Should I Pay Off My Mortgage? Part 4

What does history tell us?

There are two more reasons for couples in their 50s and 60s to seriously consider carrying a mortgage. If Jim and Sue were to invest the $200,000 they inherited, what kind of returns could they realistically expect? I never try to guess future interest rates, stock market values, or inflation rates, and I don’t believe in market timing as a consistently successful enterprise.

I can, however, point to historical facts. Over the last 80 years or so, U.S. large-cap equities have had an average annual compound return of over 10%. Small-cap equities have achieved 12.5%, and long-term corporate bonds have had an almost 6% return. Despite 13 bear markets since World War II, the market has always roared back to positive territory to achieve these historic averages.

So, can Jim and Sue “beat” the 3.5% to 4.5% mortgage cost to achieve positive leverage? Can they make more, after taxes, than their mortgage costs, after taxes? I can’t guarantee that in any given year, but over a span of 15 years, I think that the odds are in their favor for investing rather than paying off their mortgage.

Yes, there are taxes to be paid on investments, but a 15% capital gains rate is pretty darn low. Have they fully maxed out all of their tax-deferred options, such as IRAs and 401(k) contributions? That should be their priority as they run the homestretch to retirement. Dollar cost averaging into the markets is a sound strategy, particularly during bear markets when stocks are on sale.

There’s still one more great reason to consider mortgages, which I’ll cover next week.

By Deborah Hoskins, JD, CFP
The Wise and the Wary Blog