It's finally settled: Prepaying Mortgage is Better

[TooMuchGlass]

Here's a punch (see what I did there?) line from the article:

"it's important to bear in mind that every extra dollar Connor and Hannah don't use to pay down their mortgage but, instead, invest, at risk, in their 401(k) is, effectively, a decision to borrow to gamble in, say, stocks."

This article isn't the all time worst, but I did slap my forehead a few times.

https://www.forbes.com/sites/kotlikoff/2019/11/25/does-prepaying-your-mortgage-beat-contributing-to-your-401k/#6c891dd363bc

[Fomerly known as something]

What the heck is a couple making $100k together (50k each) doing buying a $600,000 house and only putting $1500 into retirement?  And how did they get the $120,000 down payment?

[TomTX]

Kotlikoff is being a dumbass. But that's hardly unique in the financial press. It's 99% clickbait bullshit anyway.

[honeybbq]

What the heck is a couple making $100k together (50k each) doing buying a $600,000 house and only putting $1500 into retirement?  And how did they get the $120,000 down payment?

Yup. I stopped reading there. This must be why sub-prime lending happens.

[TooMuchGlass]

What the heck is a couple making $100k together (50k each) doing buying a $600,000 house and only putting $1500 into retirement?  And how did they get the $120,000 down payment?

Yup. I stopped reading there. This must be why sub-prime lending happens.

I wondered why those numbers were chosen. Would a 100k in a 220k house not show the same numbers?

Math aside, the hilarity of using a couple with a house value 6x (we'll say the mortgage is 5x) annual income to show how paying down the mortgage is "safe" and to invest in stocks is "borrowing to gamble" . . . I mean the myopia is profound.

[MoneyQuirk]

"to gamble in stocks".

Well, sure, if they're picking individual stocks, maybe.

But if the slot machines returned an average of $1.07 for every dollar I stuck in, then I would borrow against my mortgage to go to Vegas.

[MDM]

Hence, even if you are holding no Treasury bonds, whatsoever, you need to assume you are investing just in such bonds to do the analysis correctly (on a risk-adjusted, apples-to-apples basis) for yourself or others.

Perhaps because nobody knows how to do a "fair" comparison between investments with different risks, it seems academia insists that all comparisons must be done between investments of equal risk.  In the real world, people sometimes choose a 100% stock asset allocation.  In that case the "only" (even if not "fair") relevant comparison is between the expected returns of the stocks vs. the mortgage.

When people have an asset allocation that includes bonds, the straight comparison of the after-tax bond yields vs. the after-tax mortgage costs is both fair and relevant.

[TooMuchGlass]

MDM,

Good point. This bit got me thinking:

Perhaps because nobody knows how to do a "fair" comparison between investments with different risks, it seems academia insists that all comparisons must be done between investments of equal risk.  In the real world, people sometimes choose a 100% stock asset allocation.  In that case the "only" (even if not "fair") relevant comparison is between the expected returns of the stocks vs. the mortgage.

It's interesting risk is often used as the baseline for comparing investments. Why not volatility, leverage, or past return? Those are both uncertain, but so is risk.

We might even get crazy and decide to use as the comparative metric some index of value and expected years held. To be clear, I'm not saying that's a meaningful way of evaluating an investment, just that risk is a meaningful way because we've decided it is.

[talltexan]

I'm surprised that the result is only about $9,200. For the couple in the modeling, that's approximately two mortgage payments out of 360.

Kotlikoff is very flippant about selecting the market rates at that moment for mortgages and treasury bills. I understand not wanting to borrow against your house to invest in 100% stocks, but I wonder if his result would flip were the 401K to even have a conservative allocation like 40% stocks/60% the bonds he advocates?

[MDM]

I understand not wanting to borrow against your house to invest in 100% stocks, but I wonder if his result would flip were the 401K to even have a conservative allocation like 40% stocks/60% the bonds he advocates?

Unless the 40/60 is all together in a single fund of funds (e.g., target date or Vanguard's "life strategy") one can compare the bond return alone vs. the mortgage.