Assume you have $100,000 to either save (not invest) or pay off a mortgage for the same amount. Paying the mortgage does not necessarily keep you up at night.
So you have a couple choices available.
1. Put the money in a 1 yr CD, (currently earning .6 to .8 percent).
2. Pay off an existing mortgage balance (3 5/8%) of the same amount? (You're currently 15 years into the 30 year mortgage term)
Looking at historical S&P index fund performance, a low cost exchange fund may produce higher returns than the 3 5/8% mortgage, however putting this $100k might throw your allocation off too far for your comfort.
What would be a smarter move at this point in time?
Additional assumptions:
. . . 62 yrs old, preparing for retirement (between now and Jan 1)
. . . not in any hurry to take SS yet. . . you do not expect a need for this $100k in the next 12 to 24 months, or perhaps longer
. . . happy with current allocation of risk, so this money won't go into the market
Hi OP, this is as much a emotional as a financial decision, so I do not believe there is one "right" answer. Let me share my situation to show you my thought process, which you may or may not agree with.
I retired end of June 2018, age 60. At the time, I was 5 years into a 15 year refinanced mortgage. The interest rate was 2.875%. The monthly payments were a little more that $600/month.
I have a very good non-cola pension that is above the U.S. median household income. In addition to my stock/bonds AA, I had 5 years of cash to cover the gap between pension + spending investment/interest income and our planned expenses. My target SWR was just over 2%. I was in no hurry to payoff my mortgage, the payments were not an issue.
Two years into retirement, our expenses have been much lower even though we have been doing everything we wanted. Our investments grew (even with the March plunge) to be greater than when I retired. Lower spending plus some unexpected cash inflows left us with more cash than when I retired, and our cash could now potentially cover us for 10 years.
I still have not taken SS. DW took her SS this year as it is much lower than what she will get as a spouse when I take my SS, and we figured why not. Her monthly SS is about 81% of the monthly mortgage payment. It is just adding to our cash.
Add to that the pandemic, which left us with over $20K allocated for travel this year that we will not be spending.
I was tempted, with all of this "excess" cash, to invest some of it. Since the mortgage had another 7 years, why not invest the equivalent of the balance, I might likely earn more that 2.875% on average annually over that time. But in truth, I do not need to. The biggest benefit of investing it would be to our heirs - who already stand to get plenty- and not so much to us. I already have an AA that lets me sleep at night. Some may consider this "winning the game", I do not know.
So my thought was, rather than increase our investments and, in a sense, complicate our financial picture, why not simplify it? The biggest item that stood out to simplify was eliminating our mortgage.
Now, we owed less than you - about $50K. Given the amount of cash we had, and being halfway into the 15 year mortgage at this point, I thought that it was time to focus less on maximizing how much money I can earn - and the risks associated with doing that - and more on having less financial things for us to deal with.
So, in July we paid off our mortgage. We have no regrets. It is a nice feeling dong the monthly bills and not having that on the list. We still have plenty of cash on hand and no financial need for me to take my SS - at which point our planned expenses will be completely covered by pension + SS + interest/dividend income.
So... I just wanted to share with you my thought process. Our situation may not be applicable to yours, but perhaps you can use it to compare and contrast. Good luck with whatever decision you make.