Reduce Mortgage or Invest Funds?

[sea-tax]

Like I said, what other investment can guarantee 6% rate of return? You mentioned none. It is true...few things in life are guaranteed. Paying off the mortgage and saving 6% is one of them.

With that logic why invest at all? Heck why even have a retirement ? Why get out a bed today?

Who can guarantee that I will live to retirement so why should I care about investing for my future. I could be hit by a bus today while crossing the street?

Look Bees I respect your opinion , but really it sounds like you are making your assesment based on fear. You are right I can't guarantee anything , but I would rather be 70 with 1 mil in my IRA and die rather than be 70 and have nothing because you couldn't guarantee that I would be alive.

I may not be able to guarantee anything but markets are a cylical thing and if I know what happened in the past I can plan with relative surety what will ocur in the future.

[jainen]

A little less

>>6.32% tax free. Thats like what a 8 to 9 % yield taxable. <<

A little less than that, and it's still taxable on the state level. Besides, the market price of a fund generally reflects its tax benefit, so the effective return on investment is similar to taxable bonds. And if you think municipals are risk-free, you aren't reading the newspaper.

[Bees Knees]

With that logic why invest at all? Heck why even have a retirement ? Why get out a bed today?

That logic is sound financial planning. Getting yourself to a debt free position before worrying about investing your excess is a financial philosophy that has been around longer than any stock market, and has worked for thousands of years in the human race. It is only recently that we have gotten ourselves into a thinking pattern that being in debt is OK.

And I never said anything about putting off investing for retirement. We are talking what to do with excess after tax money laying around. Invest it in something that has risk, or pay off the mortgage and receive a guaranteed rate of return.

No need to have a financial panic attack over it.

Look Bees I respect your opinion , but really it sounds like you are making your assesment based on fear. You are right I can't guarantee anything , but I would rather be 70 with 1 mil in my IRA and die rather than be 70 and have nothing because you couldn't guarantee that I would be alive.

Its not fear at all. Some people have a conservative approach to finances. Some have an aggressive approach. I know lots of people who have all their money locked away in safe bank CDs, living retirement free from any anxieties over how their investments are doing.

There is more to life than squeezing every last dime out of your investing dollar potential. Conservative investing doesn’t mean you’ll be living on the street at age 70.

I may not be able to guarantee anything but markets are a cylical thing and if I know what happened in the past I can plan with relative surety what will ocur in the future.

It is true that markets have in the past always recovered. But before you push that fact on every investor asking your advice, remember that not every investor has the time to wait for that market to recover. Many on fixed incomes were forced to recognize huge losses during the last down turn because they had no choice. They had no time to sit back and wait for the market to recover.

A conservative investor may also be interested in a guaranteed retirement at age 60, rather than risk shooting for an age 55 retirement, with the possibility of losing out on retirement all together.

[sea-tax]

>>6.32% tax free. Thats like what a 8 to 9 % yield taxable. <<

A little less than that, and it's still taxable on the state level. Besides, the market price of a fund generally reflects its tax benefit, so the effective return on investment is similar to taxable bonds. And if you think municipals are risk-free, you aren't reading the newspaper.

A) I never said risk free , I said little to marginally more risk than paying off mortgage. And Yes there are risks to paying off mortgage, namely liquidity which is a real risk and should be taken seriously.

B) I don't look at state taxes because they are a non-issue in washington but if you must then how about OPCAX California Municipal Fund Lifetime rate of return with sales charge of 6.92% completely state and federally tax free. Per the fund commentary it says approximately a 9.79% rate of return taxable equivalent . For the Rochester I stated early it is actually 8.82% taxable equivalent.

So Jainen I am reading the newspaper , as well as Wall Street Journal , Money, Baron's and many other periodicals related to investments. How many do you read?

[sea-tax]

A conservative investor may also be interested in a guaranteed retirement at age 60, rather than risk shooting for an age 55 retirement, with the possibility of losing out on retirement all together.

Say like a company pension. we all are starting to see how those guarantees are working out.
You ever heard the old saying "nothing ventured nothing gained". Is your money sitting in a cd without risk? Sometimes you have to be willing to take some risk to get a better reward.

[jainen]

top performers

9.79%--really? Well, no, not exactly. It did better in the past. Recently it's been posting 7.25% taxable equivalent (assuming you are in the very top tax backet). Anyway, it isn't "completely state and federally tax free." Capital gains distributions are taxable (at least they would be if the fund ever gets out of the hole they carry forward each year). 10% of the investments are not even in California so residents get a little surprise when they come to see me.

Of course yield is a nice measure but it isn't actually return on investment. That figure is a minus, because the value of the bond holdings continues to decline as the Fed fights inflation by bumping interest rates. So that's a big risk. The bonds themselves aren't the best either. They go for the ones that have to pay a little more because they are shakier. 3/4 are rated from BBB grade on down to junk status. Even the fund managers admit that most of them are just refinancing old debt the cities can't seem to ever pay off, although there's also a huge investment in the new housing boom which may or may not continue indefinitely.

Apparently this is the definition of little or marginal risk in the financial press, because this is one of the most-respected top performers.

[Unregistered]

do you know why or how bonds are rated? If you do then you would understand that there are many unrated or below bbb muni bonds. Just because a bond is unrated does not make it bad investmet. Furthermore both funds have high ratings from morgning star and other rating companies. But I am sure you know more then these experts as well.

It is expensive to get a bond rated and often times municipalities and governments do not wish to spend the money. The fact is and I do not have the figures in front of me right this moment but something like less than 1% of munis default. So that being said I feel they are a relatively safe investment.

Furthermore I just gave these two examples because BEES said that you could not find a rate better than 6% . In fact you can and to say otherwise is not telling the whole story.

sea-tax

[jainen]

You are quite right

You are quite right, sea-tax. It is not hard to find solid, conservative investments in the six to eight percent range. And depending on your risk tolerance, you can get much higher. On the other hand, if income is not as important as asset preservation, you can't beat owning your home free & clear! So, different strokes...

Nobody in this thread has mentioned the leverage of a home mortgage. If they bought the home with 20% down payment, and the housing market goes up 10%, they realize a return on investment of 50%! Pretty good numbers (unless the housing market goes down a little instead).

[S T]

Real Estate

Well real estate is on a downward trend as we speak. So those that are leveraging on the Real Estate Market are probably going to lose some dollars as well. I am probably in favor of having a lesser mortgage, or no mortgage, and then have some liquidity, cash or gold, and not having much other debt. But then I ( should say we and include my husband) are not risk takers, we just "plod" along hoping to gain in the accounts and not lose!

I have just seen too many clients that have lost 30-60% of their retirement account due to the trends in the stock market, or corporate theft, i.e. Loral, Enron, Worldcom, Adelphia, etc. They just can't recoup those dollars now, can they! I have watched this for 20 years+.

There are never any guarantees, but I would certainly like to limit my losses! It does feel good to have almost no mortgage balance, cash in the bank, and no debt owed that is over 30 days.

Sandy

So we "plod" along at 3-6%, but somehow I think we might make it to the finish line!

[sea-tax]

Well real estate is on a downward trend as we speak. So those that are leveraging on the Real Estate Market are probably going to lose some dollars as well. I am probably in favor of having a lesser mortgage, or no mortgage, and then have some liquidity, cash or gold, and not having much other debt. But then I ( should say we and include my husband) are not risk takers, we just "plod" along hoping to gain in the accounts and not lose!

I have just seen too many clients that have lost 30-60% of their retirement account due to the trends in the stock market, or corporate theft, i.e. Loral, Enron, Worldcom, Adelphia, etc. They just can't recoup those dollars now, can they! I have watched this for 20 years+.

There are never any guarantees, but I would certainly like to limit my losses! It does feel good to have almost no mortgage balance, cash in the bank, and no debt owed that is over 30 days.

Sandy

So we "plod" along at 3-6%, but somehow I think we might make it to the finish line!

Sandy,
I first would like to say that I really appreciate your posts, you seem to bring a certain high level of intelligence to the arguement. I would like to discuss your statement, so take it for what you think it is worth.
You stated " So we plod along at 3-6% , but somehow I think we might make it to the finish line" Now you are correct you most likely will make it the finish line. However is just making it good enough for you? I mean ask yourself '"What do I want out of Retirement" Do I want to travel to the local casino or travel the world.? Do you want to eat Porter House Steaks or ground chuck?
See when you make say 6% and as Jainen has said inflation is 4.1% effectively you have only made 1.9% on your money. Now how do you feel about that 6%?

Like I said earlier I really like what you have to say I just wanted to coment on your statement so I hope you don't take it the wrong way.

[Bees Knees]

My conservative approach at pouring the money into paying off the mortgage is not simply a money game. I realize more dollars could be made in the long run by choosing other investments. But even if real estate is going down, the plus side of paying off the mortgage is to be debt free.

Freedom from debt means no monthly payments. Yes, you might make more money in another investment. But does that other investment require you to continue making monthly contributions? If you go through lean times, you still have to make those mortgage payments. Without the mortgage, you can live alot cheaper. You are not forced to maintain a certain income level.

[Bird Legs]

Question

How much of that monthly payment is for escrow-taxes, insurance etc?
These amounts will still continue. The amount due each month is smaller.

[S T]

Left a little info out of the equation

Hi Sea-Tax,
Thanks for the nice compliment, and I enjoy your posts and have learned from them as well. The "posters" at TB are all terrific!

I probably left something out of the equation, not really sure why, guess just that I always don't count it in. It really is a "large" part of "our" portfolio. Real Estate Investments. So actually our own personal investment return is much higher than I stated above. I was only thinking of the CD's, bonds, etc. My husband always reminds of this monthly amount or annual amount when I whine about not have a "pension plan or 401K plan" I just only think of it as an asset. It really is "our" pension plan!

I don't know whether it is fortunate or unfortunate for us, but both my husband and myself have been self employed for over 20 years. So therefore have paid our own self employment tax, etc, and funded our own retirement programs.

Years ago, we decided real estate invesment was the direction which would produce income, so we have been on that plan for years, and used 1031 exchange. Switched from residential to commercial and are receiving almost 10% return on our investment in rents, plus appreciation factor on the property. And no DEBT! We decided not to leverage unlike so many other commercial investors. Maybe not smart in the scheme of things, but the building is ours, we can always leverage with a mortgage if need be, but all of the money after paying expenses is a nice "income stream" even allowing for vacancy factor. If all the tenants vacated, we would only have to worry about, taxes, insurance, utilities and maybe some maintenance. One would think we could at least retain a couple of tenants to cover those expenses.

So really for us the return is higher than I spoke of earlier, and we are much more comfortable than investing in other areas, such as the stock market, mutual funds, etc. that I have seen clients suffer depletion of investment or really not a lot of growth.

We can travel to Europe or other areas, and when we choose we can eat the "Filet or Prime Rib" rather than ground beef. But it did take a few years to get to this point. We just didn't get to enjoy some of the "fun" extra items and get into debt by spending money earned on paper during the process.

Now after this Janien will come in and give us some percentages on return.

Sandy

[Unregistered]

Why get out a bed today?

The short furry people in my house have very strong opinions on that subject.

[Unregistered]

Sandy,

I am glad you seem to have all your bases covered. The number one rule to investing is discipline and you seem to have mastered it pretty well. Like I said before I just gave you my two cents for what it was worth. Good Luck to you and yours and keep posting those great responses. I often wondered how you reasearched all that info. Great job.