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Is the key to a secure retirement a paid-off mortgage? That was the question Dawn Anderson, a math tutor in Charlottesville, Virginia, and her partner, builder Stuart Squire, had for me. Their combined income of $200,000 makes the $2,367 monthly payment on their new townhome easy to cover. But Dawn has gotten worried about their $363,000 mortgage balance and wants to prepay an extra $1,400 each month.
This is a math problem but also a relationship issue. So what's the solution?
To counsel the couple, I turned to trusted help: financial adviser Gary Schatsky in New York City and financial therapists Amanda Clayman in Los Angeles and Maggie Baker in Philadelphia.
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Based on the numbers, I told Dawn and Stuart, speeding up their mortgage payments should be a low priority. Here's why: Thanks in part to the mortgage-interest tax deduction, their effective interest rate is roughly 3 percent. That means paying off the mortgage gives them a 3 percent guaranteed return on their money.
In contrast, an investment in a diversified portfolio — say, a balanced mutual fund that's 60 percent in stocks and 40 percent in bonds — though it's not guaranteed, could reasonably be expected to grow 6 percent over time. Paying that extra $1,400 a month toward the mortgage would save the couple nearly $140,000 in interest. And investing that money instead would give them the chance to amass $280,000 in their retirement accounts. Once they retire, when they'll have to pull money out for the mortgage, they'll likely pay a lower tax rate.
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But the math doesn't solve Dawn's worries. So I suggest that Dawn think about what she really fears. Is it feeling helpless because money won't be coming in? Is it the chance that they'll lose money if they invest it? I tell both of them to spend time together going over the numbers.
I also check that there's a plan in place should they break up, or if either of them dies. There is. Dawn made sure they got wills and other relevant paperwork when they bought the house. “If something happens to Stuart, everything goes to me, and vice versa,” she says.
"We have to pay this off so there will be a roof over our heads,” she says. Stuart disagrees. “I'm 60,” he notes. “I obviously took out the loan without expecting to pay it off.”