I came across this Forbes "article" on Facebook the other day - Should you pay off your mortgage before you retire? Four reasons you shoudn't.
I call it an "article" because it was written by a marketer with Forbes, in this case an "Executive Officer and Vice President of Planning and Sales" at Northwestern Mutual which is a company in the business of selling insurance products. We'll come back to that little detail later on in this post.
I also almost never post a comment on these so-called articles, whether on websites or social media. There is no lasting gain to me, it usually results in someone completely misconstruing the point I am trying to make, and only creates annoyances where none need to exist. That and online publishers try to suck every bit of marketing gain out of an article before they publish another one making the opposite point. For this article, I made an exception.
When I first saw the article headline on Facebook, I was intrigued because I just had to see what compelling arguments could be made to not pay off your mortgage. In a nutshell, these are the 4 reasons this executive at Northwestern Mutual says you shouldn't pay off your mortgage.
- Maximize retirement contributions with the money instead, especially if you have an employer match.
- There might be better uses for the money you would use to pay off your mortgage.
- Your mortgage provides a tax advantage.
- You might need the money you used to pay off your mortgage for an emergency.
The author of this article, an executive at a major financial services company with years of experience, just laid out what I'm calling 3 half-truths and a lie. Let's deconstruct them one at a time.
1. Maximize retirement contributions and pay off your mortgage.
Yes, you want to maximize retirement contributions as much as possible. But isn't eliminating a major source of your monthly expenses one way to invest in your retirement? Think about it this way - if you don't have a mortgage, you don't need as much to live on each month and you don't have to worry about your investments making enough money for you to pay the mortgage. Furthermore, if you are living on a budget, below your means, and have no other debt (because you need to pay off other debt first before tackling a mortgage), then why can't you maximize retirement contributions and tackle your mortgage?
2. There might be better uses for your money. Like what?
You should have paid off your other debt first before tackling your mortgage. And when you do pay off that other debt, you start paying off the mortgage. Yes, there might be other investments that can get you a higher rate of return on average, but as I asked one commenter "are there investments out there that provide a guaranteed return at a rate large enough to counteract the risk factor involved with continuing to stay in debt?" I haven't heard back yet.
3. Your mortgage provides a tax advantage. She did NOT just say that!
This is where she compelled me to write a comment on the post. For Pete's sake, she can't do math. If you are in a 25% tax bracket and take the mortgage interest deduction, you get $25 back in taxes for every $100 you pay in interest. IF YOU HAVE NO MORTGAGE, you pay the additional $25 in taxes and keep the $100 you would have paid in interest. She is telling you to pay $100 to save $25 which comes out to a loss of $75. Now apply that example to an actual mortgage with interest running in the thousands per year and see how much keeping the mortgage for the "tax advantage" is costing Americans (and maybe you) every year.
4. You might need the money for an emergency. Why is everything one or the other?
Mortgage paid off or not, you need an emergency fund. End of story. She kind of has a point that if you are close to or in retirement that you don't want to liquidate all of your savings and retirement funds to pay it off. But don't forget that paying off your mortgage can, in many cases, substantially lower your monthly expenses.
So back to that little detail about this article being written by a marketer selling insurance products. This article is being written by a marketer selling insurance products! If you are focused on paying off your mortgage, that is money you won't be spending on their products. Now I don't think there is some big and underhanded scheme in play, but it is important to keep in mind the motives and mindset held by authors. I certainly don't hold myself as an exception to this.
And finally, ask yourself this - if you owned a home that was paid for, would you take out a loan against your home and invest the money?
Neither would I.