Do NOT Carry A Mortgage Into Retirement If You Can Avoid It!
When I got out of the Army in 1992 and moved back to Alexandria, VA, I remember hearing a guy on WMAL talk about financial stuff. Now, please understand, I didn’t know the first thing about anything financial back then. (I DID know that debt was bad, from witnessing it first hand.)
But this guy on the radio made sense. He was entertaining and informative. I very much enjoyed his show. In fact, I remember listening to him while I was on the GW Parkway on a Sunday morning, if memory serves, driving to see friends in Frederick, MD. Kind of funny the small things you remember, isn’t it?
That guy was Ric Edelman and I’ve always been a fan of his. I’ve purchased a couple of his books and know a number of people who work at his firm. Thus, this is in no way a BASH Ric email.
BUTTTTTT, he’s way off his rocker when it comes to this article he had written about carrying a mortgage. This is pure nuts and I’m actually surprised, well disappointed even, he would even entertain this idea, never mind spout it.
As you know if you follow me at all, housing costs are the BIGGEST expense you will face in retirement. Nothing, yes NOTHING, even comes close. So, the best way to secure your retirement income stream is to reduce your housing costs.
The best way to reduce your housing costs???
Have no mortgage! It’s rocket science, no?
Yet, here is Ric proclaiming the benefits of taking a mortgage and using the proceeds to invest. Ric does what ROOKIES do, which is to show what you could have with a linear rate of return. In Ric’s case he’s using a 7% rate.
This is fundamentally flawed and in fact reminds me of Dave Ramsey’s video where he tells a lady she can take $70k a year from her $1 million portfolio without blinking an eye. I did a video on this insanity, if you feel inclined to watch.
What both these guys miss, and it’s inexcusable actually, is that the markets don’t give you a 7% linear rate of return, ever. They don’t give you a 10% either. Or a 5% or ANY rate of return you want to use. So, to estimate a linear return while CASH is being withdrawn from the portfolio is purely insane.
DO NOT DO THIS!
Again, I’m shocked at the level of ineptitude by this from a well-established presence in the financial planning industry. Would Ric really tell his mom to take 80% of the equity in her home as a mortgage and invest it??? Nuts to that.
I’ve done two videos on this nonsense, first here. And then here. The second video is where I spreadsheet the idea of taking 80% from your equity, taking a mortgage and investing the proceeds into the S&P 500. I go back to 1914 and run 75 different 30 year scenarios, REAL WORLD numbers by the way.
Without taking taxes into consideration, you come out ahead using RIc’s idea…a lot. Well, it seems.
Taking some taxes into consideration though and the numbers don’t look as good, but you still come out ahead. However, BUYER BEWARE!
If you could have survived all 30 years you would have done fine, but how about 10 or 15 years in, when the market was getting crushed? Think you’d have stayed the course? After all you’ve got this big fat mortgage weighing you down and your portfolio is sinking fast.
I highly suspect the vast majority of us would have had a tough time sleeping during those years. So, much in fact, we’d have pulled the money out of the market and paid the mortgage off outright.
Now, remember, the last 100 years was an AMERICAN century. We started the years off as an emerging market and ended the century as THE rulers of the roost. Thus, those returns, while stellar, are hard to predict happening again.
One thing you don’t need to predict though is if your mortgage is paid off you don’t need to worry about the stupid market providing you enough income to pay the debt.
The county may tax you more, indeed. But at least you have voting rights in that regard. The market though?
Ever hear of George Soros? Think that guy gives two flips about your retirement savings? Think ANY banker at Goldman Sachs does? Wells Fargo? Etc.
Yeah, again, I try to deal in reality. If those bankers and hedge fund managers can profit at your greed they certainly will, and frankly I don’t blame them. I do blame us for bailing THEM out of course. But don’t think for a minute you’ll get the same bailout as we provided them.
As Nassim Nicholas Taleb calls it, “the Bob Rubin trade”. They get to privatize profits and socialize risks. We just take the risk.
Don’t do it!