Tom Discusses Peace of Mind Investing
Transcript:
Katie Nealis:
I have enough money saved to pay off my mortgage before I retire. Should I do that? Or should I invest the money elsewhere?
Tom Vaughan:
Yeah, I mean, it’s kind of interesting, you can look at this purely financial, in the sense that, you know, the average rate of return on the S&P 500, over the long term is about 11%. And if I have a 3%, mortgage, you know, that’s fixed, for example, you know, from a pure financial standpoint, you’d say to yourself, Well, I’m better off kind of putting that in the market, because I’m going to make more money than I’m going to end up having to pay, you know, at this 3% rate, or 4%, or whatever it is. But having said that, I’ll tell you something that I find very fascinating, a vast majority, you know, 85, plus percent of the clients that I have had over the last 35 years that are retired, have paid off their house. And again, so if he did that financial calculation, they might have been better off putting that money into, you know, the vanguard S&P 500, ETF or something along those lines, but they’re paying off that house. And I’m a huge proponent of that personally only because the one thing I have seen over this many years, is if you get a chance to look at retirement and look at it day after day for 35 years for 1,000s of different people, the one thing that I do see is that, you know, life is not a straight line, there’s so many uncertainties. And by not having that house payment, it just gives you flexibility. And sometimes that might be worth more.
So if I’m having to pay $1,000 or $5,000 a month or something. And you know, it’s a great idea, because it’s only 3% interest rate, but then everything falls apart and the market goes down like it did in the great depression or you know, the even in 2008. It’s really nice to not have that payment. And so you know, in retirement, one of the key things I think for big success is is what you know, the absolute things that you must pay for that aren’t really discretionary, like you got to have housing. And so having housing at a really low cost because you don’t have a mortgage, Kisha tremendous flexibility. And you know, the other things are discretionary, like travel. And so if you run out of money, maybe you don’t travel as much. But if you still have to pay your mortgage, that’s where it gets to be problematic. So reducing, as much as possible, the monies and bills that you must pay that are really, really hard to get out of, is that gives you much more flexibility into your retirement, when your incomes going to be a bit more uncertain, because you’re relying kind of on the stock and bond market potentially, to produce some of that growth and some of that income long term. So, you know, the financial, you know, planner, slash, you know, maximize rate of return and build wealth in me says, Oh, yeah, just, you know, keep putting that money, that extra money into the market. And because you’re gonna beat the, you know, the beat the cost of the mortgage. But, again, you know, when you really look at how this plays out, at least in my experience, that flexibility of having a very low overhead, as far as retirement goes, I think, can be really powerful. Especially if things go south for a while, which can happen sometimes.
Easan Arulanantham:
Is there any, like reason that you should keep, like a mortgage, you know, for those deductions on the interest rates?
Tom Vaughan:
Yeah, that is the reason, I mean, from pure financial standpoint, you know, you get the deduction, the cost is fairly low, you could make more money in other places, right? I mean, that’s, those are the reasons that you would keep it. And so again, just from a pure financial standpoint of running the numbers, and I have no problem if somebody really wants to keep it, and they’ve run the numbers, and they can see why and they’re willing to suffer through whatever consequences might happen. If the markets fall apart. That’s fine. Because I don’t feel you know, it does work, you know, over the next 10 years, you’re probably going to make more money in the s&p 500, then you’re going to, then 3%, you know, now, it’s possible that that doesn’t happen. And Matter of fact, at the end of 2009, that 10 year period from 99 to 2009, was one of the few 10 year periods where the s&p 500 lost money. So, you know, theoretically, you’d have been better off paying off your mortgage, even on a final, you know, pure financial analysis standpoint. But on average, you’re probably better off not paying it, but almost everybody does. And those people are my happy clients. People that have good fixed incomes coming in, like social security and pensions, and have really low overhead, they’re really happy. They’re, they’re very relaxed retirees.
Easan Arulanantham:
So you’re saying like that peace of mind sometimes outweighs that personal like a fight of the actual optimal situation?
Tom Vaughan:
Yeah. Yeah, definitely. You know, again, there’s like what what you see on this spreadsheet, you know, and then there’s life. Right? So there’s two different things. And, you know, and again, I’ve done 1000s and 1000s of plans and lots of different appointments and lots of meetings. And yeah, I would say no doubt about it, the average retiree likes peace of mind more than that financial calculation. They want to have no debt, no credit card debt, no house debt. Now, not everybody is able to do this. I have lots of clients that do have some of these debts, and they’re working to pay them down. But generally speaking, you know, again, I kind of use a happiness quotient, you know, I look at people, and I see, you know, people that are really nervous about their situation, you know, and I see why and I see people that aren’t as nervous. And I would say, again, paying off the house is one of those things that kind of puts people into a more at ease. Yeah, I think there’s some there’s some benefits there.