By Tracy McGinnes
Stuart Kruse says, “The line of thinking goes something like this, if you have a mortgage of 6.5% and you have a marginal tax rate of 20% that means, effectively your mortgage is only costing you 6.5% x (1-20%) = 5.2%. So if you can reasonably expect to earn more than 5.2% on your money, then should take advantage of the government’s generous offer that allows you to borrow money at a low rate while being able to earn more elsewhere.
Said another way, if you were to be faced with the decision of putting money towards paying down your mortgage or investing it, paying down your mortgage guarantees a 5.2% “return” on that money. If you believe that over a course of the next 10-20 years, that extra cash will earn more than 5.2% on average, then it should be invested. (5.2% should be a relatively easy bogey to hit during that time frame).
While there may be some short term risk to this strategy, over the long term, it is very likely that this strategy will increase your net worth significantly.(NOTE: These investments can be made in a segregated account, so that if you ever wanted to put it towards the mortgage, it could be done.)
Strunk says get on a plan and a budget with a financial planner that specializes in retirement issues and can include estate planning and power of attorney, among others.
“A financial advisor should be able to help you set up a diversified portfolio,” says Kruse. “A rule of thumb is that you should have a percentage of fixed income (bonds) in your portfolio that is around your age. So, if you’re 60 years old, about 60% of your portfolio should be in the form of bonds, leaving about 40% in stocks. Of course, this is only a guideline, which depends on your current situation, needs and risk tolerance.”
