Question for Dave on Investing rather than paying off

jazi49January 29, 2004

Dave, I read the post you wrote about placing your extra money into a tax deferred account and then waiting until you were older and in a lower tax bracket to pay off the house. My question is: does age affect this plan? I am 24 years old and I purchased my home at 22. I have had my Roth IRA since I was 19. I don't know if this type of plan would work for me since I think even paying the minimum for 30 years I still might be under retirement age. Or am I not really understanding the plan?

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Indeed, you ARE understanding the plan (and FAR ahead of the game compared to most your age... or even 10 years older!)... but missing one small (but important) element.

What you have is a strategy where your tax-deferred assets are growing faster than the after-tax costs of your liabilities. You've created a "positive growth position engine."

Once your assets outgrow your liabilities (thus, COULD theoretically be liquidated to eliminate the liabilities,) you have a Positive Net Worth.

Just because you reach "Net Worth Positive" prior to an age when your tax liability starts to shrink DOES NOT mean you must GIVE UP the "positive growth position engine" you've established with your financial portfolio by immediately unwinding your asset/liability position.

As long as your assets continue to grow stronger than your liabilities (after tax considerations,) just leave the position in place and continue to build your wealth outside the IRS' reach. When you DO reach that ripe age where the tax benefits change (or any other variable changes the net-positive growth results,) THEN it's time to unwind the mortgage liability against your liquidatable assets.

Does that make more sense now?
Dave Donhoff
Just some mortgage guy ;~)

    Bookmark   January 29, 2004 at 5:09PM
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Yes it does. Thank you. I am so glad these forums exist because I've been so much more informed about everything from my kitchen remodel to choosing the right crockpot. I wasn't even sure what PMI was until I came to THS.

    Bookmark   January 29, 2004 at 6:23PM
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You are welcome!

I'm glad these forums exist also... as the more I teach, the more I also learn!

Dave Donhoff
Just some mortgage guy ;~)

    Bookmark   January 29, 2004 at 9:34PM
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Jazi49, you seem to be on the same wavelength with Dave. I usually need a translation from a plain talker after Dave speaks. But why don't you ask this same question of Suze Orman - either call in to her show or e-mail her. I don't think she'll give the same answer, though I could be wrong (but I don't think so). Nothing wrong with hearing another opinion, is there? I don't know how you can crystal ball the Roth will always perform well. How do you reconcile paying all that extra mortgage interest against unpredictable growth? I'm asking, not judging. What's your thought process here? Are your investments that strong? Or is it that time is so much on your side you don't forsee any way you can lose by investing? Or something else? Thanx.

    Bookmark   February 2, 2004 at 9:06PM
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I just wanted to elaborate on Dave's post on another thread because I wanted to see how he thought it might work on someone like me, since my mortgage even at the minimum will most likely be paid before I'm eligible to withdraw at a lower tax bracket.

For the moment, I am making the max contributions allowed to my IRA but concentrating on paying down the mortgage. I can't decide how to do it though and I am exploring options.

    Bookmark   February 3, 2004 at 12:27PM
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Hi Cube,

Hey... sure didn't realize I'd leave you in an unclear state...

Let me try to make it REAL simple;
If you can (over the long haul) borrow money at a consitently lower cost than the return you get on investments over an equally long haul, you retire earlier with greater security.

The S&P 500 has NEVER put in less than an 8.4% average anual return in any 30 year period, and actually averages over 10%.

On the otehr hand, in the MOST WASTEFUL of 30 FRM mortgages, you can currently get 5.75% money before tax... closer to the low 3%s after tax deductions.

Borrow at 3-4%,
invest at 8-10%

Don't do that, and stretch your retirement & security further into your older age.

Hope that is much clearer. It's about as 'guaranteed' as anything gets in life.

All the best!
Dave Donhoff
Just some mortgage guy ;~)

    Bookmark   February 10, 2004 at 2:34AM
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