Financial Question – (Q & A)

Mar 2017


Dear Rick:
My husband and I are going back and forth on an issue and we would love your thoughts. From a financial standpoint we’re in good shape. My husband’s pension along with our Social Security covers all of our living expenses. In addition, we have about $150,000 in our IRA, an emergency fund at the bank of about $20,000, and a joint account with approximately $250,000. Our money is invested in a variety of things, mostly geared long term. Our kids are out of the house and I would like to sell our home and downsize. One thing I have learned is that downsizing does not mean cheaper. To buy the condominium my husband and I both like and to furnish it, in addition to the proceeds of our old home, we would need at least $150,000. The question is how do we come up with the $150,000? My husband said that with interest rates low we should just get a mortgage on the new home. I, on the other hand, like the idea that we are debt free and I’d like to take the money from our joint account. I figure that would still leave us enough money. My question to you is, what would you do?

Dear A.R.:
In reviewing your situation there are two ways to look at this. The first way is from a financial standpoint and what would be the best move financially, and the second is from a quality of life standpoint. First, let’s talk about the financial issues. In reviewing the financial issues, interest rates are still at historic lows and the after-tax cost of borrowing, assuming you itemize your deductions, is going to be in the three-percent area. Historically, that is very inexpensive money. If you continue investing in a diversified growth portfolio, overtime that portfolio, after taxes, should return a substantially better return than the three plus percent that you are going to pay on the mortgage. On the other hand, if as opposed to investing the money in a growth portfolio, you are going to invest that same money in fixed-income investments like CDs and government treasuries, after taxes you would be earning in the one percent area. Therefore, from a financial standpoint, the key is how you would invest the money that you would otherwise use to pay for the home.

Again, looking at it purely financially, if you were going to continue to invest in a long-term growth mode, then I would say go for the mortgage. On the other hand, if you would take that $150,000 and put it in the bank or buy U.S. treasuries, I’d say pay cash for the house.

When it comes to taking on debt, there is the issue of what allows you sleep at night. I know some people who sleep better at night because they have no debt. Money should be a tool to help you have a better quality of life and to bring you comfort. In the situation at hand, one of the great things is the fact that you are in such good financial shape you can afford not to think from a purely financial standpoint but also from a quality of life standpoint. Unfortunately, too many people in our society don’t have those options. You have achieved that by living within your means and saving enough so you can maintain your lifestyle throughout your life.

How do you weigh the financial versus the quality of life? My view is that with a married couple, if either husband or wife can honestly say that their quality of life would be improved, in this case by not getting the mortgage, I would lean to paying cash for the property. After all, isn’t giving us comfort exactly what money should do? Do I think it would be a mistake to get a mortgage? Absolutely not; however, when you work hard and put yourself in very good financial shape, as you have, it doesn’t always have to be about the dollars and cents.

Good luck!
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