• Among households aged 60 to 69 in 2007, 41 percent had a mortgage.  Of these, 51 percent had sufficient assets to repay their mortgage.
• Over the period 1925-2006, stocks yielded an average real return of 7.1 percent.
• 29% of households have sufficient non-retirement financial assets to repay their mortgage in full.
• 51% of households have sufficient non-retirement and retirement assets combined to repay their mortgage in full.
• One argument that is sometimes cited in favor of not repaying the mortgage is that retaining a mortgage increases the household’s liquidity, and enables it to better cope with sudden unexpected expenses.

This short 5-page paper attempts to argue for not having a mortgage in retirement.  And while the paper itself is short on examples that make sense to anyone without a PhD, the final conclusion is that most of those in retirement should pay off their mortgage with investment assets because they'll earn less on those assets than they'll make.

Essentially, we're back to a discussion on EPR, or effective percentage rate.  Will assets in retirement earn more on an after-tax basis than the cost of the mortgage.  With all questions of 'Suitability', the answer is always 'It Depends.'

Depends on what?  A great deal more than what was covered in this paper.  BUT, in this current market environment, I would agree with the author that emotionally many people have moved to cash, and may not have the fortitude for investing in this brave new world.  If the net cost of borrowing exceeds the net after tax return on your investment, then you are better off paying down the mortgage and using a HELOC, home equity line of credit, for any liquidity needs that may arise.  The benefit of this strategy is that you can still access the money for an investment opportunity should you need it, but in the mean time you'll get the benefit of the higher return.

EXAMPLE:  A consumer has $50,000 in a CD earning 2%.  They are in a 25% tax bracket, so they are essentially earning 1.5% on the CD after tax.  Their mortgage is $100,000 and they currently have a note rate of 6%.  Their EPR, or net cost of borrowing at the 25% tax bracket is going to be 4.5% (6% x .25% = 1.5% tax reduction... 6% - 1.5% = 4.5% EPR).  They could repay the mortgage by $50,000 and earn a 4.5% net after tax return as opposed to the cd return of 2%, BUT the need for liquidity, if there is one, should be considered and a HELOC for $50,000 used to replace access to that money.  Again, there are many other considerations one should consider.

If the author's estimate that the real return of 7.1% since 1925 is accepted, then the idea that earning more on investments net of borrowing is a real question to consider.  At the end of the day, one would need to consider inflation too.   Inflation erodes not only the investment gains, but the future real cost to repay debt.

Net:  The paper is light on substance, and it was written for the retiree that may be emotionally frustrated by a loss of personal wealth that could have already been used to repay mortgage debt.  My personal opinion is in line with the authors, but for different reasons.  Most 60+ retirees are better off paying down the mortgage due to a shorter time horion, and unwillingness to take the risk needed to invest in equities that can provide the real wealth spread needed to offset the time and risk.  Younger families with a longer term time horizon have many more options and considerations worth examining in more detail through a comprehensive Liability Management Review with a trained financial professional.

At the end of the day, ask the question 'What brings me the most peace?', and then work towards that to accomplish it in the most fiscally responsible way.  If you are right at retirement age, or already in retirement, you may not have time for this frustrating investment environment to return to a new normal.

I've highlighted all the key facts and summary information to allow you to review the document in 5 to 10 minutes.  This is a must read if you are a financial advisor or loan officer considering these products for your clients now or in the future.

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