Monday, August 29, 2011

Fester's Financial advice part 2

I was having a discussion with a co-worker the other day and he mentioned that his wife wants to retire in 5 years, but he is worried about the financial hit they would take if she were to retire and asked my opinion on what would be the best investment with a goal of early retirement for his wife in mind. I answered “pay off your house”.

I asked him “how much is your mortgage?” he said $1200 a month. He still owes over $100,000 on his house, but it is still his best option even if he is currently paying a low rate of interest. Here is why: If you can be fairly sure of getting about a 5% return on your savings/investments you would need $240,000 in savings to earn $1200 a month from your investments, and possibly more if you figure that you may have to pay taxes on the interest you earn. However, you could get the same effect to your lifestyle by paying off the house, so investing $100,000 into your house is like saving or investing $240,000 in a vehicle that has a 5% rate of return. Right now they combine their incomes and need to bring in an extra $1,200 a month just to cover the mortgage. In a scenario where the house was paid off his wife could at least change to part time work and take a $1,200 a month pay cut and their lifestyle would not have to suffer at all.

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