Recently a physician client asked whether they should pay off a mortgage or invest the excess cash. Here’s their situation:
- $500,000 in cash from a second home sale
- $120,000 mortgage at 2.75% on their first home with six years left to pay
- Claiming the standard tax deduction, so the mortgage does not reduce taxes
- Recently retired and relying on Social Security, pension and investments for income
- Desires a moderate risk portfolio and is bothered by debt
There are two answers to this situation. What would you do?
The first answer is based on math.
- Pay the mortgage as scheduled, invest $420,000 of the cash and leave $80,000 in the bank for upcoming expenses or a rainy-day fund.
- If the investment earns more than 4%, it’s better to invest than pay off the mortgage. Why more than 4% and not 2.75%? In this case, we need to account for volatility – some months the portfolio is up and some months down. To offset the withdrawals during the down months (i.e., selling low) some additional returns are needed. Given the recent market decline, forward looking investment projections are higher than 4%.
The second answer is based on well-being.
- Pay off the $120,000 mortgage, invest $300,000 and leave $80,000 in the bank.
- This alleviates their nagging feeling of debt and unlocks a feeling of freedom.
- It also reduces the amount of monthly investment withdrawals.
Together, we ran both projections, and this physician has a fully funded retirement regardless of which choice they make. So, they’ll need to decide what is more important to them, higher financial returns or higher emotional returns.
With the financial markets down, now is a great time to review your financial plan. Need help? WisMed Financial has the knowledge and robust planning tools to help you make the most of your finances.
If you haven’t yet, be sure to download the complimentary Physician Financial Guide from wismedfinancial.org.
For personalized help eliminating debt, investing smart and securing retirement, please contact Mark Ziety, CFP®, AIF® 608.442.3750.
Mark Ziety, CFP®, AIF®
WisMed Financial, Inc. part of the Wisconsin Medical Society.
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