My friend Lew McIntyre (names have been modified) asked me this question earlier in the week and I thought it would be good to share as it might be relevant to your situation or someone you’re close to.
Lew’s 45 and he’s done / doing very well for himself financially. He works in sales and is compensated accordingly for securing difficult and complex deals for his clients.
Additional details: Lew and his wife Melissa have three young children.
His question: “Nic, I have an $800,000 mortgage on the house, and it absolutely drives me nuts paying the $4,000 mortgage bill every month. With the market at all-time highs, what do you think about taking some money off the table and reapplying it toward paying down our mortgage?”
After taxes, the McIntyre’s net income is roughly $1.2M annually.
First thought:
If you’re serious about how much this mortgage payment bothers you, your family could sacrifice some nice-to-haves this year and make a $400k net income work, at which point you could pay off your house through free cash flow ($1.2 – $800 = $400k).
Second thought:
Unless it’s an emergency type of situation, we don’t want to do anything that would interrupt the compounding of your current investments.
Our ultimate goal is to build your “nest egg” large enough to the point it could endow your family with an ever-increasing stream of income not only for your lifetime, but if properly managed for your children’s as well.
While the McIntyre’s aren’t there yet, they’re certainly on their way.
As a reminder, markets move up & down. This is volatility, not risk. Yes, it is quite possible for your $2M investment portfolio to go to $1M before it goes to $4M. Likewise, it’s also possible that your $2M investment portfolio reaches $4M and never dips below $2M again?
Our greatest ally is time in the market. Not attempting to time the market.
Third thought:
The worst 30-year rolling period for the S&P 500® was +7.8% per year. Let me reiterate that point. The WORST historical 30-year rolling period was +7.8% annually.
The McIntyre’s mortgage rate is 4%.
My advice: Do not take money out of your investments to pay off your mortgage. We need to acquire more shares; not relinquish those shares you have worked diligently to acquire.
Forth thought:
Let’s look at the McIntyre’s financial plan to see how much money they’ll need to draw from the portfolio to fund the retirement they dream of…
Their plan states their lifestyle will require $15k/month or $180k/year, which equates to an investment portfolio of approximately $4.5M.
How much do we need to contribute annually to today’s $2M portfolio to grow it to $4.5M?
How quickly do you want to run the race? (Let’s assume a 7.8% annualized rate of return):
• 10 years = $18,220
• 7 years = $125,901
• 5 years = $271,844
Final thought:
I’m a fan of you paying off your house. It might be the right thing to do for you and your family. I just want you to do it strategically and not at the cost of limiting your future options.
If you or someone you’re close to could use help aligning their finances and establishing a financial plan, please reach out to us, we’re accepting new clients and eager to help.
Cheers, Nic
