The Debt I Love

debt

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If the home-owning MINK (more income, no kids) community really wants more income, they may want to start by increasing their debt. Yep, that’s what I said. Almost every semi-retired baby boomer I work with informs me that they are on track to pay off their mortgage right about the time they want to maximize their spending. MINKs usually wish to live big, give generously while alive and die broke. If that’s the case, what’s with the rush to pay down the mortgage?

Principal Paydown

If you intend to stay in your home for the long haul, every mortgage payment that goes toward your principal increases the home’s equity. In this case, you’re either making a gift now to your future beneficiaries or waiting to tap your equity at a time when your spending levels are most likely to drop (in your 80s and 90s). All good, if that’s what you really want. Most MINKs whom I know, however, want something different.

Leverage Win

Low interest rates: Let’s say that on a home worth more than $1 million, you could access $800,000 of the equity and pay a mortgage interest rate of 5%. If you could redeploy those funds in a way that produced a 7% yield, you would have an extra $16,000 of cash flow ($56,000 in returns minus $40,000 of interest costs). If you’re patient, and disciplined, your average investment return on an ultra-diversified “rainbow” portfolio over, say, 10 or 15 years has a good chance of outperforming that 5% interest cost. For accredited investors, there are income-oriented real estate investments with target yields exceeding 7%. One just has to know where to look.

Interest deduction: Anyone who’s entered the final years of a very small mortgage knows that the tax deduction disappears right along with it. Baby boomers who continue to have significant taxable income into their “golden years” (part-time consulting work, IRA withdrawals, portfolio income, etc.) can still benefit from a mortgage interest deduction. The more you earn, the more those deductions matter, and the easier it is to make money by investing the borrowed money.

Inflation Win

With a mortgage, you’re making the same payments to the bank every month for several years. As inflation creeps up, each dollar the bank receives from you is worth a bit less to them. Meanwhile, as you take withdrawals from your investment portfolio to cover all of your expenses, you are able to increase the amount each year to keep pace with your rising costs (food, gas, movies, etc.). Therefore, part of your annual withdrawal increase becomes a free lunch because there is no inflation happening on the mortgage portion of your expenses (you win, bank loses).

Final Thoughts

Am I saying that every baby boomer without kids should rush to their mortgage consultant and cash out half of their home equity? No. But it might be time to retire the idea that you’re supposed to be debt-free by retirement age, and explore the ideas that will give you the most fulfilling life.

Disclosure

Abacus Wealth Partners, LLC is an SEC registered investment adviser. SEC registration does not constitute an endorsement of Abacus Wealth Partners, LLC by the SEC nor does it indicate that Abacus Wealth Partners, LLC has attained a particular level of skill or ability. This material prepared by Abacus Wealth Partners, LLC is for informational purposes only and is accurate as of the date it was prepared. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Advisory services are only offered to clients or prospective clients where Abacus Wealth Partners, LLC and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Abacus Wealth Partners, LLC unless a client service agreement is in place. This material is not intended to serve as personalized tax, legal, and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Abacus Wealth Partners, LLC is not an accounting or legal firm. Please consult with your tax and/or legal professional regarding your specific tax and/or legal situation when determining if any of the mentioned strategies are right for you.

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