Almost At The Tipping Point
Steve plans to retire in 10 years. They have investments in retirement and mutual funds. Should they take some of the money to pay off their $305,000 mortgage? Dave says yes.
QUESTION: Steve in Houston plans to retire in 10 years, and he and his wife are debt-free but their house. They have $750,000 in IRAs and 401(k) accounts. They also have $40,000 in a 529, and another $330,000 in seven non-retirement mutual funds. Should they take some of the money to pay off their $305,000 mortgage? Dave says yes.
ANSWER: If your home was paid for and you didn’t have $300,000 in mutual funds and instead had $20,000 in mutual funds, would you go refinance it to put $300,000 in mutual funds? It’s the same thing. If we took the money out of the mutual funds and paid the house off tomorrow and we didn’t like it, you could put it back.
You are at a tipping point on your wealth. You have done an excellent job, and you’ve got an excellent income. The tipping point is you’re almost to the point—once you have the house paid off—that your wealth will make you more than you make. What happens (that is hard to convince people until five years later when they look back at it because the math is under the table on this statement) is when you don’t have a house payment and you have no debt whatsoever and you’re making six figures like this, you start making different decisions about investing and about career that are better, more solid decisions. Because something snaps in your heart—not in your head—when your home’s paid for, and you do end up making more money as a result. Plus, you’ve carried less risk along the way.
I’m out of debt by the end of the week if I’m in your shoes. But I’ve been that way a long time, and I see all the benefits from it. The good news about this deal is as long as you don’t mess up your credit along the way, if my advice is wrong, you can always go back into debt. You really can. It’s not a permanent decision. When you say that out loud and we both kind of laugh about it, that’s also when you realize this is a no-brainer.