If the home-owning MINK (more income, no kids) community really wants more income, they may want to start by increasing their debt. Yep, that’s what I said. Almost every semi-retired baby boomer I work with informs me that they are on track to paying off their mortgage right about the time they want to maximize their spending. MINKS usually wish to live big, give generously while alive, and die broke. If that’s the case, what’s with the rush to pay down the mortgage?
Principal Pay Down
If you intend to stay in your home for the long haul, every mortgage payment that goes towards your principal increases the home’s equity. In this case, you’re either making a gift now to your future beneficiaries or waiting to tap your equity at a time when your spending levels are most likely to drop (80s & 90s) – all good, if that’s what you really want. Most MINKs that I know, however, want something different.
Low Interest Rates
Let’s say that on a home worth more than $1 million, you could access $800,000 of the equity and pay mortgage interest at a rate of 5%. If you could re-deploy those funds in a way that produced a 7% yield, you would have an extra $16,000 of cash flow ($56,000 in returns minus $40,000 of interest costs). If you’re patient and disciplined, your average investment return on an ultra-diversified portfolio over, say, 10 or 15 years has a good chance of outperforming that 5% interest cost. For accredited investors, there are income-oriented real estate investments with target yields exceeding 7%. One just has to know where to look.
Anyone who’s entered the final years of a very small mortgage knows that the tax deduction disappears right along with it. Baby boomers who continue to have significant taxable income into their “golden years” (part-time consulting work, IRA withdrawals, portfolio income, etc.) can still benefit from a mortgage interest deduction. The more you earn, the more those deductions matter, and the easier it is to make money by investing the borrowed money. For example, if your effective income tax rate was 20%, a 5% interest cost would be reduced to 4% after accounting for your deduction.
With a mortgage, you’re making the same payments to the bank every month for several years. As inflation creeps up, each dollar that the bank receives from you is worth a bit less to them. Meanwhile, as you take withdrawals from your investment portfolio to cover all of your expenses, you are able to increase the amount each year to keep pace with your rising costs (food, gas, movies, etc.). Therefore, part of your annual withdrawal increase becomes a free lunch, because there is no inflation happening on the mortgage portion of your expenses (you win, bank loses).
Am I saying that every baby boomer without kids should rush to their mortgage consultant and cash out half of their home equity? No. But it might be time to retire the idea that you’re supposed to be debt free by retirement age, and explore the ideas that will give you the most fulfilling life.
The opinions expressed are those of the author and are subject to change without notice in reaction to shifting market conditions. This blog is provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.