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Here's a simple personal finance question that seems very hard to answer: should you overpay your mortgage, or put more money towards retirement? The well info

by Tycho 7y ago

Here's a simple personal finance question that seems very hard to answer: should you overpay your mortgage, or put more money towards retirement? The well informed answers you tend to see on sites like MoneySavingExpert seem to converge on putting money towards retirement. They cite things like difference in interest rates and tax relief. But I feel the analysis is too one-dimensional, and there's actually a myriad of utility considerations and possible future scenarios. It might be impossible to answer well but I feel someone should turn it into an optimization problem (in the engineering sense).

sigstoat 7y ago
> Here's a simple personal finance question that seems very hard to answer: should you overpay your mortgage, or put more money towards retirement? it's certainly subtle, and depends quite a bit on a person's circumstances. i feel like i've seen the financial forums answer that fairly well, though, when folks describe their personal situation (and risk tolerance!). > It might be impossible to answer well but I feel someone should turn it into an optimization problem (in the engineering sense). i think it might be hard to turn it into a concrete one (most of your effort would go into accurately estimating the user's current risk tolerance, and their expectations for future interest rates and cash flows), but it would be nice to see a rough flow chart produced, so that people could be walked through the steps that need to be considered.
throw0101a 7y ago
We get this question a lot in /r/PersonalFinanceCanada/ and the 'towards retirement' answer is the "mathematically correct" one because most mortgage rates are <3% but equity returns are >5%. However, in Canada, if you put money into your RRSP, which is a tax-deferral account, you get a refund: so a popular option is to save for retirement and use your tax refund for your mortgage. Lastly, the other thing generally mentioned is the observation that some people are just uncomfortable with debt 'hanging over them'. So if it helps you sleep at night, there's nothing wrong with paying it down, as long as you recognize that there is a "financially better" option.
- Tycho 7y ago
  Yes there is the psychological utility consideration of not having debt hanging over you. But in a less subjective sense aren't there also considerations of risk of ruin and optionality? If you have no mortgage to pay off, you are free to do a lot of things you could not do otherwise (including buying more property to get rental income). If you have a lot of debt, you are in a leveraged position where some bad luck could bankrupt you. Then there's stuff like, just cause you have a lot of money in your retirement account, doesn't mean you can actually consume it all, depending on the rules of your country.
  - throw0101a 7y ago
    > If you have no mortgage to pay off, you are free to do a lot of things you could not do otherwise (including buying more property to get rental income). Except that you have to use some of your income now to pay down your mortgage so that you have better cash flow later. So that means right now you have less cash flow. The decision is: use cash flow now for mortgage to get more financial space later, or use cash flow now for other things but have less space later. TL; DR: Pay now or pay later.
    - Tycho 7y ago
      But the overpayment is optional, you can stop it at any time if it becomes inconvenient. Whereas as long as your mortgage balance is outstanding you are legally required to make the monthly payments.
tunesmith 7y ago
Best solution I've come up with - if your allocation model says to put a certain % of your savings in cash, that cash will undoubtedly work better for you if you send it towards your mortgage. That way you sidestep the whole "but it might make more money in the market!" thing. (At least, until interest rates start rising a ton.)

by Tycho 7y ago

sigstoat 7y ago

> Here's a simple personal finance question that seems very hard to answer: should you overpay your mortgage, or put more money towards retirement? it's certainly subtle, and depends quite a bit on a person's circumstances. i feel like i've seen the financial forums answer that fairly well, though, when folks describe their personal situation (and risk tolerance!). > It might be impossible to answer well but I feel someone should turn it into an optimization problem (in the engineering sense). i think it might be hard to turn it into a concrete one (most of your effort would go into accurately estimating the user's current risk tolerance, and their expectations for future interest rates and cash flows), but it would be nice to see a rough flow chart produced, so that people could be walked through the steps that need to be considered.

throw0101a 7y ago

We get this question a lot in /r/PersonalFinanceCanada/ and the 'towards retirement' answer is the "mathematically correct" one because most mortgage rates are <3% but equity returns are >5%. However, in Canada, if you put money into your RRSP, which is a tax-deferral account, you get a refund: so a popular option is to save for retirement and use your tax refund for your mortgage. Lastly, the other thing generally mentioned is the observation that some people are just uncomfortable with debt 'hanging over them'. So if it helps you sleep at night, there's nothing wrong with paying it down, as long as you recognize that there is a "financially better" option.

Tycho 7y ago
Yes there is the psychological utility consideration of not having debt hanging over you. But in a less subjective sense aren't there also considerations of risk of ruin and optionality? If you have no mortgage to pay off, you are free to do a lot of things you could not do otherwise (including buying more property to get rental income). If you have a lot of debt, you are in a leveraged position where some bad luck could bankrupt you. Then there's stuff like, just cause you have a lot of money in your retirement account, doesn't mean you can actually consume it all, depending on the rules of your country.
- throw0101a 7y ago
  > If you have no mortgage to pay off, you are free to do a lot of things you could not do otherwise (including buying more property to get rental income). Except that you have to use some of your income now to pay down your mortgage so that you have better cash flow later. So that means right now you have less cash flow. The decision is: use cash flow now for mortgage to get more financial space later, or use cash flow now for other things but have less space later. TL; DR: Pay now or pay later.
  - Tycho 7y ago
    But the overpayment is optional, you can stop it at any time if it becomes inconvenient. Whereas as long as your mortgage balance is outstanding you are legally required to make the monthly payments.

tunesmith 7y ago

Best solution I've come up with - if your allocation model says to put a certain % of your savings in cash, that cash will undoubtedly work better for you if you send it towards your mortgage. That way you sidestep the whole "but it might make more money in the market!" thing. (At least, until interest rates start rising a ton.)