Should I Pay Off My Mortgage or Invest?

Our topic on this episode of the Ready for Retirement podcast is about understanding whether you should pay off a mortgage or invest.

Questions answered: Should I pay off my mortgage or invest? What are the trade-offs of investing vs. paying down a mortgage? What is the best approach for my individual situation? 

Are you ready to start focusing on the things that truly matter when it comes to your financial future?

Key Points

• Should I use funds to pay off my mortgage or let these funds stay invested and grow?
  • For more information on carrying a mortgage in retirement, check out Episode 8: Should I Take A Small Mortgage Into Retirement?
• Listener Question Information:
  • Mortgage Balance: $163,000
  • Minimum Payment $900/month
  • Interest Rate: 3.35%
• Scenario 1: 
  • Use $163,000 to pay off the mortgage.
• Scenario 2:
  • Leave funds fully invested, paying the minimum $900/month and gradually pay down the mortgage until it is paid off.
• How do we compare these two scenarios?
  • If you paid $900/month for 21 years, you would have paid $227,000 over 21 years. 
    • $163,000 pays off the principal.
    • $64,000 is interest.
      • If you paid off the mortgage, that’s going to save $64,000 of interest over 21 years.
• What if you invested the funds?
  • If you invested $163,000 and grew at 6% for 21 years, you would end up with ~$554,000 in 21 years.
    • $163,000 is the initial investment.
    • $391,000 is growth on your initial investment.
• Would you rather save $64,000 in interest or receive $391,000 in growth?
  • If you invest, you would have an additional $327,000.
• 5 Arguments To Paying Off The Mortgage
  • There’s no guarantee that a 6% return will be achieved every year.
    • Over the last 80 years, what are the best and worst rolling returns that the stock market has gone through?
    • Annual Returns
      • If we use the S&P 500 as a benchmark, over any given 1 year-time period, its best return was 61% from May 1942 – May 1943.
      • The S&P 500’s worst return was -43% from March 2008 – March 2009, looking at that same 1 year time-horizon.
    • 10-year Returns
      • The best 10-year return of the S&P 500 was 21%/year. The S&P 500 averaged a 21% return for 10 years starting in June of 1949.
      • The worst 10-year return of the S&P 500 was -3.5%/year for 10 years in a row from March 1999 – March 2009.
    • 20-year Returns
      • The best 20-year return of the S&P 500 was an average 18%/year from April 1980 – April 2000. 
      • The worst 20-year return of the S&P 500 is 4.8%/year from April 2000 – April 2020. 
    • Unlucky Investor
      • If you were the most unlucky investor over the last 80 years, the worst case scenario is that your money grew 4.8% over any 20-year time horizon.
    • History 
      • There’s no guarantee 4.8% will be the worst return over 20 years, but the market has demonstrated an ability to do well over time.
  • Does it make sense to pay off interest now?
    • Paying down debt
      • Benefits
        • Reduces monthly expenses
        • Free up $900/month
        • Peace of Mind
      • Opportunity Cost
        • No longer have $163,000 investing and growing for you
    • Investing
      • Opportunity Cost
        • Expenses remain the same
        • No peace of mind
      • Benefits
        • Long-term growth
        • Compounding
  • Should I pay down the mortgage in full and redirect monthly payments towards investing?
    • What if you re-directed the $900/month towards investing?
      • If you used funds to pay the mortgage off in full and re-directed the $900/month to investments, now that you no longer have a mortgage payment, that $900/month growing at 6%/year for 21 years would have ~$432,000.
      • If you didn’t pay the mortgage down and kept the $163,000 invested, you ended up with $554,000
        • This is $122,000 more dollars than if you had paid down the mortgage and re-directed the $900/month towards investing.
    • Benefits:
      • This pays down the mortgage immediately
      • $900/month grows to a substantial sum of $432,000
    • Cons
      • You would have $122,000 fewer dollars than if you had invested the original $163,000 instead of paying the mortgage down
  • What’s the guaranteed savings and interest of paying down the mortgage vs. historical performance if we invest?
    • Paying down your mortgage
      • If you pay down the mortgage, there is a guaranteed 3.35% interest (that you won’t have to pay if you pay off the mortgage.
      • By paying the mortgage of $163,000, you are getting guaranteed interest savings of $64,000.
    • What guaranteed rate can you get investing?
      • There’s really no guarantee with investing. You can get a high-yield savings account, but that return is going to fluctuate with interest rates.
    • Guaranteed v. Potential
      • If you’re looking for guarantees, paying off a mortgage may be the best thing you can do.
      • If you’re looking for the best possible return on your investment, and you’re comfortable accepting a probable rate of return, investing may be best for you.
      • What is your comfort level?
        • There’s no guarantee with investing, but there are historical returns we can look to guide us in our future decision-making.
  • What’s your comfort level with debt?
    • If you don’t like debt, pay it off!
    • If you are willing to hold debt to yield what has historically been high returns over time, investing may make more sense for you.
• How do I know what’s best for my individual situation?
  • It depends on your risk tolerance and what you’re comfortable with. 
  • Understand the pros & cons so you can make an informed decision on what is best for your individual situation. 

Timestamps

1:44 – Listener Question

4:30 – Should I Pay Down My Mortgage?

5:14- Quantifying Paying Down Interest vs. Investing

7:00 – Historical Investment Returns

10:20 – Unlucky Investing

14:05 – Paying Down Mortgage And Investing

16:44 – Peace of Mind

17:00 – Comfort Level of Debt

18:00 – How Much Mental Bandwidth Do You Have?

19:44 – Aligning Your Investments With Your Financial Goals

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