Keep Paying on the Mortgage?

There are several things to think about when you get ready to retire. That is the case for Jason's aunt.

QUESTION: Jason’s aunt is 42, makes $43,000 a year and wants to retire in 15 years.  She’s got over $166,000 in a regular, taxable account and $145,000 in a 401-K and IRA combined.  She has no debt except a $107,000 mortgage at 4.25%.  Jason thinks she should pay off the house and then invest.  She checked with her accountant and he said she should leave the $166,000 in the regular account and just keep paying on the mortgage.  Jason’s not sure that’s good advice. 

ANSWER: I would pay off the house and take the extra $1,000 each month and put it into a good growth stock mutual fund.

Her CPA thinks that she’s better off borrowing money at 5% and investing it at 12%, but because the account is taxable, 12% ends up looking like 9.6%.  The CPA will still say that she’s making 9.6%, which is still better than 5%, but he’s not thinking about the risk involved with investment.  

Ask your aunt, “What if your house was paid for?  Would you go borrow $100,000 and then invest that money?”  In other words, if the house is paid for do you borrow money on it in order to invest?  Her answer would be no because she’s measuring the risk with her heart, not her head.
 

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