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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to how to retire on time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire on Time, which you can grab today on Amazon or by going to www.how to retire on time.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to financial topics, we can pretty much talk about it all. That said, please remember, this is just a show.
Mike:Everything you hear should be considered informational, as in not financial advice. If you want personalized financial advice, then request your wealth analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is my esteemed colleague, mister David Fransen. David, thanks for joining me. Hey.
David:Yeah. Glad to be here.
Mike:David's gonna be reading your questions, and I'm gonna do my best to answer them. You can send your questions in by either texting them to 913-363-1234. It's 913-363-1234. Or you can email questions to heymike@howtoretyme.com. Let's begin.
David:Hey, Mike. Should I pay off my mortgage before I retire?
Mike:We're stepping into a a very controversial area, the debt conversation. So I I need to make a confession.
David:Okay.
Mike:K.
David:Yes.
Mike:When I first started in this industry, I was unintentionally trained to despise Dave Ramsey
David:Okay.
Mike:Who's really the the leader of the debt conversation.
David:Right.
Mike:And the whole conversation was, oh, why would you pay off debt? And this was during, you know, the 2,010, 2011 on. Right? Interest rates were very low. Debt was very cheap.
Mike:Mortgages were just insanely low. And I was just taught to hate Dave Ramsey and everything he stood for because when you have a mortgage, why would you pay it off when you could invest in the market and make more money there? Right? This is called positive arbitrage. And it was like everyone I talked to in this industry was just saying, don't pay off your mortgage.
Mike:Don't pay off your debt. Keep it in the market. Keep it growing. It's better for you. And, technically, on paper, that's true.
Mike:But what no one talks about is the inherent conflict of interest that if you pay off your mortgage, the adviser gets paid less.
David:Uh-huh. Yeah. The curtain's been pulled back.
Mike:Well, I have I have done such a deep dive into Dave Ramsey, especially over the past few months because I'm just curious. I'm so focused on what is right. I'm trying to understand as neutral as I can why he makes the claims that he makes. And I'm in harmony with a lot of what he says. So, for example, I recently heard from him, and I wanna give credit where credit's due, that I guess there's a large amount of people that take a 30 year mortgage out and say, but we're gonna pay it off in 15 years.
Mike:Yeah. And it's some crazy number, like, maybe 3% actually do it. All these other people, they want to do it, but they don't actually do it. Life gets in the way. There's poor planning.
Mike:They wanna go on different trips, whatever it is. And so they never really do it.
David:Yeah. Because it seems like very easy to do. If you make, like, 13 payments a year instead of 12, right, then you can pay the mortgage off sooner, like some number of years sooner.
Mike:But but I've got the flexibility. Right? And I'll always make the right decision. Yes. I'm not an emotional creature.
David:Right.
Mike:So the reality is debt and this is my opinion now. This is not Dave Ramsey's. Debt is just a tool. That's it. It is a tool that should be used for investment purposes and not a counterfeit lifestyle.
Mike:Here's what I mean by that. If you are in or near retirement, and you have credit card debt that's rolling over every single month, and you're just hanging on to that while keeping your assets invested in the market, I'm willing to bet that your portfolio is not averaging 20 to 24% year over year
David:Yeah.
Mike:Like your credit card is going against you. That doesn't make sense to me. Now a mortgage, some people have 2, 3%, some people at 6 or 7. Everyone's a little bit different. That's the rate, dollar for dollar that's going against you fixed.
Mike:Guaranteed that mortgage is gonna do that rate. Right? That's just it. What is assuming you have a fixed mortgage?
David:Yeah.
Mike:The market does not guarantee its growth every year. Some years might be great. Some years it might go down. We don't know. Yes.
Mike:Over the long term period of time, the the the reality is long term period of time. It just the market tends to do better than 6%.
David:Mhmm.
Mike:Based on what I've seen on the DIY portfolio, the do it yourself portfolio. Right? That's just how it is. But what I'm getting at is, I think it's more of an emotional decision than an economic decision. And here's here's my case.
David:Yeah. Tell us about that.
Mike:So if we were to be factual about it, sure. It it would be better if you could guarantee or ensure that you're gonna make more money in the market than pay down your debt. But you can't guarantee that. No one can guarantee the market. So would you sleep better at night knowing that your house is paid off and that your retirement cash flow needs are less because you have a less committed expense overall or not?
Mike:For me, someone who works in the industry personally, I wouldn't pay off my mortgage soon if I had 2, 3, 4%. That's just my opinion. Yeah. I have a lot of clients that sleep better at night just paying off their mortgage. Yeah.
Mike:Just not having a heavy committed, cash flow expense every single month.
David:Right. They don't have that 1200 or 25100, whatever it might be, like
Mike:Or 3000, 4000. I mean, the the mortgage, this is sky the limit. How expensive do you want your house to be? Right?
David:Right. But knowing that that payment is is not committed. Right? That's just gone.
Mike:And and think about this from an I'm gonna call it the, the equity standpoint of your cash flow. How much of your cash flow do you have control of? So if your mortgage is 20 or 30% of your monthly cash flow, it's creeping up. It has more of a say on how much you're spending. If your mortgage and committed expenses are more than 50%, you're you're in for a hard time.
Mike:Yeah. K? If you have no committed expenses, you own all of your cash flow, and you're you're the CEO of how that works. You know, co CEO if you're married because marriages should have, in my opinion, equal say over the household cash flow. Right?
Mike:But do you see how this is not so black and white? Because humans are emotional creatures, we have to acknowledge the emotional factor, the toll. Let me say all that a little bit differently. When people are trying to lose weight, if they're stressed out a lot, it's gonna be harder for them to lose weight than if they're not stressed out all the time. In finance, if you're stressed out, there's a higher chance you could be spending more money because of that stress.
Mike:If you're not stressed out, you might be happier. You might spend less money. So when when I say we need to live within our emotional and economic limits, Yes, it's true. If you can make more money in the market or elsewhere than your mortgage dollar for dollar, that makes sense. But if if you can't guarantee that and if you're going to lose sleep at night, maybe you should pay it off.
Mike:I recognize I'm telling people to probably, you know, I'm talking myself out of a job here. But this is the reality. K? I wanna I wanna make sure I clarify something too. Debt in my mind is has a lot to do with the interest against you.
Mike:So when people say, well, I can make money in the market and they're broke, and they're trying to not pay down their mortgage faster. This is where Dave Ramsey really dives in. 3% of a $300,000 mortgage is much worse against you than 20% of a $1,000 for you. Focus on the interest that's for you or against you. And that that's for the young people listening in right now.
Mike:But for the older people, when you have, let's say, a $300,000 mortgage and you have $300,000 in cash that you can either pay off the mortgage or you could invest in the market. That's a personal decision at that point. And I don't think anyone should guilt people into saying, is this right or wrong? Now, if you have less money, there may be more on the line on the the cost benefit of all of that. And you can get nitty gritty if you're talking about cash on where it should go.
Mike:If you put it in the market, you've got capital gains issues and all you know, there's a ripple effect on your decisions. But from a principal standpoint or a general standpoint here, I don't think it should be as black and white as maybe other financial advisers would suggest. I think there's an emotional factor that needs to be accounted for in this. Do I explain that okay, David?
David:I think I get it. Yeah.
Mike:So if you really want context, look, run 2 plans. Yeah. Run 2 plans. Have one plan. Assume that you've paid off your mortgage and this is the cash flow that you need.
Mike:And and what would it look like over the next 20, 30, 40 years? And then run the other plan. Same thing, except for you just add the mortgage back in. So you've got more money in the portfolio and and your mortgage. And then just ask yourself, which plan makes you more comfortable?
Mike:Yeah. I think that's the only objective way you can really look into this, if you're working with a financial adviser and try to get rid of that conflict of interest. Is have them run 2 plans, keep everything the same, just add the mortgage in or take it out, and then the associated cash flow next to it. That's the easiest way to go about this. That's all the time we've got for the show today.
Mike:If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis.
Mike:Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date. Go to www.yourwealthanalysis.com today to learn more and get started.