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Are Financial Planners Giving Erroneous Advice?

by Robert D. Ashby, CMPS CITRMS
Solid Rock Mortgage

PEMBROKE PINES, FL - In an article titled “Five More Mistakes to Avoid,” Suze Orman, the “guru” of personal finance, claims that “not paying off your mortgage early” is a “dumb move.”  Following this guidance may actually be the exact opposite of what you should be doing!

Ms. Orman bases the fact on a survey by Allianz Life Insurance Company which showed 46% of woman respondents stated the prospect of becoming a “bag lady” weighs heavily on them.  When you factor in all aspects of retirement planning, including liquidity, the chances of becoming a “bag lady” these days may in fact be greater if your mortgage is paid off.

“Properly integrating your mortgage into your financial plan is the key to a successful retirement,” states Robert D. Ashby, president of Solid Rock Mortgage Corporation.  “Now more than ever Americans need to properly manage their home equity to meet their financial goals, such as retirement.”  Mr. Ashby does not recommend any strategies related to “consuming” home equity, such as for vacations, new cars, or other types of activities that do not provide a true benefit.  He also doesn’t advise any strategies that will place his clients in a potentially burdensome situation.

Ms. Orman also states in her article that if you are over 50, you should cut back on your 401(k) contributions and focus on paying off your mortgage instead.  This is likely to be a more bad advice as this minimizes your liquidity and rate of return.  She argues that the lack of a mortgage payment is worth it, even with reduced tax deductions during retirement.  This line of thinking can actually increase your chances of being a “bag lady.” 

Why is this wrong when Ms. Orman says to pay off the mortgage for “security?”  How safe is paying off your mortgage?  For starters, the more money you use to pay off your mortgage, the less you have working for you.  The sooner you focus on paying off your mortgage, the greater the reduction in the amount of money you could have.  This is because mortgage interest is straight interest and your investments earn compounding interest.  In virtually every case, you can earn at least the same rate of return in safe investments as compared to your mortgage interest, and in most cases more.

Also, since your investments compound and mortgage interest doesn’t, in some cases you could still make more money even if the investment rate of return is less than the mortgage interest rate.  In regards to a 401(k), another thing to remember is that some employers match contributions and focusing on paying off the mortgage eliminates the match.

Let’s look at why the best choice is to keep the mortgage and focus on your retirement accounts.  We will look at someone making $60,000 per year and regularly contributes 10 percent of his salary to his 401(k) and does not have matching contributions from his employer.  He is currently age 50 and plans to retire like most people at age 65.  His investments are doing the average rate of return in the stock market over the past 20 years which is 12 percent.  For simplicity here, we will assume he must use all of his normal contributions to pay off the mortgage by his retirement age which means he currently has a loan of $250,000 at 6% approximately. 

Which option do you think is best?  Follow Ms. Orman’s advice like many other financial planners would say, or keep the mortgage and keep the 401(k) contributions going?
Well, during those fifteen years, the tax reduction associated only to the 401(k) contributions would cost $22,500.  This is not even considering the loss of tax deductions related to the mortgage interest.  Also, during this time, his 401(k) contributions would grow an additional $223,678 above the account if he stopped his contributions.  This net “cost” of focusing on the mortgage payoff would be $246,178 counting both those items only.  When you look at the mortgage balance if he decides not pay off the mortgage, the balance would be $129,702. 

That means that if he paid his mortgage off at retirement, he would still have an additional $116,476 in his retirement account by keeping the mortgage!  The financial planners are potentially costing their clients money by giving this advice.

Another thing worth mentioning is the lack of liquidity and safety if you pay off your mortgage at retirement.  What would happen if a disaster strikes, such as a hurricane?  Senator Trent Lott estimated his loss around $400,000, nearly half of his retirement “nest egg,” due to hurricane Katrina last year.  Can you afford to lose that much?  If you have a mortgage and that $400,000 is in safe investments, I would bet your chances of becoming a “bag lady” are reduced dramatically.

Mr. Ashby added, “Almost every American would do better by treating their mortgage as a financial tool and to use it wisely.  That requires working with the right financial planners and certified mortgage planners.  Just as there are financial planners that may steer you wrong, many so-called mortgage planners do the same.  Make sure you understand fully what you are doing and why.”  Using your mortgage and integrating it properly into your financial and investment plans can supercharge your way to financial freedom.

Mr. Ashby and his team at Solid Rock Mortgage Corporation have developed a unique process that educates their clients and shows how their mortgage can work for them.  Having been in the financial services industry, he has been using these strategies for years and decided to focus solely on the mortgage side of the financial plan since there are very few mortgage professionals able to provide this type of service.  Mr. Ashby and his team can be reached by calling (954) 432-3450 or visiting www.solidrockmortgage.com.

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