from the sale, leaving us with no mortgage. Our retirement savings are nowhere near enough yet, so we will continue to work and save (and buy more silver and gold).

    I like having no mortgage because if times get really tough, all we have to do is earn enough to buy food, pay the utilities, and pay the taxes on the new house (which, admittedly, could be a problem here in California if Prop 13 were repealed); low income will not threaten our housing.

    I understand the logic of having a loan shrink in real terms because of inflation, but to keep the collateral, you must continue to make the payments. Many people may find they can't make the payments. We will not be among them.

  6. Scarlett and Scott-

    Too bad the parasites could end up with your house anyway if they decide to raise the property taxes so high that you cannot afford them. As they become more strapped for cash during the Greater Depression we are presently in, they will use any power they can to extract their pound of flesh.

  7. Richard Dale--

    To be sure, it's a risk, though we could probably handle a doubling or even tripling of property taxes (they're only about 1.3% with Prop 13, the 0.3% being extras added on by the voters).

    But that would take property taxes into the range that led to the Prop 13 Tax Revolt in the first place, and kill the real estate market since many owners would try to sell. I expect other taxes to be raised before that is attempted. For example, for years I have predicted that the 8% sales tax would be applied to services, but it hasn't yet. There are calls to do that, though.

    And right now I can pay my annual property taxes with two ounces of gold. I have enough ounces to pay that for the rest of my life, even if doubled. I would bet that will continue to be true in the accelerating inflation.