Let me begin by reiterating something that those who read my columns regularly are already aware of: I do not engage in generalized, much-ado-about-nothing talk. And today is no exception to that standard. My goal today is to point out the apparent flaws in a June 2009 “Insight on the Issues” publication by the AARP Public Policy Institute, which sought to determine whether it’s a good idea for retirees to continue to carry mortgages. In my professional view, this report generated its own skewed data to “validate” its intended foregone conclusions. You can draw your own conclusions after reading this argument.
The report begins by making this point: “Most households will be better off by paying down their mortgage than by seeking a higher rate of return in stocks or other assets.”
Then, at the very end, the report concludes: “The above analysis indicates that retired households are, in theory, better off repaying their mortgage. In addition to this theoretical conclusion…”
In this world in which we live, I have yet to meet anyone who has achieved anything financially noteworthy in theory. The last time I checked, we were still living in reality. Before I comment on the other aspects of the report, can you see how the words “theory” and “theoretical” make the opening paragraph MATERIALLY different from the conclusion? I wonder why those two key words were omitted from the opening of the report. Or do I? You see, most retired folks are smart enough to realize that they are not living in theory, so they’d be more inclined to take an interest in a report that did NOT contain those words. But by the time they reach the very end of the report, what’s the likelihood that these two unassuming words would even draw their attention?
The report’s introduction notes that “…liquidity considerations aside… rejects the argument that households should retain their mortgage…” It went on to say, “If the after-tax return on the household’s risk-free assets, such as bank certificates of deposit, Treasury bills, and Treasury bonds, exceeds the after-tax interest cost of the mortgage, the household has an opportunity to make a risk-free profit. As discussed below, this situation is rare and, liquidity considerations aside, the household will generally be better off using such assets to pay down its mortgage.”
I am glad the author at least alludes to the financial real-life fact that you’d be pretty savvy, it would be a good thing, and you could actually become wealthier by not paying off the mortgage IF the money you’re using to pay off your mortgage were able to generate a return higher than the cost of the mortgage, and then some.
But realize how the report quickly shifts from this position by assuming that the only so-called risk-free investments are bank CDs and treasury notes. The author’s investment choices are strikingly odd to me because those instruments have extremely low rates of return. It would require a modern-day miracle (on the proportion of the parting of the Red Sea) for these instruments to beat the after-tax cost of almost any mortgage. So it’s no mystery why this writer’s conclusion was foregone before even the first letter of the report was written.
Here’s what I want to know: Is the author aware of other investments with absolutely NO market risk that are paying fixed interest rates in the neighborhood of 5 to 5.5 percent in today’s market? If not, I would like to suggest they contact us, because our clients have been using those instruments, and my office would be glad to give them a crash course on the subject.
Also notice how, in those quotes from the report, the author repeated “liquidity considerations aside”? I find that utterly preposterous, because the whole issue of whether a household should or should not pay off their mortgage is about LIQUIDITY, period! So how could anyone have this discussion and actually advise millions of AARP members, as well as other Americans, while completely ignoring the most important issue?
The author also mentions, in support of the report’s conclusion, that the alternative to paying off their mortgages is to “invest those dollars in stocks.” I don’t know about you, but any financial professional who would make such a recommendation appears, frankly, stupid! As I point out in my book, Savvy Strategies for Turning Your Mortgage into a Goldmine, those critical dollars should never be exposed to any market risk. But that does not mean you could not make a decent profit – the fact is, you can, even in today’s market. I know this because we have clients who are experiencing this reality!
I am relieved by the fact that the author actually notes that the report completely ignores liquidity considerations and that its conclusions are theoretical. But, in my humble opinion, I don’t think the label “Insight on the Issues” is appropriate, because the report generates its own issues to arrive at a foregone conclusion. This one would have been more aptly titled, “Opinions on Topics We Want to Discuss.”
This reminds me of a story from my school days. There was a student who was convinced that the 1-question test for which he was studying was going to be about birds. So he studied only the chapter about birds and ignored all the other topics on the syllabus. Well, the test day finally arrived, and the question was about the forest. This student began by writing, “A forest has several habitats, like trees, soil, grass, as well as various kinds of animals and birds. One may ask, what is a bird…” and then went on to write all he had studied about birds. You can guess the outcome.
Please, let’s offer clean, practical, proven, straightforward information to investors who are looking for ways to grow their wealth. It’s plain and simple. Thank you!
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Call Laser Financial Group today at 301.949.4449 - or visit us on the Web - to schedule your complimentary consultation where we will give you real, practical, honest answers about whether continuing to carry your mortgage makes sense for YOU.
i agree whole heartedly with your analysis
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