Question:
Should we strive for a balence?
In other words, have a large nominal amount, say 5-6x your annual salary in retirement accounts, plus 1x your annual salary in an individual account, THEN start paying off the Mortgage early...?
“Should we strive for a balence?”
Yes, but my personal opinion is to approach it a little differently. First, I think people need to start with a basic question: are you in financial trouble or likely to be? E.g. having debts such as credit cards that can’t be paid off, spending large amounts of current income paying off debt, living well above one’s means, etc. In that case, my opinion is to listen very closely to Dave Ramsey and what he has to say. His “tough love” approach to getting rid of all debt is called for. Debt can be addictive.
If that’s not the situation, then I think a combination of approaches makes sense.
1. Have an emergency fund in a credit union account or “safe” investments equal to 6 months expenditure.
2, Make sure 15% of income going to retirement (Roth IRA’s, 401K)
3. Pay off high interest rate, non tax advantaged debt. E.g car loans.
4. Pay off low interest rate or tax advantaged debt. E.g. mortgage.
(Disclaimer: I’m not an investment adviser, accountant, lawyer, or anything else. I’m just some schmoe on the internet who has an interest in the subject. Listen at your own peril.)
If I put 6,000 annually in a tax deferred account and it makes 7.5%, I'll have about 1 mill after 35 years. If I buy three 3 300,000 homes and they each double twice in 35 years, I've made 2.7 mill net(still owing 900,000). Also, I can redirect equity at any time, as I recommended earlier and make tax free money. Equity loans are also not taxable, so there is no tax anywhere in the system.
If you take out 75,000 per year from your retirement (using the same 7.5%), you'll pay about 25,000 per year in taxes, especially since you paid off your tax deduction.
I always recommend a cash reserve from 6-12 months worth of expenses.
If you pay off your home, you are risking not being able to take money out. Loans can be difficult after you retire. You may be able to do a reverse mortgage for say $1,200 a month in income to you.
Equity has no rate of return. So I shudder when I hear people sitting around year after year telling me how much equity they have in the house, making nothing. And where is it? Nowhere, unless you can reach it or make money from it.