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Ask Money

Mortage Paydown and Baby Boomer Retirement

Chris Farrell May 19, 2008

Question: I am 55 years old, earn $62,000/year and I have a mortgage on my condo slated to pay off in six years (2014). My current mortgage balance is about $35,000 @ 5.25% APR. I have an account with a major brokerage house with a current value of approximately $54,000 and could sell some securities to pay off the balance on the mortgage now. (I have a 403B and an IRA in addition to the stocks I refer to above for my retirement.) I am wondering if the market might be in for a real bust as us baby boomers begin to retire. Should I pay off my mortgage now by some of selling my stock, and forfeit my mortgage interest tax deduction? I enjoy listening to your program. I am a member of my local NPR affiliate, WUOM, 91.7 Ann Arbor, MI. All the best, Mark

Answer: There is a popular idea that consistently pops up. Call it Malthus Visits Wall Street. Simply put, the notion is that there are too many baby boomers, and they will overtax the economy’s resources. Home prices adjusted for inflation will fall for a long time with hordes of elderly home sellers and not enough young home buyers. When they retire and draw down their private pensions, the massive asset sale will depress stock and bond values, leaving boomers with less money in their golden years.

I don’t think that investors should fear the march of time. For one thing, an aging population in a computer-dominated economy is working longer than previous generations. Far more important is the move toward market economies around the world. The spread of private property rights and openness to the world economy is encouraging vast amounts of capital to flow across borders. By the time boomers need to sell, markets will be far more international. Baby boomers will sell their stocks and bonds into a global economy full of Indian, Chinese, Brazilian, and other foreign investors.

When it comes to real estate, the picture is a bit more complicated. We’re going through a tough downward cycle after the decade-long boom. But the market will eventually stabilize. Overall, I expect housing will remain an appreciating asset. However, here is one wrinkle to think about. I wouldn’t be surprised if a surprising number of aging boomers decided to downsize. The demand for smaller homes could soar (since first time homebuyers will compete for the same properties) while the demand for McMansion type homes will lag. Overall, housing should be a healthy asset, but smaller homes could enjoy stronger demand than bigger ones (with the exception of the true luxury market).

For most people, I think it’s important to be debt free in retirement (i.e. no mortgage). But it’s also critical to enter your golden years with a well-diversified portfolio. There’s nothing wrong with paying off your mortgage early. But you shouldn’t feel that you have to. You have a good rate, and time is on your side.

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