Ponderings For the Week of June 15 to 21, 2020
Worsening Coronavirus Data Depresses Stocks
Stocks suffered their worst weekly decline in three months as worsening coronavirus outbreaks in several areas of the country dominated the news. For the week, U.S. stocks declined over 7%, weighed down by large losses in mid- and small-cap stocks. Technology stocks continue to lead the way, but they still declined for the week. Foreign equities also suffered losses but far lower than their U.S. counterparts.
Last week started off with continued gains as the pace of reopening the economy picked up. But two later events took the steam out of the market. Reports of increased COVID-19 hospitalizations and people testing positive erased any hopes that the pandemic is ending. Second, Fed Chair Powell noted that interest rates are likely to stay very low well into the future and that the pace of recovery for the remainder of the year will be slow and unemployment will remain stubbornly high. These are hardly the ingredients for robust investment performance over the last two weeks of 2020’s first half.
Home, Sweet (Mortgage-Free) Home
A home will probably be the second best investment you'll ever make (education is first, although marrying someone worth $10 million is even better). True, a home is a ceaseless drain on our hard-earned money, but home ownership still beats renting, despite many opinions to the contrary. Aside from the quality-of-life advantages of owning a home, there are two very significant financial benefits of home ownership, particularly for baby boomers (beyond the obvious, but overrated, tax deductions for mortgage interest and property taxes, now curtailed by tax changes that took effect in 2018):
- A home gives you the opportunity to be mortgage-free by the time you retire or shortly thereafter. Owning a mortgage-free home can dramatically improve your odds of enjoying a financially comfortable retirement. In fact, paying off your mortgage could be the single most important thing you do to achieve your retirement dreams between now and the time you retire.
- A home is a potential source of additional income during retirement. Retirees who sell or downsize their homes can put up to hundreds of thousands of dollars of gains, most or all of which is federal income tax free, into their retirement kitty.
The financial savings of mortgage prepayment are easy to quantify. For example, making one extra payment a year on a $200,000 mortgage could save you more than $60,000 in interest.
Exceptions to Jonathan’s mortgage prepayment entreaty. In reckless defiance of the criticism that's been heaped upon me, I still urge you to make extra payments against your mortgage, but if and only if:
- You've pretty much maximized any and all available retirement plan contributions, including your retirement savings plans at work and an IRA. While there are lots of financial benefits of reducing your mortgage sooner rather than later, tax-advantaged retirement savings plans offer better ones, so you should generally put as much as possible into retirement plans first.
- You've paid off all other higher interest loans, including credit card loans and car loans. It makes no sense to make extra payments against your, say, 4% mortgage while you've got an 8% car loan and 18% credit card balances.
- You've got a stash of non-retirement savings sufficient to pay at least six mortgage payments. This will protect you in the event you lose your job or some other calamity befalls you (of course, the 2020 pandemic comes immediately to mind). Everyone needs some readily available rainy day money. The fact that you've been reducing your mortgage payments doesn't enhance your standing with the lender; if you fall behind on your payments due to lack of an emergency fund, don’t expect to receive any special treatment.
Smart Money Tips
- 401(k) plans are too good to pass up, even if there’s no match. Many employers have suspended their matches on workplace retirement plans as a result of their financial exigencies caused by the coronavirus pandemic. Some workers think that if their employer doesn’t offer a match for their 401(k) or 403(b) plan, it’s not worth participating. Or, they eschew contributing additional money beyond the low percentage that is required for the match. While an employer match is nice, it is simply icing on the cake. An unmatched 401(k) or other workplace retirement savings plan still offers two tremendous advantages – immediate tax savings and the opportunity to enjoy tax-free buildup of your plan investments until you begin making withdrawals after you retire. Here’s an example of the immediate tax savings. Say you can contribute $10,000 annually to your plan and you’re in the 22 percent federal income tax bracket. That contribution will reduce your tax bill by $2,200 ($10,000 multiplied by 22 percent taxes). Put another way, if you forego making the $10,000 contribution to your 401(k) or other pretax plan, your tax bill will increase by $2,200. I haven’t met anyone yet who would choose to pay more taxes if they have the choice to pay less. Anyone who does when they can afford the outlay is, as the saying goes, one sandwich short of a picnic.
- How family health influences your financial planning. Family health is an important, albeit often overlooked factor in financial planning. For example, the financial planning for a 60-year-old whose health is poor (or whose spouse’s or partner’s health is poor) must be viewed in a considerably different light than others of similar age who are blessed, so far at least, with good health. The health status of other family members, for example children or parents who are currently or may become financially-dependent should also be considered. Several areas of financial planning may be affected by family health matters, including insurance coverage, investing, and retirement and estate planning strategies.
The health history of your immediate family may also be important in your financial planning. The longevity and disease patterns of older generation family members may be helpful in making certain financial decisions – for example, the way in which retirement benefits are deployed (rollover to an IRA vs. annuity) and the efficacy of acquiring long-term care insurance. While far from a perfect predictor, health and longevity characteristics of older generation family members are at least somewhat relevant in predicting an individual’s later life health condition and life expectancy.
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