Is It Better to Pay Off Your Mortgage or Invest in Railroad Retirement?

Transcript:

Should I pay off my house in railroad retirement?

Welcome everyone to another edition of the Highball Advisors Railroad Retirement Whiteboard. My name's John McNamara, Highball Advisors. And today we're going to talk about a topic that there is no right or wrong answer. All right. So probably going to put your comments in different ways. There's probably, like I said, no right or wrong. Feel free to put your comments in. But I just want to walk through the concept of paying off your mortgage. It's going to be your biggest purchase probably in your life. I can't really think of a bigger one, that's for sure.

So let's just kind of set the stage, so to speak. So in the last 10 years, 30-year mortgages have been around 3% plus or minus, a half a percent here or there. If you look at the last 10 years of the S&P 500 index, the biggest 500 companies, they've returned about 13.6% annually. So that's done very well. Obviously, you don't know what's going to ever happen in the future. But let's just walk through what it would look like getting a mortgage on a house versus that investment, that type of thing.

So let's say you have a $500,000 mortgage or a $500,000 investment. So in year one, it's 3% mortgage. And we'll say the return on the market's 6%, roughly half of this. So at the end of the year one, you would have a balance of 489,561, but you would've paid 14,857. Remember in mortgages, the interest is all upfront. It's those last couple years of, especially of a 30-year, where you're just really paying principal. But in the beginning, they just front load you and you're getting whacked on the interest.

So at the end of year 30, your balance is zero. House is paid off, but you've paid out $258,887 just in interest alone on borrowing that $500,000. That's why the banks do very well for themselves. But if you invested that money at 6%, like we were talking about, at the end of year one, you would have $530,000. And then at the end of year 30, you would have over $2.8 million. Because that's the power of compounding, especially over 30 years. 6%, that money just grows and grows and grows.

So that's just a way to look at it. That's just numbers. There's no opinion behind it. I'm just showing you what the numbers are. All right. Now, why would you want to pay off your mortgage? So peace of mind is really the biggest reason. "Hey, listen, you can take whatever you want, market can go up or down. I've got my house. That's all I need. Got the property." And then you also have no payments in retirement. So part of your retirement income is not going to make mortgage payments.

Now, why not to pay off your mortgage. It ties up your money. Correct. So you don't have that money to invest. You put it all into your house. And now you can't participate in the market in general. Then you also lose the tax benefits, the mortgage interest tax deduction. For some people, it's there. That's something to think about there.

So that's the arguments pro and con for the paying off your mortgage. What you really want to do in my opinion is you want to understand what your retirement income is. That's very important. And say, "Hey, what does my retirement income look like? Can I afford a mortgage payment? Should I pay it off? What should I be doing with it?" So understanding that. And then also, how much principal is left in your mortgage? Remember what I said about the 30-year? If it's just those remaining, let's say you have five years or 10 years or less, really, you're just paying principal. So maybe it's not really advantageous to pay it off. Rather have that money working for you. But if you're early in a 30-year, then maybe you want to pay that off because you don't want to be paying off all that interest. Remember they stack all the interests up front.

So those are the things you want to look at. Know what your income is and then know what the mortgage balance is. So I hope you found this video helpful. Reach out to me if you have any questions about the topic. We can walk ourselves through that. Please subscribe to my YouTube channel, click on the notifications bell to get the latest video. And until next time everyone, please stay safe, stay on track, and take care. So long everybody. Bye.

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