Most retirees with that level of income are taking a minimum of 5 luxury trips per year, I’d be very uncomfortable with only two.
intercst
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I didn’t even open the article, but from the blurb here, they don’t appear to be as financially savvy as they ought to be. You don’t ever hasten your payment on a 2.5% loan while you can invest the money in a treasury bill at 5+%. Even after income taxes, they are literally throwing money away each year.
Heh, I just thought of another interesting phenomenon of early retirement. At any time between ages 62 and 70, you can choose to “give yourself a raise” and after you take it, it continues until you die!
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There are non-financial reasons to pay off the house however. Some like the fact their cash-flow is reduced. Some don’t like debt, even “good” debt. These are just some reasons we paid off our house. (Also, in our situation, we did not pay enough in interest, so we’ve been standard deduction for several years now anyway).
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That was one of the few pieces of good advice from Suze Orman. Most 30-year mortgages have an amortization schedule where you pay most of the interest in the first 15 years, so you get very little tax deduction in the last 15 years where you’re mostly paying off principal. Try to pay the mortage off by year 15.
intercst
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Even if they want to pay it off early they are still doing it wrong. They could pay it off faster if instead they money in Treasuries earning over 5% and let it grow until it is equal to the remaining mortgage and then pay it off lump sum.
But the other thing is that while his pension is not inflation adjusted, his disability and planned SS are. So with inflation raging along at 4% or whatever it is, their mortgage payment is becoming relatively cheaper and a smaller part of their budget over time.
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This is something that I’ve tried to explain to people many times, and they rarely listen or even understand the point. The fact is that prepaying a mortgage, regardless of rate, is a risky endeavor. Certainly more risky than not paying it early. That’s because of the following two cases for a person/family that has a little extra money each month. Let’s say they have a mortgage payment of $1000, and $250 extra each month.
Choice 1: They use the extra $250 each month to pay an extra $250 principal to reduce the term of the mortgage. They do this for 5 years and have made a good dent in their mortgage principal.
Choice 2: They save the extra $250 each month in a savings account (or even an investment account). Rates are low-ish, and the market returns are anemic, so after 5 years they only have a total of $16,350 saved.
Now suddenly after 5 years, calamity hits, there’s a great recession and the higher paid spouse loses their job. Money is real tight. Now which choice above turns out to be more risky? Choice 1, they reduced their principal by $15,000, and their mortgage will end way earlier now. BUT the darned mortgage company STILL wants $1000 a month no matter what. If you can’t pay for a few months they’re going to foreclose! Choice 2? Well, you have $16k in the bank, and that’ll cover 16 months of mortgage payments, add another 6 months of possible no payment and you have 22 months of worry-free homeownership, and hopefully the great recession will be over by then and the jobs come back!
I’ve explained it to people a number of times, and usually their eyes glaze over and they say something along the lines of “but my mortgage guy says I can save a lot of interest by paying extra each month”. Like I said … not financially savvy. And I do understand that sometimes people use non-financial reasons to pay off low interest debt.
And itemization is pretty much a red herring for most people at this point with the large standard deduction. That could likely change in 2026 though. I haven’t itemized in years.
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In some ways that actually makes it worse. The tax deduction effectively lowers the interest rate. So if you had/have one of those sweet sub 3.5% mortgages you are almost getting the money for free. The median 30-year (length of the mortgage) return for stock market is about 10%. So you get most of the benefit of not paying down in the beginning.
Another way to look at it is your house is an illiquid, slowing appreciating asset. If it was anything else, no one would put extra money into it.
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Can’t stand that clickbait crap from Marketwatch. Love icsts sarcastic entry to this.
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Keep in mind that the only part of itemizing that matters is the part in excess of the standard deduction.
I recently used the AARP tax calculator to estimate my 2023 taxes. Mortgage interest and property taxes (house and car) just about equaled the standard deduction. It was the charitable deduction that made itemizing work.
This is yet another thing that people are willfully ignorant about. Let’s say you have mortgage interest of $17k, property/sales tax of $7k, and charitable deductions of $5k, so that totals $29k which means you can itemize. Woo hoo! I guarantee that your mortgage broker will tell you “oh, you’re in the 22% tax bracket, so by deducting the $17k of mortgage interest, that deduction saved you $3740 in taxes (22% of $17k)”. Of course, anyone who isn’t innumerate and/or willfully ignorant, would know that that isn’t true at all, in fact it is total nonsense. Having paid that mortgage interest, at best, only gives you an additional deduction of $1300 ($29k itemized - $27.7k standard) which saves you $286 in tax. A paltry sum that is essentially meaningless.
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In theory you are right. The risk is greater in paying off a mortgage versus not. In reality, the behavioral risk of whizzing away the money that you’d use to pay it off is greater for most. Most who never prepay anything on a mortgage and “invest the money that would be the prepayment” never invest it at all.
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