Last week, FiveCentNickel answered a reader’s question about whether one should cash out a Roth IRA to pay off a mortgage. FCN’s answer was the right one, I believe, and you can read it here. The question is of interest to me because my mom has asked me the same thing. My answer to my mom has always been, “Don’t do it!” Cashing out a retirement account to pay off the mortgage reminds me of 16th Century London. Bear with me.
In the 16th century, money dedicated to Westminster Abbey was redirected to St. Paul’s Cathedral. If you take a tour of London on its famous red double-decker buses, they’ll tell you some of the money was eventually used to rebuild St. Paul’s after The Great Fire of 1666. So what’s the point? Well, Westminster Abbey goes by another name. . .The Collegiate Church of St. Peter, Westminster. And its from this transfer of wealth from St. Peter’s to St. Paul’s that many believe we get the oft-repeated expression, “Robbing Peter to pay Paul.”
So why am I against robbing Peter (retirement account) to pay Paul (mortgage). My reasoning may surprise you, because it has nothing to do with the difference between investment returns and mortgage interest rates. Many point out, and rightly so, that for a 30-year fixed rate mortgage, you will pay less in interest than you can earn in a Roth IRA invested in a diversified portfolio of mutual funds. Add to that the tax benefit from deducting mortgage interest, and the decision becomes even more clear. But I think there is even a better rationale for leaving poor old St. Peter alone–uman nature.
I love my mom; she’s the greatest. But she is not a diligent saver. If she paid off her mortgage, would she invest the monthly savings from no longer paying principal and interest (she’d still have to pay taxes and insurance)? Probably not. Frankly, if she could trust herself to invest the savings, I’d be less adamant that she not pay off the mortgage. But by keeping the mortgage, she is in effect forcing herself to save, as her retirement account continues to grow, and she reduces her mortgage balance each month.
This relates to one of my disagreements with Dave Ramsey. He suggests saving a $1,000 emergency fund, and then paying off all non-mortgage debts before saving anything else. That’s great if you follow the program, and never borrow again. Some folks may do just that, but I bet most don’t. If you don’t, you may find yourself repeating the same “borrow–pay back–borrow–pay back” cycle, with only $1,000 in the bank.
To make wise financial decisions, we must know ourselves. In the words of the Bard of Avon, “To thine own self be true, and it must follow, as the night the day, thou canst not then be false to any man.”