I understand the concept that pre-paying the mortgage is risk-free return, but that always brings up a question in my mind:
If 'risk free' investments are providing less after-tax return than a mortgage pre-pay, does that mean that no one should ever have any money invested in anything until they have paid off their mortgage?
One seems to lead to the other, no?
Let's say that all savings went to pay the mortgage, and that paid it off in 10 years rather than 30. That person would be totally out of the market for 10 years, but could step up the savings rate in years 11-30. Would they catch up?
I was out of the market completely (as far as taxable investments) for the forty-eight months that it took to pay off my mortgage. I did contribute the maximum plus over-50 catchup to my TSP(401K), but that was it. This was a conscious decision and I think such a decision is not the right one in every circumstance, though I think it was absolutely right in mine. Here's why:
Everybody has, or should have, a "bare bones survival income" figure in mind that is necessary for basic survival only in ER. This would be the figure covering nothing more than minimal existence, the income threshold needed for bare short term survival and nothing more. For me it would even involve eating the cheapest food, enduring uncomfortable (though survivable) temperatures inside my home, buying zero that is not immediately needed for survival, no medical, and so on. Got that "bare bones survival income" figure in mind?
OK, I believe the "bare bones survival income" plus inflation MUST be available to me with zero risk (or as near zero as possible) for my entire ER. I have only one child and I doubt she will be able to support me in my old age. I really don't want, or feel that I have, a fallback position of depending on her for my survival.
My expenses beyond "bare bones survival income" can be covered by investments of moderate or higher risk. By paying off my mortgage, my "bare bones survival income" level is reduced to less than half what it was before paying it off. The part covering my "bare bones survival income" must be covered by the very lowest risk investments possible, and whatever excess I have to invest can go into all sorts of risk levels.
In order to get a reasonably balanced portfolio (that is not massively overloaded with very low risk investments that may provide income reflecting little more than inflation), I feel I have to keep the "bare bones survival income" figure lower than it would be if it included mortgage P&I.
Someone like Nords, who I believe has probably a considerably larger portfolio than I ever will in addition to a substantial military retirement pension, has no issues with bare bones survival distorting his portfolio. Any money he gets his hands on from not paying off his home can go into higher risk investments that will provide him with higher gain.
Makes sense to me, anyway. Of course now that I have this potential, unexpected inheritance coming (hopefully), my plans are in a state of flux or transition. My portfolio may end up being several times larger than this prior planning reflects. My planning outlook should respond to any increase in resources.