Cents and Sensibility
Cents and Sensibility
Pay off mortgage early,
or invest more for retirement?Question: I can't decide if I should pay off my mortgage or invest my extra money for my retirement. What factors should I be considering?
Answer: Paying off your mortgage early might be a good move -- but not necessarily from a financial point of view.
For many people, it feels good to have their mortgage paid off sooner rather than later. If you're already in your mid-40s to mid-50s, you may be especially keen on having your mortgage paid off as you enter your retirement years. Furthermore, you can save many thousands of dollars in interest by paying off your mortgage early.
However, you must keep in mind that all of that interest is tax deductible. In fact, mortgage interest payments are the single biggest deduction that most people will ever have. So, once you've paid off your mortgage, you may need to find new ways to save money on taxes.
Also, every extra dollar you devote to paying off your mortgage early is a dollar you won't be able to invest. Of course, there's no guarantee on what type of investment return you might get from the money you might have put toward a mortgage. And yet, if you put these funds into a well-diversified portfolio containing high-quality investments, you could speed up your progress toward some of your important long-term financial goals, such as a comfortable retirement.
Building up your investments may provide you with more financial protection than paying off your mortgage early. If you encounter a severe setback -- disability, job loss, etc. -- you can always fall back on your investments until you regain your financial footing. But if the bulk of your assets are tied to your house, you might be forced to refinance or look at other options, such as a home equity loan or line of credit. These aren't necessarily bad choices -- your home equity loan or credit line may be tax-deductible, and the interest rate may be competitive. On the other hand, you have to be sure you can afford the payments on these types of loans, because you're essentially using your house as collateral.
So, should you pay off your mortgage early? There's no one "right" decision -- but there's a decision that's right for you. Take the time to find it.
Question: I received a capital gains distribution in December from my mutual fund, which lost a lot of its value last year. What can I do to minimize the tax consequences of the capital gains payment?
Answer: If you have investments that posted a loss this year, you could possibly use the loss to offset capital gains. A little tax management during the year helps reduce the potential impact of capital gains in November or December. The appropriate tax strategy to use depends on your situation. Your investment representative can suggest a qualified tax adviser to assist you.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com