Rob hopes to retire at age 60, but he has a pesky mortgage balance he wants to eliminate beforehand. He and his wife expect to inherit $300,000. Should they use this money to pay off their mortgage or should they bulk up their retirement accounts?
“Billy” has two questions. One is about the tax efficiencies of ETFs vs. mutual funds, while the other is about Ginny Mae funds and whether there are bond funds that have an inverse relationship with equities.
Priya is looking for information on home equity loans: where can you get the best terms, and what are the disadvantages? Additionally, she’d like to know which city is best for rental investing: Atlanta, Dallas, or Raleigh?
My friend and former financial planner, Joe Saul-Sehy, joins me on the show to answer your questions. Let’s dive in!
“Billy” asks (at 2:59 minutes):
I have two unrelated questions:
- How are ETFs more tax efficient than mutual funds? Would indexed mutual funds have the same tax liabilities as their ETFs equivalents in a taxable account? For example, what are the differences in tax liabilities between VFIAX and VOO?
- Are Ginny Mae funds correlated with interest rates? A common warning voiced in our financial community is that when interest rates rise, bonds lose value. Is this also true for Ginny Mae funds? If not, are there any bond funds that don’t have that correlation?
As a side note, I’ve heard anecdotes from others about how their bond funds went down during the great recession and March 2020. Having a portfolio that drops in equities and bonds at the same time doesn’t sound appealing. Are there types of bond funds that have an inverse relationship with equities? What types, and why?
Rob asks (at 35:59 minutes):
I recently turned 52, and my wife turns 53 this year. I work full-time, and she works part-time. Our combined gross income is around $100,000 per year.
We have $75,000 in cash, $760,000 in Roth and traditional retirement accounts (401ks and IRAs), and $80,000 in a Mainstay High Yield Corporate Bond Fund. This fund pays monthly dividends that represent a five percent annual return based on the current bond fund price. The dividends are reinvested monthly, and this is in a taxable account. Our annual contribution towards our retirement accounts is $30,000 per year.
In 2020, I also received a four percent 401k match and another 10 percent in the company employee stock ownership (ESOP). The usual ESOP contribution is five percent. My wife doesn’t receive any retirement benefits.
Our only debt is a mortgage balance of $127,000, and the property is worth about $350,000. The principal and interest portion of our mortgage is $965 per month. Without paying extra, we’re due to pay off the mortgage in September 2034. I’ll be 65 and my wife will be 66. However, if we can figure out the health insurance puzzle, I’d like to retire by 60, at which time I want to be mortgage-free.
We expect to receive an inheritance of $300,000. My original plan was to pay off the mortgage and free up the $965. Here are the three scenarios I can think of – which is the best option?
- Pay off the mortgage and invest some, or all, of the $965 into retirement and taxable accounts.
- Don’t pay off the mortgage and invest the $127,000 in equities. Pay off the mortgage at age 60. (Without any extra payments, the balance will be around $60,000 when I’m 60.)
- Invest $127,000 in the Mainstay High Yield Corporate Bond Fund, redeem $500 per month in dividends, and put that towards our mortgage principal. (I know the dividend and share price can fluctuate, and the yield may be under five percent. We can ride out any share price decrease before we cash it in, so I’m not concerned about its value when I reach 60. In this scenario, the mortgage would be paid off in June 2029 – a few months after I turn 60.)
Priya asks (at 51:35 minutes):
What does the process of taking out a homeowner’s equity loan look like? What are the disadvantages? How can I find good rates?
I’d also like to know – which cities should I invest in for rental properties? I want to avoid vacancies. I live in Boston where the rental market seems to be plummeting. What’s your take on Atlanta, North Carolina (specifically Raleigh, Morrisville, and Cary), and Dallas?
Resources Mentioned:
- Morningstar
- Yahoo Finance
- How Do Bonds Perform During a Recession? | Article on Darrow Wealth Management
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