It’s always good to have readers who pay attention. Last week, asked how a young Army lieutenant should invest, I focused on finding a low-cost fund that invested in a broad portfolio. I suggested three such funds. Readers quickly pointed out that I had overlooked the same federal Thrift Savings Plan (TSP) that I have often praised.

Bottom line: If you are in the military, check out the Thrift Savings Plan. Have deductions taken straight from your paycheck.

Q. I’m not sure I understand your advice to pay off a home mortgage. So, help me with this: I calculate about 7 years to pay off my mortgage. But I really want to pay off this loan by applying an extra annual amount from my IRA.

You wrote that “the older a loan is, the more you benefit from paying it off."

Would you explain how I can benefit? I have a monthly payment of $538 on a mortgage balance of $40,000 at 5.875 percent. --- N. C., by email

A. You benefit from paying off an older home mortgage from the change in cash flow. Here is how it would work in your case. You're currently paying interest at 5.875 percent. You can't earn that in short-term Treasury obligations or bank CDs. According to, for instance, 5-year CDs, were recently yielding an average of 3.1 percent.

So if you have $40,000 in 5-year CDs you would earn about $1,240 a year in interest, before taxes. That’s way short of the $2,350 a year you're currently paying in mortgage interest that probably isn't tax-deductible because your total deductions may be less than the standard deduction.

But there's more! With a monthly payment of $538 on your mortgage, you are paying out $6,456 a year. A large portion of that is principal, of course, but the main issue for most retirees isn't saving for the future. It is spending for the present. So taking $40,000 out of your savings to pay off the mortgage would eliminate that payment. As a percentage of the payoff, that's 16.1 percent a year--- a major change in your cash flow requirements.

It's also an opportunity to reduce your income taxes. Suppose you need to take that $6,456 a year out of a retirement fund. That means you need to create a $6,456 a year "taxable event" just to make your mortgage payment. Eliminate the payment and you eliminate the tax bill.

All these factors are why I generally urge older people to pay off as much debt as possible and try to live debt-free.

Q. Recently you suggested that owning TIPS is one of the things we can employ against any upcoming inflation spike.  But Warren Buffett has warned about a bubble in the Treasury bond market. What is your opinion about his observation? Are you recommending that we buy directly from the Treasury rather than investing in bond funds? ----R.J., by email

A. I believe Mr. Buffett is simply looking at the unnatural yield spread between Treasury issues and private issues. Actions by the Federal Reserve have, until recently, worked to artificially reduce the yield on Treasury obligations. Recently, for instance, yields on tax-free- AAA-rated 30-year municipal bonds were actually higher than yields on same maturity Treasury bonds. (You can follow this on This has been done to influence the interest rates on home mortgage loans. If home mortgage rates are low, home buying will be encouraged because monthly payments will be lower.

The recent global rise in interest rates may be an indication that the "bond vigilantes" aren't interested in buying the $2 trillion in new issues the Treasury plans to sell at artificially low yields.

The only connection to Treasury Inflation Protected Securities here is that they will provide some protection against rising interest rates IF the rise in interest rates is driven by inflation. If the rise in interest rates is driven by perceptions of increased credit risk, TIPS won't help. Since governments around the world are floating trillions of new bond issues, there is increased worry that governments will have a tough time supporting their rising debt levels.

On the web:

Thursday, June 3, 2009

Sunday, May 22, 2009: The Payoff for Low Cost Index Investing